SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 23, 2018

 

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

 

Commission File Number: 0-12919

 

RAVE RESTAURANT GROUP, INC.

(Exact name of registrant as specified in its charter)

 

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

 

 

3551 Plano Parkway

The Colony, Texas 75056

(Address of principal executive offices)

(469) 384-5000

(Registrant's telephone number,
including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [   ]

 

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

Large accelerated filer [   ] Accelerated filer [   ] Non-accelerated filer [   ] Smaller reporting company [ X ]

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 [ X ]

 

As of November 2, 2018, 15,071,311 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 Operations for the three months ended September 23, 2018 and September 24, 2017 (unaudited)			4
		Condensed Consolidated Balance Sheets at September 23, 2018 (unaudited) and June 24, 2018			5
		Condensed Consolidated Statements of Shareholders’ Equity for the three months ended September 23, 2018 (unaudited)			6
		Condensed Consolidated Statements of Cash Flows for the three months ended September 23, 2018 and September 24, 2017 (unaudited)			7
		Supplemental Disclosure of Cash Flow Information for the three months ended September 23, 2018 and September 24, 2017 (unaudited)			7
		Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			29
Item 4.		Controls and Procedures			29

 

PART II. OTHER INFORMATION

 

Item 1.		Legal Proceedings			30
Item 1A.		Risk Factors			30
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3.		Defaults Upon Senior Securities			30
Item 4.		Mine Safety Disclosures			30
Item 5.		Other Information			30
Item 6.		Exhibits			31
Signatures					32

 

 

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

RAVE RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
		Three Months Ended
		September 23,				September 24,
		2018				2017
REVENUES:		$	2,991			$	5,433
COSTS AND EXPENSES:
Cost of sales			159				2,086
General and administrative expenses			1,414				2,055
Franchise expenses			1,061				640
Pre-opening expenses			—				115
Loss/(Gain) on sale of assets			(4	)			2
Impairment of long-lived assets and other lease charges			15				148
Bad debt			24				124
Interest expense			25				68
Depreciation and amortization expense			139				314
Total costs and expenses			2,833				5,552
INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES			158				(119	)
Income tax expense			50				12
INCOME/(LOSS) FROM CONTINUING OPERATIONS			108				(131	)
Loss from discontinued operations, net of taxes			—				(225	)
NET INCOME / (LOSS)		$	108			$	(356	)
INCOME / (LOSS) PER SHARE OF COMMON STOCK - BASIC:
Income / (loss) from continuing operations		$	0.01			$	(0.01	)
Loss from discontinued operations			—				(0.02	)
Net income / (loss)		$	0.01			$	(0.03	)
INCOME / (LOSS) PER SHARE OF COMMON STOCK - DILUTED:
Income / (loss) from continuing operations		$	0.01			$	(0.01	)
Loss from discontinued operations			—				(0.02	)
Net income / (loss)		$	0.01			$	(0.03	)
Weighted average common shares outstanding - basic			15,064				11,159
Weighted average common and
potential dilutive common shares outstanding			15,897				11,159
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

RAVE RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
			September 23,				June 24,
			2018 (Unaudited)				2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	2,006			$	1,386
Accounts receivable, less allowance for bad debts
of $179 and $158, respectively			1,357				1,518
Other receivable			—				300
Notes receivable			939				712
Inventories			6				6
Income tax receivable			4				5
Property held for sale			467				539
Deferred contract charges			15				—
Prepaid expenses and other			351				273
Total current assets			5,145				4,739
LONG-TERM ASSETS
Property, plant and equipment, net			1,391				1,510
Intangible assets definite-lived, net			202				212
Long-term notes receivable			791				803
Deferred tax asset, net			3,462				3,479
Long-term deferred contract charges			221				—
Deposits and other			243				243
Total assets		$	11,455			$	10,986
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade		$	797			$	774
Accrued expenses			836				1,109
Deferred rent			34				32
Deferred revenues			428				65
Total current liabilities			2,095				1,980
LONG-TERM LIABILITIES
Convertible notes			1,567				1,562
Deferred rent, net of current portion			424				433
Deferred revenues, net of current portion			2,399				670
Other long-term liabilities			48				42
Total liabilities			6,533				4,687
COMMITMENTS AND CONTINGENCIES (SEE NOTE 3)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 26,000,000
shares; issued 22,190,515 and 22,166,674 shares, respectively;
outstanding 15,071,311 and 15,047,470 shares, respectively			222				222
Additional paid-in capital			33,343				33,206
Accumulated deficit			(4,007	)			(2,493	)
Treasury stock at cost
Shares in treasury: 7,119,204			(24,636	)			(24,636	)
Total shareholders' equity			4,922				6,299
Total liabilities and shareholders' equity		$	11,455			$	10,986
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

RAVE RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
										Additional
		Common Stock								Paid-in				Accumulated				Treasury Stock
		Shares				Amount				Capital				Deficit				Shares				Amount				Total
BALANCE, JUNE 24, 2018			15,047			$	222			$	33,206			$	(2,493	)			(7,119	)		$	(24,636	)		$	6,299
ASC 606 Cumulative Adjustment															(1,622	)											(1,622	)
Stock compensation expense			—				—				101				—				—				—				101
Conversion of senior notes, net			—				—				—				—				—				—				—
Issuance of Common Stock			24				—				36				—				—				—				36
Net income			—				—				—				108								—				108
BALANCE, SEPTEMBER 23, 2018			15,071			$	222			$	33,343			$	(4,007	)			(7,119	)		$	(24,636	)		$	4,922
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

RAVE RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
		Three Months Ended
		September 23,				September 24,
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)		$	108			$	(356	)
Adjustments to reconcile net inome/(loss) to cash
provided by (used in) operating activities:
Impairment of fixed assets and other assets			—				148
Stock compensation expense			101				10
Depreciation and amortization			129				304
Amortization of intangible assets definite-lived			10				10
Amortization of debt issue costs			5				11
(Gain)/loss on the sale of assets			(4	)			2
Provision for bad debt			24				124
Changes in operating assets and liabilities:
Accounts receivable			296				529
Inventories			—				(12	)
Prepaid expenses, deposits and other, net			(79	)			(194	)
Deferred revenue			234				(534	)
Accounts payable - trade			23				(907	)
Deferred tax assets			17				—
Accrued expenses, deferred rent and other			(274	)			(183	)
Cash provided by (used in) operating activities			590				(1,048	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets			4				—
Purchase of intangible assets definite-lived			—				(7	)
Capital expenditures			(10	)			(363	)
Cash used in investing activities			(6	)			(370	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock			36				4,943
Cash provided by financing activities			36				4,943
Net increase in cash and cash equivalents			620				3,525
Cash and cash equivalents, beginning of period			1,386				451
Cash and cash equivalents, end of period		$	2,006			$	3,976
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest		$	2			$	—
Income taxes		$	4			$	—
Non-cash activities:
Capital expenditures included in accounts payable		$	—			$	164
Conversion of notes to equity		$	—			$	—
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

RAVE RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying condensed consolidated financial statements of Rave Restaurant Group, Inc. (the "Company") have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 24, 2018.

 

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

 

(1)

Summary of Significant Accounting Policies

 

Principles of Consolidation

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

 

Cash and Cash Equivalents

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

 

Fiscal Quarters

The three month periods ended September 23, 2018 and September 24, 2017 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.

 

As further described in Accounting Standards Adopted, Adoption of ASU 2014-09, “Revenue from Contracts with Customers,” revenue recognition in fiscal 2019 follows ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” Prior year revenue recognition follows ASU Topic 605, Revenue Recognition.

 

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

 

Restaurant Sales

 

Revenue from restaurant sales is recognized when food and beverage products are sold in Company-owned restaurants. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities.

 

Franchise Revenues

 

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

 

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

 

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

 

Franchise license fees are typically billed upon execution of the franchise agreement and amortized over the term of the franchise agreement which can range from five to 20 years. Fees received for renewal periods are amortized over the life of the renewal period.

 

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

 

For periods prior to adoption of Topic 606, revenue was recognized when we performed our obligations related to such fees, primarily the store opening date for initial franchise fees and area development fees, or the date the renewal option was effective for renewal fees.

 

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

 

Supplier convention funds are deferred until the obligations of the agreement are met and the event takes place.

 

Accounting Standards Adopted

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP, including industry-specific requirements, and provides companies with a single framework for recognizing revenue from contracts with customers. In March and April 2016, the FASB issued Topic 606. This update and subsequently issued amendments require companies to recognize revenue at amounts that reflect the consideration to which the companies expect to be entitled in exchange for those goods or services at the time of transfer. Topic 606 requires that we assess contracts to determine each separate and distinct performance obligation. If a contract has multiple performance obligations, we allocate the transaction price using our best estimate of the standalone selling price to each distinct good or service in the contract.

 

The Company adopted Topic 606 as of June 25, 2018. See Note 2 for additional information.

 

Stock-Based Compensation

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

 

 

 

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

 

Discontinuation of Norco Distribution Division

During the fiscal quarter ended December 24, 2017, the Company discontinued its Norco distribution division and revised its arrangements with third party suppliers and distributors of food, equipment and supplies. As a result, sale of food, equipment and supplies is no longer recognized as revenue and the cost of such items is no longer included in cost of sales. The Company now recognizes incentive revenues received from third party suppliers and distributors as revenue.

 

(2)

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

 

The Company adopted ASU 2014-09 and Topic 606 using the modified retrospective transition method effective June 25, 2018. Results for reporting periods beginning after June 25, 2018 are presented in accordance with Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605, Revenue Recognition.

 

A cumulative effect adjustment of $1.6 million was recorded as a reduction to retained earnings as of June 25, 2018 to reflect the impact of adopting Topic 606. The impact of applying Topic 606 for the quarter ended September 23, 2018, was an increase in revenues of $450 thousand and an increase in pre-tax income of $31 thousand.

 

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

 

Cumulative adjustment from adoption

 

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

 

 

The following chart presents the specific line items impacted by the cumulative adjustment to opening retained earnings:

 

		As Reported								Adjusted
		June 24,				Total				Balance Sheet
(In thousands, except share amounts)		2018				Adjustment				June 25, 2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	1,386			$	—			$	1,386
Accounts receivable, less allowance for bad debts of $158			1,518				—				1,518
Other receivable			300				—				300
Notes receivable			712				—				712
Inventories			6				—				6
Income tax receivable			5				—				5
Property held for sale			539				—				539
Deferred contract charges			—				10				10
Prepaid expenses and other			273				—				273
Total current assets			4,739				10				4,749
LONG-TERM ASSETS
Property, plant and equipment, net			1,510				—				1,510
Intangible assets definite-lived, net			212				—				212
Long-term notes receivable			803				—				803
Deferred tax asset, net			3,479				—				3,479
Long term deferred contract charges			—				182				182
Deposits and other			243				—				243
Total assets		$	10,986			$	192			$	11,178
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade		$	774			$	—			$	774
Accrued expenses			1,109				(4	)			1,105
Deferred rent			32				—				32
Deferred revenues			65				243				308
Total current liabilities			1,980				239				2,219
LONG-TERM LIABILITIES
Convertible notes			1,562				—				1,562
Deferred rent, net of current portion			433				—				433
Deferred revenues, net of current portion			670				1,575				2,245
Other long-term liabilities			42				—				42
Total liabilities			4,687				1,814				6,501
COMMITMENTS AND CONTINGENCIES (SEE NOTE 3)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 26,000,000
shares; issued  22,166,674 shares
outstanding 15,047,470 shares			222				—				222
Additional paid-in capital			33,206				—				33,206
Accumulated deficit			(2,493	)			(1,622	)			(4,115	)
Treasury stock at cost
Shares in treasury: 7,119,204			(24,636	)			—				(24,636	)
Total shareholders' equity			6,299				(1,622	)			4,677
Total liabilities and shareholders' equity		$	10,986			$	192			$	11,178

The following charts present the specific line items impacted by the application of Topic 606 in the first quarter of fiscal 2019.

 

		As Reported								Balance Sheet
		September 23,				Total				Without Adoption
(In thousands, except share amounts)		2018 (Unaudited)				Adjustment				of Topic 606
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	2,006			$	—			$	2,006
Accounts receivable, less allowance for bad debts of $179			1,357				—				1,357
Notes receivable			939				—				939
Inventories			6				—				6
Income tax receivable			4				—				4
Property held for sale			467				—				467
Deferred contract charges			15				15				30
Prepaid expenses and other			351				(47	)			304
Total current assets			5,145				(32	)			5,113
LONG-TERM ASSETS
Property, plant and equipment, net			1,391				—				1,391
Intangible assets definite-lived, net			202				—				202
Long-term notes receivable			791				—				791
Deferred tax asset, net			3,462				—				3,462
Long term deferred contract charges			221				221				442
Deposits and other			243				—				243
Total assets		$	11,455			$	189			$	11,644
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade		$	797			$	—			$	797
Accrued expenses			836				3				839
Deferred rent			34				—				34
Deferred revenues			428				240				668
Total current liabilities			2,095				243				2,338
LONG-TERM LIABILITIES
Convertible notes			1,567				—				1,567
Deferred rent, net of current portion			424				—				424
Deferred revenues, net of current portion			2,399				1,538				3,937
Other long-term liabilities			48				—				48
Total liabilities			6,533				1,781				8,314
COMMITMENTS AND CONTINGENCIES (SEE NOTE 3)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 26,000,000
shares; issued 22,190,515  shares
outstanding 15,071,311 shares			222				—				222
Additional paid-in capital			33,343				—				33,343
Accumulated deficit			(4,007	)			(1,592	)			(5,599	)
Treasury stock at cost
Shares in treasury: 7,119,204			(24,636	)			—				(24,636	)
Total shareholders' equity			4,922				(1,592	)			3,330
Total liabilities and shareholders' equity		$	11,455			$	189			$	11,644

 

		As Reported								Income Statement
		Three Months Ended								Without Adoption
		September 23,				Total				of
		2018				Adjustments				Topic 606
REVENUES:		$	2,991			$	(450	)		$	2,541
COSTS AND EXPENSES:
Cost of sales			159				—				159
General and administrative expenses			1,414				—				1,414
Franchise expenses			1,061				(419	)			642
Pre-opening expenses			—				—				—
Loss/(Gain) on sale of assets			(4	)			—				(4	)
Impairment of long-lived assets and other lease charges			15				—				15
Bad debt			24				—				24
Interest expense			25				—				25
Depreciation and amortization expense			139				—				139
Total costs and expenses			2,833				(419	)			2,414
INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES			158				(31	)			127
Income tax expense			50				—				50
INCOME/(LOSS) FROM CONTINUING OPERATIONS			108				(31	)			77
Loss from discontinued operations, net of taxes			—				—				—
NET INCOME / (LOSS)		$	108			$	(31	)		$	77
INCOME / (LOSS) PER SHARE OF COMMON STOCK - BASIC:
Income / (loss) from continuing operations		$	0.01			$	(0.00	)		$	0.01
Loss from discontinued operations			—				—				—
Net income / (loss)		$	0.01			$	(0.00	)		$	0.01
INCOME / (LOSS) PER SHARE OF COMMON STOCK - DILUTED:
Income / (loss) from continuing operations		$	0.01			$	(0.00	)		$	0.01
Loss from discontinued operations			—				—				—
Net income / (loss)		$	0.01			$	(0.00	)		$	0.01
Weighted average common shares outstanding - basic			15,064				15,064				15,064
Weighted average common and
potential dilutive common shares outstanding			15,897				15,897				15,897

 

 

 

 

 

(3)

Commitments and Contingencies

 

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 quarter ended September 23, 2018.

 

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.

 

 

(4)

Stock-Based Compensation

 

Stock Options:

 

For the fiscal quarter ended September 23, 2018, the Company did not recognize any stock-based compensation expense related to stock options compared to $10 thousand in the same period of the prior year. As of September 23, 2018, there was no unamortized stock-based compensation expense related to stock options.

 

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

 

 

		Three Months Ended
		September 23, 2018				September 24, 2017
		Shares				Shares
Outstanding at beginning of year			478,056				478,056
Granted			—				—
Exercised			—				—
Forfeited/Canceled/Expired			(100,000	)			—
Outstanding at end of period			378,056				478,056
Exercisable at end of Period			378,056				438,056

 

 

Restricted Stock Units:

 

For the fiscal quarter ended September 23, 2018, the Company recognized $0.1 million in stock-based compensation expense related to RSU’s compared to no expense in the same period of the prior year. As of September 23, 2018, unamortized stock-based compensation expense related to RSU’s was $0.5 million.

 

 

 

 

 

 

 

A summary of the status of restricted stock units as of September 23, 2018, and changes during the fiscal quarter then ended is presented below:

 

 

Number of Restricted Stock Units
Unvested at June 24, 2018			908,293
Granted			—
Vested			—
Forfeited			(134,723	)
Unvested at September 23, 2018			773,570

 

 

(5)

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 23,				September 24,
		2018				2017
Income/(loss) from continuing operations		$	108			$	(131	)
Loss from discontinued operations			—				(225	)
Net income/(loss) available to common stockholders		$	108			$	(356	)
Interest saved on convertible notes of $1,567 at 4%		$	16			$	—
Adjusted net income/(loss)		$	124			$	(356	)
BASIC:
Weighted average common shares			15,064				11,159
Income/(loss) from continuing operations per common share		$	0.01			$	(0.01	)
Loss from discontinued operations per common share			—				(0.02	)
Net income/(loss) per common share		$	0.01			$	(0.03	)
DILUTED:
Weighted average common shares			15,064				11,159
Convertible notes			833				—
Dilutive stock options			—				—
Weighted average common shares outstanding			15,897				11,159
Income/(loss) from continuing operations per common share		$	0.01			$	(0.01	)
Loss from discontinued operations per common share			—				(0.02	)
Net income/(loss) per common share		$	0.01			$	(0.03	)

 

 

For the three months ended September 23, 2018, options to purchase 378,056 shares of common stock at exercise prices ranging from $1.55 to $13.11 were excluded from the computation of diluted EPS because their inclusion would have been anti-dilutive.

 

For the three months ended September 24, 2017, options to purchase 478,056 shares of common stock at exercise prices from $1.87 to $13.11 were excluded from the computation of diluted EPS because their inclusion would have been anti-dilutive.

 

 

(6)

Closed restaurants and discontinued operations

 

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

 

The authoritative guidance on “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that discontinued operations that meet certain criteria be reflected in the statement of operations after results of continuing operations as a net amount. This guidance also requires that the operations of closed restaurants, including any impairment charges, be reclassified to discontinued operations for all periods presented.

 

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

 

Discontinued operations include losses attributable to the discontinued Norco distribution and supply division, leased buildings associated with Company-owned restaurants closed in prior years, and closed Company-owned restaurants closed in the reported period.

 

 

(7)

Income Taxes

 

For the three months ended September 23, 2018, the Company recorded an income tax expense of $50 thousand calculated at a rate consistent with the 21% statutory U.S. federal rate. Income tax expense consists of $28 thousand in state taxes and $22 thousand in deferred taxes. The Company anticipates utilizing net operating loss carryforwards to offset any 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 the valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. Based on the review of this evidence, the Company determined it was appropriate to reverse a portion of the valuation allowance against the deferred tax assets as of June 24, 2018.

 

As of September 23, 2018, the Company had $5.9 million of gross deferred tax assets partially offset by a valuation allowance of $2.4 million. The Company determined it was not necessary to further adjust the of valuation allowance. However, the Company will continue to review the need for an adjustment to the valuation allowance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8)

Segment Reporting

 

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

 

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

 

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

 

Corporate administration and other assets primarily include cash and short-term investments, as well as furniture and fixtures located at the corporate office and trademarks and other intangible assets. All assets are located within the United States.

 

Summarized in the following table are net sales and operating revenues, depreciation and amortization expense, income from continuing operations before taxes, capital expenditures and assets for the Company's reportable segments as of the three months ended September 23, 2018 and September 24, 2017 (in thousands):

 

 

		Three Months Ended
		September 23,				September 24,
		2018				2017
Net sales and operating revenues:
Pizza Inn Franchising		$	1,904			$	1,774
Pie Five Franchising			963				1,483
Company-Owned Restaurants (Note 1)			114				2,175
Interest income			10				1
Consolidated revenues		$	2,991			$	5,433
Depreciation and amortization:
Pizza Inn Franchising		$	—			$	—
Pie Five Franchising			—				—
Company-Owned Restaurants (Note 1)			31				200
Combined			31				200
Corporate administration and other (Note 2)			108				114
Depreciation and amortization		$	139			$	314
Income/(Loss) from continuing operations before taxes:
Pizza Inn Franchising		$	1,347			$	1,478
Pie Five Franchising			459				1,139
Company-Owned Restaurants (Note 1)			(129	)			(838	)
Combined			1,677				1,779
Corporate administration and other			(1,519	)			(1,898	)
Income/(loss) from continuing operations before taxes		$	158			$	(119	)
Geographic information (revenues):
United States		$	2,894			$	5,355
Foreign countries			97				78
Consolidated total		$	2,991			$	5,433
Notes:
(1) Company stores that were closed are included in discontinued operations in the accompanying Condensed Consolidated Statement of Operations.
(2) Portions of corporate administration and other have been allocated to segments.

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 24, 2018 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 24, 2018. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

Results of Operations

Overview

 

Rave Restaurant Group, Inc., through its subsidiaries (collectively, the “Company” or “we,” “us” or “our”) operates and franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants under the trademark “Pizza Inn” and operates and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”. The Company also licenses Pizza Inn Express, or PIE, kiosks (“PIE Units”) under the trademark “Pizza Inn”. We facilitate food, equipment and supply distribution to our domestic and international system of restaurants through agreements with third party distributors. At September 23, 2018, Company-owned, franchised and licensed units consisted of the following:

 

 

Three Months Ended September 23, 2018
(in thousands, except unit data)
			Pizza Inn								Pie Five								All Concepts
			Ending				Retail				Ending				Retail				Ending				Retail
			Units				Sales				Units				Sales				Units				Sales
Domestic Franchised/Licensed			153			$	21,987				70			$	11,529				223			$	33,516
Company-Owned			—				—				1				114				1				114
Total Domestic Units			153			$	21,987				71			$	11,643				224			$	33,630
International Franchised			51								—								51

 

 

Domestic units are located in 24 states predominantly situated in the southern half of the United States. International units are located in seven foreign countries.

 

Basic and diluted income per common share improved $0.04 per share to a net income of $0.01 per share for the three months ended September 23, 2018, compared to a loss of $0.03 per share in the comparable period in the prior fiscal year. The Company had a net income of $0.1 million for the three months ended September 23, 2018, and net loss of $0.4 million in the comparable period in the prior fiscal year, on revenues of $3.0 million for the three months ended September 23, 2018 compared to $5.4 million in the comparable period in the prior fiscal year. The improvement in net income from the prior year was primarily due to the closing of poorly performing stores and reduced general and administrative expenses.

 

 

 

 

 

Adjusted EBITDA for the fiscal quarter ended September 23, 2018, decreased $0.2 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):

 

		Three Months Ended
		September 23,				September 24,
		2018				2017
Net income (loss)		$	108			$	(356	)
Interest expense			25				68
Income taxes			50				12
Depreciation and amortization			139				314
EBITDA		$	322			$	38
Stock compensation expense			101				10
Pre-opening costs			—				115
(Gain)/Loss on sale/disposal of assets			(4	)			2
Impairment of long-lived assets and other lease charges			15				148
Discontinued operations, excluding taxes			—				227
Closed and non-operating store costs			22				136
Adjusted EBITDA		$	456			$	676

 

 

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 23,				September 24,
		2018				2017
Pizza Inn Retail Sales - Total Domestic Units		(in thousands, except unit data)
Domestic Units
Buffet Units - Franchised		$	20,133			$	20,139
Delco/Express Units - Franchised			1,815				1,755
PIE Units - Licensed			39				—
Total Domestic Retail Sales		$	21,987			$	21,894
Pizza Inn Comparable Store Retail Sales - Total Domestic			20,880				20,401
Pizza Inn Average Units Open in Period
Domestic Units
Buffet Units - Franchised			88				91
Delco/Express Units - Franchised			61				68
PIE Units - Licensed			3				—
Total Domestic Units			152				159

 

Total Pizza Inn domestic retail sales increased $0.1 million, or 0.4%, for the three months ended September 23, 2018 when compared to the same period of the prior year. Pizza Inn domestic comparable store retail sales increased by $0.5 million, or 2.3%, for the three months ended September 23, 2018 when compared to the same period of the prior year.

 

The following chart summarizes Pizza Inn unit activity for the three months ended September 23, 2018:

 

		Three Months Ended September 23, 2018
		Beginning								Concept								Ending
		Units				Opened				Change				Closed				Units
Domestic Units
Buffet Units- Franchised			90				—				—				2				88
Delco/Express Units - Franchised			60				1				—				1				60
PIE Units - Licensed			3				2				—				—				5
Total Domestic Units			153				3								3				153
International Units (all types)			58				1				—				8				51
Total Units			211				4				—				11				204

 

There was no net change in the total domestic Pizza Inn unit count during the three months ended September 23, 2018. We believe that this represents a stabilizing of domestic unit count that will begin to increase in future periods. The number of international Pizza Inn units decreased by seven units in the three months ended September 23, 2018 due to closure of underperforming units.

 

 

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 23,				September 24,
		2018				2017
		(in thousands, except unit data)
Pie Five Retail Sales - Total Units
Domestic Units - Franchised		$	11,529			$	10,266
Domestic Units - Company-owned			114				2,175
Total Domestic Retail Sales		$	11,643			$	12,441
Pie Five Comparable Store Retail Sales - Total		$	8,864			$	9,023
Pie Five Average Units Open in Period
Domestic Units - Franchised			71				70
Domestic Units - Company-owned			1				14
Total Domestic Units			72				84

 

Pie Five system-wide retail sales decreased $0.8 million, or 6.4%, for the three months ended September 23, 2018 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 84 to 72. Comparable store retail sales decreased by $0.2 million, or 1.8%, during the first quarter of fiscal 2019 compared to the same period of the prior year.

 

The following chart summarizes Pie Five Unit activity for the three months ended September 23, 2018:

 

 

		Three Months Ended September 23, 2018
		Beginning																Ending
		Units				Opened				Transfer				Closed				Units
Domestic - Franchised			72				2				—				4				70
Domestic - Company-owned			1				—				—				—				1
Total Domestic Units			73				2				—				4				71

 

 

The net decrease of two Pie Five Units during the three months ended September 23, 2018 was primarily the result of the closure of poor-performing stores, which we believe will provide a stronger foundation for future brand growth. We believe that this trend of net store closures will moderate and then reverse in future periods. We do not anticipate the opening of additional Company-owned Pie Five Units in the near future.

 

 

Pie Five - Company-Owned Restaurants		Three Months Ended
(in thousands, except store weeks and average data)		September 23,				September 24,
		2018				2017
Store weeks (excluding partial weeks)			13				177
Average weekly sales			8,769				12,331
Average number of units			1				14
Restaurant sales (excluding partial weeks)			114				2,170
Restaurant sales			114				2,175
Loss from continuing operations before taxes			(129	)			(838	)
Allocated marketing and advertising expenses			6				109
Depreciation/amortization expense			31				200
Pre-opening costs			—				115
Operations management and extraordinary expenses			—				55
Impairment, other lease charges and non-operating store costs			37				284
Restaurant operating cash flow			(55	)			(75	)

 

 

Average weekly sales for Company-owned Pie Five Units decreased $3,562, or 28.9%, to $8,769 for the three months ended September 23, 2018 compared to $12,331 for the same period of the prior fiscal year. Company-owned Pie Five restaurant operating cash flow increased $20 thousand during the first quarter of fiscal 2019 compared to the same period of prior year. Loss from continuing operations before taxes for Company-owned Pie Five stores improved $0.7 million for the three months ended September 23, 2018 compared to the same period of the prior year. The decrease in retail sales was due to the combined impact of decreased store count and lower average weekly sales.

 

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.

 

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

 

·

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

·

“Adjusted EBITDA” represents earnings before interest, taxes, depreciation and amortization, stock compensation expense, pre-opening expense, gain/loss on sale of assets, costs related to impairment, discontinued operations and closed and non-operating store costs.

·

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

·

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

·

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

·

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

·

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

·

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

·

“Restaurant operating cash flow” represents the pre-tax income earned by Company-owned restaurants before (1) allocated marketing and advertising expenses, (2) depreciation and amortization, (3) pre-opening expenses, (4) operations management and extraordinary expenses, (5) impairment and other lease charges, and (6) non-operating store costs.

·

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

·

“Pre-opening expenses” consist primarily of certain costs incurred prior to the opening of a Company-owned restaurant, including: (1) marketing and promotional expenses, (2) accrued rent, and (3) manager salaries, employee payroll and related training costs.

 

 

 

Financial Results

 

During the fiscal quarter ended December 24, 2017, the Company discontinued its Norco distribution division and revised its arrangements with third party suppliers and distributors of food, equipment and supplies. As a result, sale of food, equipment and supplies is no longer recognized as revenue and the cost of such items is no longer included in cost of sales. The Company now recognizes incentive revenues received from third party suppliers and distributors as revenue.

 

In order to show the impact of this change and better reflect the current operational structure, the Company has redefined 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 23, 2018 and September 24, 2017 (in thousands):

 

 

		Pizza Inn								Pie Five								Company-Owned
		Franchising								Franchising								Stores								Corporate								Total
		Fiscal Quarter Ended								Fiscal Quarter Ended								Fiscal Quarter Ended								Fiscal Quarter Ended								Fiscal Quarter Ended
		Sept 23,				Sept 24,				Sept 23,				Sept 24,				Sept 23,				Sept 24,				Sept 23,				Sept 24,				Sept 23,				Sept 24,
		2018				2017				2018				2017				2018				2017				2018				2017				2018				2017
REVENUES:
Franchise revenues		$	1,904			$	1,774			$	963			$	1,483				—				—				—				—			$	2,867			$	3,257
Restaurant sales			—				—				—				—				114				2,175				—				—				114				2,175
Interest income and other			—				—				—				—				—				—				10				1				10				1
Total revenues			1,904				1,774				963				1,483				114				2,175				10				1				2,991				5,433
COSTS AND EXPENSES:
Cost of sales			—				—				—				—				159				2,086				—				—				159				2,086
General and administrative expenses			—				—				—				—				38				340				1,376				1,715				1,414				2,055
Franchise expenses			557				296				504				344				—				—				—				—				1,061				640
Pre-opening expenses			—				—				—				—				—				115				—				—				—				115
(Gain)/Loss on sale of assets			—				—				—				—				—				—				(4	)			2				(4	)			2
Impairment of long-lived assets
and other lease charges			—				—				—				—				15				148				—				—				15				148
Bad debt			—				—				—				—				—				124				24				—				24				124
Interest expense			—				—				—				—				—				—				25				68				25				68
Amortization and depreciation expense			—				—				—				—				31				200				108				114				139				314
Total costs and expenses			557				296				504				344				243				3,013				1,529				1,899				2,833				5,552
INCOME/(LOSS) FROM CONTINUING
OPERATIONS BEFORE TAXES		$	1,347			$	1,478			$	459			$	1,139			$	(129	)		$	(838	)		$	(1,519	)		$	(1,898	)		$	158			$	(119	)

 

 

Revenues:

 

Revenues are derived from franchise royalties, franchise fees, supplier incentives, advertising funds and convention funds and sales by Company-owned restaurants. 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 23, 2018 and for the same period in the prior fiscal year were $3.0 million and $5.4 million, respectively. The decrease in total revenues was driven by the reduction in the number of Company-owned stores and revenue recognized from defaulted area development agreements in the prior year, partially offset by advertising fund contributions and convention fund contributions that were previously recorded as an offset to franchise expenses before adoption of Topic 606.

 

Pizza Inn Franchise Revenues

 

Pizza Inn franchise revenues increased by $0.1 million to $1.9 million for the three month period ended September 23, 2018 compared to $1.8 million for the same period in the prior fiscal year. The increase was primarily the result of $0.2 million in recognition of convention fund contributions that were previously recorded as an offset to franchise expenses before the adoption of Topic 606, partially offset by a reduction in supplier incentive revenues.

 

 

 

 

Pie Five Franchise Revenues

 

Pie Five franchise revenues decreased by $0.5 million to $1.0 million for the three month period ended September 23, 2018 compared to $1.5 million for the same period in the prior fiscal year primarily driven by the prior year’s $0.7 million for franchise and development fees, including defaulted area development agreements, partially offset by $0.2 million of advertising fund contributions that were previously recorded as an offset to franchise expenses before the adoption of Topic 606.

 

Restaurant Sales

 

Restaurant sales, which consist of revenue generated by Company-owned restaurants, decreased 94.8%, or $2.1 million, to $0.1 million for the three month period ended September 23, 2018, compared to $2.2 million for the comparable period in the prior year. The decrease in restaurant sales was primarily a result of the combined impact of decreased Company-owned store count and lower average weekly sales.

 

Costs and Expenses:

 

Cost of Sales - Total

 

Total 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 $0.2 million for the three month period ended September 23, 2018 compared to $2.1 million in the three month period ended September 24, 2017. The decreases were primarily the result of decreased Company-owned store count.

 

General and Administrative Expenses - Total

 

Total general and administrative expenses decreased to $1.4 million for the three month period ended September 23, 2018 compared to $2.1 million for the three month period ended September 24, 2017 primarily resulting from the lower number of Company-owned restaurants and decreased corporate overhead.

 

General and Administrative Expenses - Company-Owned Restaurants

 

General and administrative expenses for Company-owned restaurants decreased to $38 thousand for the three month period ended September 23, 2018 compared to $0.3 million in the three month period ended September 24, 2017 primarily as a result of lower store count.

 

General and Administrative Expenses - Corporate

 

General and administrative expenses for corporate decreased to $1.4 million for the three month period ended September 23, 2018 compared to $1.7 million for the three month period ended September 24, 2017. The decrease in general and administrative expenses for the three month period was primarily attributable to a reduction in the number of general and administrative employees.

 

Franchise Expenses - Total

 

Franchise expenses include general and administrative expenses directly related to the continuing service of domestic and international franchises. Franchise expenses increased to $1.1 million for the three month period ended September 23, 2018 compared to $0.6 million for the three month period ended September 24, 2017, primarily related to the change in accounting for convention fund contribution revenues and advertising fund revenues which were recorded as revenue in the current year due to adoption of Topic 606 but were recorded as reductions in expense in the prior year.

 

 

 

 

 

 

Franchise Expenses – Pizza Inn

 

Pizza Inn franchise expenses include general and administrative expenses directly related to the continuing service of the Pizza Inn domestic and international franchises. Franchise expenses increased to $0.6 million for the three month period ended September 23, 2018 compared to $0.3 million for the three month period ended September 24, 2017. The increase was primarily related to convention fund contributions which were recorded as revenue in the current year due to adoption of Topic 606 but were recorded as reductions to expense in the prior year.

 

Franchise Expenses – Pie Five

 

Pie Five franchise expenses include general and administrative expenses directly related to the continuing service of the Pie Five domestic and international franchises. Franchise expenses increased to $0.5 million for the three month period ended September 23, 2018 compared to $0.3 million for the three month period ended September 24, 2017. The increase was primarily related to advertising fund contributions which were recorded as revenue in the current year due to adoption of Topic 606 but were recorded as reductions in expense in the prior year.

 

Pre-Opening Expenses

 

Pre-opening expenses are directly related to the number of new corporate store openings. Pre-opening expenses decreased to zero for the first quarter of fiscal 2019 compared to $0.1 million for the same quarter of fiscal 2018 due to the reduction in openings of Company-owned restaurants.

 

Impairment of Long-lived Assets and Other Lease Charges

 

Impairment of long-lived assets and other lease charges were $15 thousand for three month period ended September 23, 2018 compared to $0.1 million for the same period in the prior fiscal year. For the three month period ended September 23, 2018, these charges related to lease termination expenses.

 

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 $0.1 million for the three month period ended September 23, 2018 as compared to the comparable period in the prior fiscal year.

 

Interest Expense

 

Interest expense decreased to $25 thousand in the three month period ended September 23, 2018 compared to $68 thousand during the same fiscal quarter of the prior year. The decrease in interest expense during the three month period was primarily related to a reduction in outstanding principal amount due to the conversion of $1.3 million in par value of convertible notes to stock during fiscal 2018.

 

Provision for Income Tax

 

For the three months ended September 23, 2018, the Company recorded an income tax expense of $50 thousand calculated at a rate consistent with the 21% statutory U.S. federal rate. Income tax expense consists of $28 thousand in state taxes and $22 thousand in deferred taxes. The Company anticipates utilizing net operating loss carryforwards to offset any 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 the valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. Based on the review of this evidence, the Company determined it was appropriate to reverse a portion of the valuation allowance against the deferred tax assets as of June 24, 2018.

 

As of September 23, 2018, the Company had $5.9 million of gross deferred tax assets partially offset by a valuation allowance of $2.4 million. The Company determined it was not necessary to further adjust the of valuation allowance. However, the Company will continue to review the need for an adjustment to the valuation allowance.

 

Discontinued Operations

 

Net losses from the Norco food and supply distribution division are included within discontinued operations. The discontinuation of the Norco food and supply distribution entity was a strategic shift for the Company during the second quarter of fiscal 2018, releasing the Company from added credit risk, overhead expense, and direct supply and delivery responsibilities. Discontinued operations also include losses from leased buildings and operating losses associated with Company-owned restaurants closed in prior years.

 

 

Liquidity and Capital Resources

 

During the three month period ended September 23, 2018, our primary source of liquidity was proceeds 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 provided by operating activities increased $1.6 million to cash provided of $0.6 million for the three month period ended September 23, 2018 compared to cash used of $1.0 million for the three month period ended September 24, 2017. The primary drivers of increased cash flows during the three month period ended September 23, 2018 were growth in net income and reductions in cash consumed by working capital.

 

Cash flows from investing activities reflect net proceeds from the sale of assets and capital expenditures for the purchase of Company assets. Cash used by investing activities during the three month period ended September 23, 2018 of $6 thousand was primarily attributed $10 thousand in capital expenditures for technology partially offset by $4 thousand in proceeds from the sale of assets. This compares to cash used by investing activities of $0.4 million during the same period in the prior fiscal year primarily attributable to Company-owned Pie Five Units that were under development during the period.

 

Cash flows from financing activities generally reflect changes in the Company's stock and debt activity during the period. Net cash provided by financing activities was $36 thousand for the three month period ended September 23, 2018 compared to $4.9 million for the three month period ended September 24, 2017. Cash flows from financing activities for the three months ended September 23, 2018 were primarily attributable to at-the-market sales of common stock. Cash flows from financing activities for the three months ended September 24, 2017 were from the sale of stock in connection with a shareholder rights 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 September 23, 2018, the Company had sold an aggregate of 173,852 shares in the 2017 ATM Offering, realizing aggregate gross proceeds of $0.3 million.

 

Management believes the cash on hand combined with cash from operations and proceeds from at-the-market sales of common stock under its shelf registration will be sufficient to fund operations for the next 12 months.

 

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.

 

Inventory consists primarily of food, paper products and supplies stored in and used by Company-owned restaurants and is stated at lower of first-in, first-out (“FIFO”) or market. The valuation of such restaurant inventory requires us to estimate the amount of obsolete and excess inventory based on estimates of future retail sales by Company-owned restaurants. Overestimating retail sales by Company-owned restaurants could result in the write-down of inventory which would have a negative impact on the gross margin of such Company-owned restaurants.

 

The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to 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. For periods prior to adoption of Topic 606, franchise fees, area development and foreign master license agreement fees were recognized when we performed our obligations related to such fees, primarily the store opening date.

 

 

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. The new lease standard is effective for public companies for fiscal years, (including interim periods therein), beginning after December 15, 2018. Application of ASU 2016-02 will be required beginning in the first quarter of our fiscal 2020. Early adoption of ASU 2016-02 as of its issuance is permitted. This new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required for a smaller reporting company.

 

Item 4. Controls and Procedures

 

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

 

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

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

Not required for a smaller reporting company.

 

 

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 23, 2018.

 

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 23, 2018, 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

 

Not applicable.

 

 

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 By-laws of Rave Restaurant Group, Inc. (incorporated by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K filed January 8, 2015).

 

4.1

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 1 dated as of October 31, 2017, between Rave Restaurant Group, Inc. and Securities Transfer Corporation (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

 

 

 

SIGNATURES

 

 

 

 

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

 

 

RAVE RESTAURANT GROUP, INC.

(Registrant)

 

 

 

 

By: /s/ Scott Crane                                                                                   

Scott Crane

Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

 

By: /s/ Andrea K. Allen                                                                           

Andrea K. Allen

Chief Accounting and Administrative Officer

(Principal Financial Officer)

 

 

 

 

 

 

 

 

Dated: November 6, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Scott Crane, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Rave Restaurant Group, Inc. (“the Registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

3. Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

4. Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

 

1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

 

Date: November 6, 2018

By:

/s/ Scott Crane Scott Crane Chief Executive Officer (Principal Executive Officer)

Exhibit 31.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Andrea K. Allen, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Rave Restaurant Group, Inc. (“the Registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

3. Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

4. Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

 

1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

 

Date: November 6, 2018

By:

/s/ Andrea K. Allen Andrea K. Allen Chief Accounting and Administrative Officer (Principal Financial Officer)

Exhibit 32.1

 

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of Rave Restaurant Group, Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:

 

The accompanying Quarterly Report on Form 10-Q for the quarter ended September 23, 2018 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-Q.

Date: November 6, 2018

By:

/s/ Scott Crane Scott Crane Chief Executive Officer (Principal Executive Officer)

 

The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

Exhibit 32.2

 

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of Rave Restaurant Group, Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:

 

The accompanying Quarterly Report on Form 10-Q for the quarter ended September 23, 2018 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-Q.

Date: November 6, 2018		By:	/s/ Andrea K. Allen Andrea K. Allen Chief Accounting and Administrative Officer (Principal Financial Officer)

 

The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.