10-K
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brhc10015331_10k.htm
10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
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)
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (469) 384-5000
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
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. ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See
definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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 December 29, 2019, 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 $14.1 million computed by reference to the price at which the common equity was last sold on the NASDAQ Capital Market.
As of September 23, 2020, there were 15,465,222 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 December 8, 2020, have been incorporated by reference in Part III of this report.
Index
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., through its subsidiaries (collectively, the “Company” or “we,” “us” or “our”) operates and franchises pizza buffet (“Buffet Units”),
delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants under the trademark “Pizza Inn” and operates and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”.
The Company also licenses Pizza Inn Express, or PIE, kiosks (“PIE Units”) under the trademark “Pizza Inn”. We facilitate food, equipment and supply distribution to our domestic and international system of restaurants through agreements with third
party distributors.
As of June 28, 2020, we had 42 franchised Pie Five Units, 176 franchised Pizza Inn restaurants and 13 licensed PIE Units. The 138 domestic franchised Pizza Inn restaurants
were comprised of 83 Buffet Units, ten Delco Units and 45 Express Units. As of June 28, 2020, there were 38 international franchised Pizza Inn restaurants. Domestic Pizza Inn restaurants and kiosks were located predominantly in the southern half
of the United States, with Texas, Arkansas, North Carolina and Mississippi accounting for approximately 23%, 19%, 17% and 9%, respectively, of the total number of domestic units.
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. In 2019, we launched the PIE kiosk and convenience store
solution to meet the consumer demand for tasty and high-quality pizzas within a grab-and-go delivery model.
Our Concepts
We operate and franchise restaurant concepts and license PIE kiosks under two distinct brands: Pizza Inn and Pie Five.
Pizza Inn
We franchise Buffet Units, Delco Units and Express Units under the Pizza Inn brand. Additionally, we license PIE 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.
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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 near 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.
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. We discontinued offering new domestic Delco Unit
franchises during fiscal 2014.
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.
Historically, the Company established PIE Units to serve customers through a non-traditional, licensed pizza-only model called Pizza Inn Express. Like Delco Units and Express
Units, the PIE Units are primarily production-oriented facilities and, therefore, do not require all of the equipment, labor or square footage of the Buffet Unit. The Company does not intend to expand the licensed business model in the foreseeable
future.
Pie Five
Pie Five is a fast-casual pizza concept that creates individualized pizzas which are baked in our specially designed oven. Pizzas are created at the direction of our customers
who choose from a variety of freshly prepared and displayed proprietary and non-proprietary toppings, cheeses, sauces and doughs. 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.
Traditional 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. 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. Pie Five restaurants typically are in high traffic, high visibility
urban or suburban sites in mid to large-size metropolitan areas. Sales are predominantly on-premise though carry out and delivery are offered as well. 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.
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 using 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 continued development of new Pizza Inn Buffet and Delco Units in international markets in fiscal 2021, particularly in the Middle East.
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In appropriate circumstances, the Company previously granted area developer rights for Pizza Inn restaurants in existing domestic markets. However, the Company is no longer
pursuing such agreements. A Pizza Inn area developer typically paid a negotiated fee to purchase the right to operate or develop restaurants within a defined territory and, previously, agreed to a multi-restaurant development schedule. The area
developer assisted 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.
We intend to continue developing franchised Pie Five Units domestically and internationally. 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, restaurant operators. In addition, we intend to take the brand into international markets.
Domestic Franchise Operations
Franchise and development agreements. We discontinued offering new domestic Delco Unit franchises during fiscal 2014. Our current standard
forms of domestic franchise agreements provide for the following basic terms:
Pizza Inn Pie Five
Buffet Unit Express Unit Pie Five Unit
Development fee per unit $ – $ – $ 5,000
Initial franchise term 20 years 5 years 10 years
Renewal period 10 years 5 years 5 years
Royalty rate % of sales 4 % 5 % 6 %
National ad fund % of sales 1 % 2 % 2 %
Required total ad spending % of sales 5 % 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,
contribute a specified percentage of sales to a marketing fund managed by the Company, and continuing royalties, and (iii) except for Express Units, prohibit the development of one restaurant within a specified distance from another.
We launched the franchise program for Pie Five in fiscal 2013. 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 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
Pizza Inn and Pie Five 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.
Domestic Kiosk License Operations
Kiosk license agreements. Our PIE Units are typically offered for five-year initial license periods with options for additional five year
renewals. PIE Unit licensees are not charged development fees, license fees, royalties, or advertising assessments. PIE Unit license agreements require that the licensee comply with standards of the Pizza Inn brand, including marketing, kiosk
system configuration, and sales and sourcing of authorized products and services. The mandated products and sourcing provisions within the PIE Unit licensing agreement result in supplier rebates for the Company.
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Training. New licensees and their PIE Unit employees must attend and successfully complete our training program, which consists of a
single day of training at the licensed location. PIE Unit managers train their staff through on-the-job training, utilizing video and printed materials produced by us.
Standards. We require licensee adherence to a variety of standards designed to ensure proper operations and to protect and enhance the
Pizza Inn brand. All licensees are required to operate their kiosks 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 kiosks 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 licensees by our franchise business consultants, who are deployed locally in markets where our licensees are located.
Company-Owned Restaurant Operations
As of June 28, 2020, we did not operate any Company-owned restaurants. We do not presently intend to open or operate any Company-owned restaurants during fiscal 2021.
International Franchise Operations
We also offer master license rights to develop Pizza Inn and Pie Five 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 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 Pizza Inn restaurant outside of the United States opened in the late 1970s. As of June 28, 2020, there were 38 Pizza Inn restaurants operating
internationally. Except for three restaurants in Honduras, all of the Pizza Inn 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.
Food and Supply Distribution
Our franchisees and licensees purchase food and supplies directly from authorized, reputable, and experienced supply and distribution companies. The Company provides sourcing,
quality assurance, and research and development for both the Pizza Inn and Pie Five systems. The authorized distributors make deliveries to all domestic units from several distribution centers, with delivery territories and responsibilities for
each determined according to geographical region. As a franchisor, the Company is able to leverage the advantages of direct vendor negotiations and volume purchasing of food, equipment and supplies for the franchisees’ and licensees’ benefit in
the form of a concentrated, one-truck delivery system, competitive pricing and product consistency. Franchisees and licensees are able to source all products and ingredients from authorized distributors. In order to assure product quality and
consistency, our franchisees and licensees are required to purchase from authorized distributors 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. Franchisees and licensees may purchase other non-proprietary food products and supplies either from authorized distributors or from other suppliers who meet our requirements for quality and reliability.
Non-proprietary food and ingredients, equipment and other supplies 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 by our suppliers are subject to fluctuation, and franchisees and licensees bear increased costs or benefit from savings 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.
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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 several ways for the brand image and message to be promoted at the local and regional levels.
Pizza Inn and 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, related marketing
and public relations services, and consumer research. We anticipate continuing to optimize Pizza Inn and Pie Five marketing activities commensurate with the contributions of the marketing funds.
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 several governmental authorities, which include health, safety, sanitation, wage and hour, alcoholic beverage, building and fire agencies in the state and 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 an existing restaurant in a particular area.
We are subject to Federal Trade Commission (“FTC”) regulations 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 28, 2020, we had 22 employees. 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 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.
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.
With respect to the sale of franchises and licenses, 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.
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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 19,576 square foot corporate office facility with average annual lease payments of approximately $18.00 per square foot. This lease began on January 2,
2017 and has a ten-year term. The Company amended its lease agreement in June 2020 and has elected to defer one-half of the monthly base rent for the period from June 2020 through May 2021.
As of June 28, 2020, the Company had contingent and direct lease obligations for 16 additional locations. Two of the lease obligations have been subleased, nine of the lease
obligations have been assigned to franchisees, and five of the lease obligations are direct lease obligations for non-operating locations. These leased properties range in size from 2,021 to 2,850 square feet, have annual rental rates ranging from
approximately $28.00 to $44.00 per square foot and expire between 2022 and 2028. The Company is currently pursuing alternatives for subleasing or terminating the remaining five non-operating 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.
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PART II
As of September 10, 2020, there were approximately 1,896 stockholders of record of the Company’s common stock.
The Company had no sales of unregistered securities during fiscal 2020 or 2019.
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.
High Low
The Company did not pay any dividends on its common stock during the fiscal years ended June 28, 2020 or June 30, 2019. 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 28, 2020.
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 28, 2020, 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.
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Equity Compensation Plan Information
The following table furnishes information with respect to the Company’s stock option equity compensation plans as of June 28, 2020:
Stock option compensation plans not approved by security holders – – –
ITEM 6. SELECTED FINANCIAL DATA
Not required for a smaller reporting company.
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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.”
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”. The Company also licenses Pizza Inn Express 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 June 28, 2020, Company-owned and franchised restaurants consisted of the following (in thousands, except
unit data):
Fiscal Year Ended June 28, 2020
(in thousands, except unit data)
Pizza Inn Pie Five All Concepts
Ending Units Retail Sales Ending Units Retail Sales Ending Units Retail Sales
International Franchised 38 – 38
The domestic units were located in 20 states predominately situated in the southern half of the United States. The international restaurants were located in six foreign
countries.
The following table summarizes domestic comparable store retail sales for the Company. Week 53 from fiscal year 2019 was added to fiscal year 2020 so that the number of weeks
is comparable.
53 Weeks Ended
(in thousands)
Pizza Inn Domestic Comparable Store Retail Sales $ 74,767 $ 81,986
Pie Five Domestic Comparable Store Retail Sales 22,694 26,905
Total Rave Comparable Store Retail Sales $ 97,461 $ 108,891
Basic and diluted net income per common share decreased $0.23 to a net loss of $0.28 per share for fiscal 2020 compared to a net loss of $0.05 per share in the prior fiscal
year. Net income decreased $3.4 million to a net loss of $4.2 million for fiscal 2020 compared to a net loss of $0.8 million for the prior fiscal year on revenues of $10.0 million for fiscal 2020 as compared to $12.3 million in fiscal 2019.
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Adjusted EBITDA for the fiscal year ended June 28, 2020, improved to $0.6 million compared to $0.4 million for the comparable period of the prior fiscal year. The following
table sets forth a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods shown (in thousands):
Fiscal Year Ended
Depreciation and amortization 186 466
Stock compensation expense (104 ) 36
Loss (gain) on sale/disposal of assets (24 ) (551 )
Impairment of long-lived assets and other lease charges 880 1,664
Franchisee default and closed store revenue (606 ) (777 )
Closed and non-operating store costs 137 238
Results of operations for the fiscal years 2020 and 2019 included 52 weeks and 53 weeks, respectively.
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 carry-out 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 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. The closure of one Company-owned Pie Five restaurant in January 2020 was unrelated to the
COVID-19 outbreak but the quick closure of a Pie Five Unit recently acquired from a franchisee was accelerated by the pandemic.
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 furloughed certain employees, reduced base salary by 20% for all remaining employees and reduced expenses. While the Company will remain focused on controlling expenses,
future results of operations are likely to be materially adversely impacted.
We expect that Buffet Units and Pie Five Units will continue to be subject to capacity restrictions for some time as social distancing protocols remain in place. Additionally,
an outbreak or perceived outbreak of COVID-19 connected to restaurant dining could cause negative publicity directed at any of our brands and cause customers to avoid our restaurants. We cannot predict how long the pandemic will last or whether it
will reoccur, what additional restrictions may be enacted, to what extent off-premises dining will continue, or if individuals will be comfortable returning to our Buffet Units and Pie Five Units following social distancing protocols. Any of these
changes could materially adversely affect the Company’s future financial performance. However, the ultimate impact of COVID-19 on our future results of operations and liquidity cannot presently be predicted.
Pizza Inn Brand Summary
The following tables summarize certain key indicators for the Pizza Inn franchised and licensed domestic restaurants that management believes are useful in evaluating
performance. Week 53 from fiscal year 2019 was added to fiscal year 2020 so that the number of weeks is comparable.
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53 Weeks Ended
Pizza Inn Retail Sales - Total Domestic Units (in thousands, except unit data)
Domestic Units
Delco/Express Units - Franchised 6,200 6,981
Pizza Inn Comparable Store Retail Sales - Total Domestic $ 74,767 $ 81,986
Pizza Inn Average Units Open in Period
Domestic Units
Buffet Units - Franchised 85 88
Delco/Express Units - Franchised 57 60
PIE Units - Licensed 10 7
Pizza Inn total domestic retail sales decreased by $12.4 million, or 13.7% compared to the prior year. The decrease in domestic retail sales was primarily due to the effects
of COVID-19. Pizza Inn domestic comparable store retail sales decreased by $7.2 million, or 8.8%.
The following chart summarizes Pizza Inn restaurant activity for the fiscal year ended June 28, 2020:
Fiscal Year Ended June 28, 2020
Beginning Units Opened Closed Ending Units
Domestic Units:
Buffet Units - Franchised 87 2 6 83
Delco/Express Units - Franchised 59 2 6 55
PIE Units - Licensed 9 4 – 13
International Units (all types) 48 5 15 38
The net decrease of four domestic units was primarily due to modest declines in Buffet and Delco units partially offset by new PIE units. The net decrease of ten international
Pizza Inn units was primarily due to closure of underperforming units in the Middle East partially offset by new units in the region. We believe that this represents a stabilizing of international unit count.
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.
Week 53 from fiscal year 2019 was added to fiscal year 2020 so that the number of weeks is comparable.
53 Weeks Ended
(in thousands, except unit data)
Pie Five Retail Sales - Total Units
Domestic Units - Company-owned 240 887
Pie Five Comparable Store Retail Sales - Total $ 22,694 $ 26,905
Pie Five Average Units Open in Period
Domestic Units - Franchised 53 65
Domestic Units - Company-owned 1 2
Total Domestic Units 54 67
Pie Five total retail sales decreased $15.6 million, or 37.4%, compared to the prior year. Average units open in the period decreased to 54 from 67 the prior year. Comparable
store retail sales decreased by $4.2 million, or 15.7% during fiscal 2020 compared to the prior year.
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The following chart summarizes Pie Five restaurant activity for the fiscal year ended June 28, 2020:
Fiscal Year Ended June 28, 2020
Beginning Units Opened Closed Ending Units
Domestic - Company-owned 1 1 2 –
The net decrease of 16 Pie Five units during fiscal 2020 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 this trend of net store closures will moderate and then reverse in future periods.
Pie Five - Company-Owned Restaurants Fiscal Year Ended
(in thousands, except store weeks and average data) June 28, June 30,
Store weeks (excluding partial weeks) 30 79
Average number of units 1 2
Restaurant sales (excluding partial weeks) 240 887
Loss from continuing operations before taxes (1,006 ) (2,001 )
Allocated marketing and advertising expenses 12 44
Depreciation/amortization expense – 123
Impairment, other lease charges and non-operating store costs 810 1,135
Restaurant operating cash flow (184 ) (699 )
Total retail sales of Company-owned Pie Five restaurants decreased $0.6 million, or 72.9%, to $0.2 million for fiscal 2020 compared to $0.9 million for fiscal 2019 primarily as
a result of decreased store count. Average weekly sales for Company-owned Pie Five restaurants also decreased $3,145, or 27.9%, to $8,108 for the fiscal year ended June 28, 2020 compared to $11,253 for the prior year. The decrease in average
weekly sales was primarily attributable to a similar decline in comparable store retail sales.
Loss from continuing operations before taxes for Company-owned Pie Five stores decreased $1.0 million for the fiscal year ended June 28, 2020 compared to the same period of the
prior year primarily due to the closure of Company-owned restaurants. Similarly, operating cash flow from Company-owned Pie Five restaurants improved by $0.5 million to $0.2 million cash used in fiscal 2020 compared to $0.7 million cash used in
fiscal 2019.
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 restaurants and comparing such store operating performance from period to period. Management also uses these non-GAAP financial measures for
evaluating operating performance, assessing the effectiveness of business strategies, projecting future capital needs, budgeting and other planning purposes.
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The following key performance indicators presented herein, some of which represent non-GAAP financial measures, have the meaning and are calculated as follows:
Fiscal years 2020 and 2019 included 52 weeks and 53 weeks, respectively. In order to reflect comparable 53 week periods, the last week of fiscal 2019 has been included in both
periods in the presentation of retail sales, average units open and comparable store retail sales.
Financial Results
Pizza Inn Franchising Pie Five Franchising Company-Owned Stores Corporate Total
REVENUES:
Rental Income — — — — — — 195 — 195 —
COSTS AND EXPENSES:
Gain on sale of assets – – – – – – (24 ) (551 ) (24 ) (551 )
Impairment of long-lived assets
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Revenues:
Revenues are derived from (1) franchise royalties, franchise fees and supplier incentives, (2) sales by Company-owned restaurants, (3) sublease rental income, and (4) interest
and other income. 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 fiscal 2020 and fiscal 2019 were $10.0 million and $12.3 million, respectively.
Pizza Inn Franchise and License Revenues
Pizza Inn franchise revenues decreased by $0.5 million to $6.7 million in fiscal 2020 compared to $7.2 million in fiscal 2019. The 7.4% decrease was primarily due to the
effects of COVID-19.
Pie Five Franchise and License Revenues
Pie Five franchise revenues decreased by $1.3 million to $2.9 million for fiscal 2020 compared to $4.2 million for fiscal 2019. The 31.0% decrease was primarily due to reduced
restaurant count and the effects of COVID-19.
Restaurant Sales
Restaurant sales, which consist of revenue generated by Company-owned restaurants, decreased 72.9%, or $0.6 million, to $0.2 million for fiscal 2020 compared to $0.9 million
for fiscal 2019. The decrease in restaurant sales was primarily a result of the closure of all remaining Company-owned stores during fiscal 2020.
Costs and Expenses:
Cost of Sales
Cost of sales primarily includes food and supply costs and labor directly related to Company-owned restaurant sales. These costs decreased 60.8%, or $0.7 million, to $0.4
million for fiscal 2020 compared to $1.1 million in fiscal 2019. The decrease was primarily the result of the closure of all remaining Company-owned stores during fiscal 2020.
General and Administrative Expenses
Total general and administrative expenses increased $0.2 million to $5.5 million for fiscal 2020 compared to $5.3 million for the prior fiscal year. General and administrative
expenses for Company-owned restaurants decreased $0.1 million to $0.1 million for fiscal 2020 compared to $0.2 million for the prior fiscal year primarily as a result of lower store count. General and administrative expenses for corporate
increased $0.3 million to $5.4 million for fiscal 2020 compared to $5.1 million for the prior year primarily as a result of an increase in marketing costs and professional fees.
Franchise Expenses
Franchise expenses include general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. Total franchise
expenses decreased $0.7 million to $3.1 million in fiscal 2020 from $3.8 million in the prior fiscal year. Pizza Inn franchise expenses decreased $0.4 million to $1.3 million in fiscal 2020 compared to $1.7 million in the prior fiscal year
primarily as a result of a reduction in force and lower travel expenses due to COVID-19. Pie Five franchise expenses decreased by $0.3 million to $1.8 million in fiscal 2020 compared to $2.1 million in the prior fiscal year primarily as a result of
a reduction in force and lower travel expenses due to COVID-19.
Gain on Sale of Assets
The Company’s gain on sale of assets reflects the net difference between the sale price of assets and the net carrying value of the assets at the time of sale. Gain on sale of
assets decreased to $24 thousand in fiscal 2020 compared to $551 thousand in the prior year due to the sale of two Company-owned stores in fiscal 2019.
Impairment Expenses
Impairment of long-lived assets and other lease charges were $0.9 million for fiscal 2020 compared to $1.7 million for fiscal 2019. Impairment of long-lived assets and other
lease charges for Company-owned restaurants of $0.7 million in fiscal 2020 consisted primarily of impairments of leasehold improvements and equipment and lease charges for closed stores.
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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 decreased by $1.2 million to $0.1 million in fiscal 2020 compared to $1.3 million in fiscal 2019 related to uncollectible domestic and international accounts receivable.
Interest Expense
Interest expense decreased $9 thousand for fiscal 2019 to $95 thousand compared to $104 thousand in the prior year due to a decrease in outstanding principal balance of senior
convertible notes as a result of conversions during the third quarter of fiscal 2019.
Amortization and Depreciation Expense
Amortization and depreciation expense decreased $0.3 million to $0.2 million in fiscal 2020 compared to $0.5 million in fiscal 2019 primarily as a result of lower depreciation
attributable to fewer Company-owned restaurants.
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 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. During the quarter ending March 29, 2020, it was determined that the valuation allowance on deferred tax assets should be increased by $4.3 million resulting in a full
valuation allowance. The Company has maintained the full valuation allowance for the year ended June 28, 2020.
For the year ended, June 28, 2020, the Company recorded an income tax expense of $4.1 million including federal deferred tax expense of $4.1 million and current state tax expense of
$25 thousand. As of June 28, 2020, the Company had net operating loss carryforwards totaling $23.6 million that are available to reduce future taxable income and will begin to expire in 2032. Under the Tax Cuts and Jobs Act, approximately $0.8
million of the loss carryforwards are limited to 80% and do not expire.
On March 27, 2020, President Trump signed into law the CARES Act. The legislation enacts various measures to assist companies affected by the COVID-19 pandemic. Key income
tax-related provisions of the bill include temporary modifications to net operating loss utilization and carryback limitations, allowance of refundable alternative minimum tax credits, reduced limitation of charitable contributions, reduced
limitations of business interest expense, and technical corrections to depreciation of qualified improvement property.
Liquidity and Capital Resources
Sources and Uses of Funds
Our primary sources of liquidity are cash flows from operating activities, loan proceeds, 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 taxes, share
based compensation, and changes in working capital. Cash used by operations was $0.4 million in fiscal 2020 compared to cash provided by operations of $0.7 million in fiscal year 2019. The decrease in operating cash flow was primarily attributable
to payments on terminated leases.
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 was $0.1 million in
both fiscal 2020 and fiscal 2019.
Cash flows from financing activities generally reflect changes in the Company’s borrowings and securities activity during the period. Net cash provided by financing activities
was $1.0 million and $0.1 million for the fiscal years ended June 28, 2020 and June 30, 2019, respectively. Cash flows from financing activities for fiscal 2020 were primarily the result of proceeds from a government-sponsored loan program and
sales of stock in an at-the-market offering. Cash flows from financing activities for fiscal 2019 were primarily the result of sales of stock in the at-the-market offering.
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During the fourth quarter of 2020 we furloughed certain employees, reduced base salary by 20% for all remaining employees and otherwise reduced expenses. We expect reduced cash flow from operations
during fiscal 2021 as a result of the COVID-19 pandemic. However, management believes the cash on hand combined with cash from operations, net proceeds from government sponsored loan programs and proceeds from sales of common stock will be
sufficient to fund operations for the next 12 months.
PPP Loan
On April 13, 2020, the Company received the proceeds from a loan in the amount of $656,830 (the “PPP Loan”) from JPMorgan Chase Bank, N.A. (the “Lender”) pursuant to the Paycheck
Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”). The PPP Loan matures on April 10, 2022 and bears interest at a rate of
0.98% per annum. Commencing November 10, 2020, we are required to pay the Lender equal monthly payments of principal and interest as necessary to fully amortize by April 10, 2022 the principal amount outstanding on the PPP Loan as of October 10,
2020. We may prepay the PPP Loan at any time prior to maturity with no prepayment penalties. The PPP Loan is evidenced by a promissory note dated April 10, 2020, which contains various certifications and agreements related to the PPP, as well
customary default and other provisions.
The PPP Loan is unsecured by the Company and is guaranteed by the SBA. All or a portion of the PPP Loan may be forgiven by the SBA upon application by the Company accompanied by documentation of
expenditures in accordance with SBA requirements under the PPP. In the event all or any portion of the PPP Loan is forgiven, the amount forgiven will be applied to outstanding principal.
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 is being 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 June 28, 2020, the Company had sold an aggregate of 524,660 shares in the 2017 ATM Offering, realizing aggregate gross proceeds of $0.7 million.
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.
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 are accreted into interest expense using the effective
interest method over the debt maturity period.
During fiscal 2020, $64 thousand in par value of the Notes were converted to common shares. As of June 28, 2020, $1.6 million in par value of the Notes was outstanding, offset
by $48 thousand of unamortized debt issue costs and unamortized debt discounts.
Liquidity
We expect to fund continuing operations and planned capital expenditures for the next fiscal year primarily from cash on hand, operating cash flow, loan proceeds, 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 2021 fiscal year.
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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 concessions. 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 and eventual disposition of the assets compared to their carrying value. If impairment is indicated, the carrying value of an impaired asset is reduced to its fair value,
based on discounted estimated future cash flows. During fiscal year 2020, the Company tested its long-lived assets for impairment and recognized pre-tax, non-cash impairment charges of $0.2 million primarily related to assets held for sale. The
Company also had lease charges related to closed units of $0.7 million.
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.
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 28, 2020 and June 30, 2019, 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.
Adoption of ASC 842, “Leases”
In February 2016, FASB issued Accounting Standards Codification 842, Leases (“ASC 842”) which requires an entity to recognize a right of use asset and lease liability for all leases. Classification
of leases as either a finance or operating lease determines the recognition, measurement and presentation of expenses.
The new standard became effective for the Company in the first quarter of fiscal 2020 and was adopted using a modified retrospective approach with the date of initial application on July 1, 2019.
Consequently, upon transition, the Company recognized an operating lease right of use asset and an operating lease liability. The Company applied the following practical expedients as provided in the standards update which provide elections to:
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• not reassess certain land easements in existence prior to July 1, 2019.
Through the implementation process, the Company evaluated each of its lease arrangements and enhanced its systems to track and calculate additional information required upon adoption of this
standards update. The adoption had an impact to the Condensed Consolidated Balance Sheet as of July 1, 2019 relating to the recognition of operating lease right of use assets and operating lease liabilities which represented approximately a 30%
change to total assets and a 64% change to total liabilities. The impact of adoption of this new standards update was as follows (in thousands):
Adoption July 1, 2019 Reclassification (1) Total Adjustment
Balance Sheet:
Operating lease right of use assets $ 3,428 $ 434 $ 3,862
Operating lease liabilities, current 528 528
Operating lease liabilities, net current portion 3,347 3,347
(1) As of June 30, 2019, the Company had $132 thousand recorded within deferred rent for lease incentives incurred at the inception of the affected leases and $302 thousand in deferred rent tenant improvements. Upon
adoption of the new standards update, these lease incentives were included within the lease liability.
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 lease liability. Right of use assets
represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Short-term leases that have an initial term of one year or less are
not capitalized but are disclosed below. Short-term lease costs exclude expenses related to leases with a lease term of one month or less.
Operating lease right of use assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. In addition to the present value of lease
payments, the operating lease right of use asset also includes any lease payments made to the lessor prior to lease commencement less any lease incentives and initial direct costs incurred. Lease expense for operating lease payments is recognized
on a straight-line basis over the lease term.
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 10 years. The Company has concluded that its office
agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and
obligations do not exist under the rental agreements subsequent to the primary term.
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 10 years. The Company has concluded that
its restaurant agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable
rights and obligations do not exist under the rental agreements subsequent to the primary term.
The Company also subleases some of its restaurant space to third parties. The Company’s two subleases have terms that end in 2023 and 2025. The sublease agreements are noncancelable through the end of the term and both
parties have substantive rights to terminate the lease when the term is complete. Sublease agreements are not capitalized and are recorded as rental income in the period that rent is received.
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As of June 28, 2020, the Company had no 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 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.
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 statement of operations
on a straight-line basis over the lease term which has not changed from our prior recognition. To the extent that there are variable lease payments, we recognize those payments in our statement of operations in the period in which the obligation
for those payments is incurred.
The components of total lease expense for the fiscal year ended June 28, 2020, the majority of which is included in general and administrative expense, are as follows (in thousands):
Fiscal Year Ended June 28, 2020
Operating lease cost $ 670
Sublease income (195 )
Total lease expense, net of sublease income $ 475
Supplemental cash flow information related to operating leases is included in the table below (in thousands):
Fiscal Year Ended June 28, 2020
Cash paid for amounts included in the measurement of lease liabilities $ 684
Supplemental balance sheet information related to operating leases is included in the table below (in thousands):
Fiscal Year Ended June 28, 2020
Operating lease right of use assets, net $ 3,567
Operating lease liabilities, current 632
Operating lease liabilities, net of current portion 3,471
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Weighted average remaining lease term and weighted average discount rate for operating leases are as follows:
Fiscal Year Ended June 28, 2020
Weighted average remaining lease term 5.3 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):