Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this
Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended June 26, 2022 and may contain certain forward-looking statements that are based on current management expectations. Generally, verbs in the future tense and the
words “believe,” “expect,” “anticipate,” “estimate,” “intends,” “opinion,” “potential” and similar expressions identify forward-looking statements. Forward-looking statements in this report include, without limitation, statements relating to our
business objectives, our customers and franchisees, our liquidity and capital resources, and the impact of our historical and potential business strategies on our business, financial condition, and operating results. Our actual results could differ
materially from our expectations. Further information concerning our business, including additional factors that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q,
are set forth in our Annual Report on Form 10-K for the year ended June 26, 2022. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The
forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or
revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Results of Operations
Overview
Rave Restaurant Group, Inc., through its subsidiaries (collectively, the “Company” or “we,” “us” or “our”), franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco
Units”) and express (“Express Units”) restaurants under the trademark “Pizza Inn” and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”. The Company also licenses Pizza Inn
Express, or PIE, kiosks (“PIE Units”) under the trademark “Pizza Inn”. We facilitate food, equipment and supply distribution to our domestic and international system of restaurants through agreements with third party distributors. At September 25,
2022, franchised and licensed units consisted of the following:
Three Months Ended September 25, 2022
(in thousands, except unit data)
|
|
Pizza Inn
|
|
|
Pie Five
|
|
|
All Concepts
|
|
|
|
Ending
Units
|
|
|
Retail
Sales
|
|
|
Ending
Units
|
|
|
Retail
Sales
|
|
|
Ending
Units
|
|
|
Retail
Sales
|
|
Domestic Franchised/Licensed
|
|
|
128
|
|
|
$
|
23,979
|
|
|
|
31
|
|
|
$
|
5,243
|
|
|
|
159
|
|
|
$
|
29,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Franchised
|
|
|
33
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
The domestic units were located in 18 states predominantly situated in the southern half of the United States. The international units were located in seven foreign countries.
Basic net income per share of $0.02 per share was unchanged for the three months ended September 25, 2022, compared to the comparable period in the prior fiscal year. The
Company had net income of $0.3 million for the three months ended September 25, 2022 compared to net income of $0.3 million in the comparable period in the prior fiscal year, on revenues of $3.0 million for the three months ended September 25, 2022
compared to $2.6 million in the comparable period in the prior fiscal year. The increase in revenue was primarily due to increases in franchise royalties, supplier and distributer incentives, and advertising fund contributions.
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 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, severely disrupted our business operations. Further, the COVID-19 pandemic precipitated significant job
losses and a national economic downturn that impacted the demand for restaurant food service.
Although most of our domestic restaurants continued to operate under these conditions, we have experienced temporary closures from time to time during the pandemic. During much of the COVID-19
pandemic, we experienced 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 correspondingly decreased
supplier rebates and franchise royalties payable to the Company.
In most cases, in-store dining has now resumed subject to seating capacity limitations, social distancing protocols, and/or enhanced cleaning and disinfecting practices. As a result, the adverse
impacts of the COVID-19 pandemic have diminished in recent periods. Nonetheless, 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 continue or whether it will recur, what additional restrictions may be enacted, if individuals will be comfortable frequenting our Buffet Units and Pie Five Units, or to what extent
off-premises dining will continue. Any of these changes could materially adversely affect the Company’s future financial performance. However, the ultimate impact of COVID-19 on our future results of operations and liquidity cannot presently be
predicted.
Non-GAAP Financial Measures and Other Terms
The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”). However, the Company also presents and
discusses certain non-GAAP financial measures that it believes are useful to investors as measures of operating performance. Management may also use such non-GAAP financial measures in evaluating the effectiveness of business strategies and for
planning and budgeting purposes. However, these non-GAAP financial measures should not be viewed as an alternative or substitute for the results reflected in the Company’s GAAP financial statements.
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. 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 these meanings 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-based compensation expense, severance, gain/loss on sale of assets, costs related to impairment and other
lease charges, franchisee default and closed store revenue/expense, and closed and non-operating store costs.
|
|
● |
“Retail sales” represents the restaurant sales reported by our franchisees 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.
|
|
● |
“Non-operating store costs” represent gain or loss on asset disposal, store closure expenses, lease termination expenses and expenses related to abandoned store sites.
|
|
● |
“Franchisee default and closed store revenue/expense” represents the net of accelerated revenues and costs attributable to defaulted area development agreements and closed franchised stores.
|
EBITDA and Adjusted EBITDA
Adjusted EBITDA for the fiscal quarter ended September 25, 2022 increased $0.1 million compared to the same 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):
RAVE RESTAURANT GROUP, INC.
ADJUSTED EBITDA
(In thousands)
|
|
Three Months Ended
|
|
|
|
September 25,
2022
|
|
|
September 26,
2021
|
|
Net income
|
|
$
|
307
|
|
|
$
|
285
|
|
Interest expense
|
|
|
1
|
|
|
|
24
|
|
Income taxes
|
|
|
92
|
|
|
|
3
|
|
Depreciation and amortization
|
|
|
51
|
|
|
|
44
|
|
EBITDA
|
|
$
|
451
|
|
|
$
|
356
|
|
Stock-based compensation expense
|
|
|
86
|
|
|
|
42
|
|
Severance
|
|
|
—
|
|
|
|
33
|
|
Impairment of long-lived assets and other lease charges
|
|
|
5
|
|
|
|
—
|
|
Franchisee default and closed store revenue
|
|
|
—
|
|
|
|
(1
|
)
|
Closed and non-operating store costs
|
|
|
—
|
|
|
|
1
|
|
Adjusted EBITDA
|
|
$
|
542
|
|
|
$
|
431
|
|
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 25,
2022
|
|
|
September 26,
2021
|
|
Pizza Inn Retail Sales - Total Domestic Units
|
|
(in thousands, except unit data)
|
|
Domestic Units
|
|
|
|
|
|
|
Buffet Units - Franchised
|
|
$
|
22,441
|
|
|
$
|
18,645
|
|
Delco/Express Units - Franchised
|
|
|
1,482
|
|
|
|
1,642
|
|
PIE Units - Licensed
|
|
|
56
|
|
|
|
60
|
|
Total Domestic Retail Sales
|
|
$
|
23,979
|
|
|
$
|
20,347
|
|
|
|
|
|
|
|
|
|
|
Pizza Inn Comparable Store Retail Sales - Total Domestic
|
|
|
22,512
|
|
|
|
20,017
|
|
|
|
|
|
|
|
|
|
|
Pizza Inn Average Units Open in Period
|
|
|
|
|
|
|
|
|
Domestic Units
|
|
|
|
|
|
|
|
|
Buffet Units - Franchised
|
|
|
72
|
|
|
|
71
|
|
Delco/Express Units - Franchised
|
|
|
47
|
|
|
|
52
|
|
PIE Units - Licensed
|
|
|
9
|
|
|
|
10
|
|
Total Domestic Units
|
|
|
128
|
|
|
|
133
|
|
Pizza Inn total domestic retail sales increased by $3.6 million, or 17.9%, for the three months ended September 25, 2022 when compared to the same period of the prior year. The
increase in domestic retail sales was primarily the result of the diminished impact of COVID-19 and increased customer engagement. Pizza Inn domestic comparable store retail sales increased by $2.5 million, or 12.5%, for the same reason.
The following chart summarizes Pizza Inn restaurant activity for the three months ended September 25, 2022:
|
|
Three Months Ended September 25, 2022
|
|
|
|
Beginning
Units
|
|
|
Opened
|
|
|
Concept
Change
|
|
|
Closed
|
|
|
Ending
Units
|
|
Domestic Units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buffet Units - Franchised
|
|
|
72
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72
|
|
Delco/Express Units - Franchised
|
|
|
47
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47
|
|
PIE Units - Licensed
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
Total Domestic Units
|
|
|
128
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Units (all types)
|
|
|
31
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Units
|
|
|
159
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
161
|
|
The domestic Pizza Inn units remained stable during the three months ended September 25, 2022. For the three months ended September 25, 2022, the number of international Pizza Inn units increased
by two units. The Company believes the number of both domestic and international Pizza Inn units will increase modestly in future periods.
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 25,
2022
|
|
|
September 26,
2021
|
|
|
|
(in thousands, except unit data)
|
|
Pie Five Retail Sales - Total Units
|
|
|
|
|
|
|
Domestic Units - Franchised
|
|
$
|
5,243
|
|
|
$
|
5,060
|
|
Domestic Units - Company-owned
|
|
|
—
|
|
|
|
—
|
|
Total Domestic Retail Sales
|
|
$
|
5,243
|
|
|
$
|
5,060
|
|
|
|
|
|
|
|
|
|
|
Pie Five Comparable Store Retail Sales - Total
|
|
$
|
4,989
|
|
|
$
|
4,635
|
|
|
|
|
|
|
|
|
|
|
Pie Five Average Units Open in Period
|
|
|
|
|
|
|
|
|
Domestic Units - Franchised
|
|
|
31
|
|
|
|
33
|
|
Domestic Units - Company-owned
|
|
|
—
|
|
|
|
—
|
|
Total Domestic Units
|
|
|
31
|
|
|
|
33
|
|
Pie Five system-wide retail sales increased $0.2 million, or 3.6%, for the three months ended September 25, 2022 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 33 to 31. Comparable store retail sales increased $0.4 million, or 7.6%, during the first quarter of fiscal 2023 compared to the same period of the prior
year. For the three months ended September 25, 2022, the improvements in domestic retail sales and comparable store retail sales were primarily the result of the diminished impact of COVID-19 and increased customer engagement.
The following chart summarizes Pie Five restaurant activity for the three months ended September 25, 2022:
|
|
Three Months Ended September 25, 2022
|
|
|
|
Beginning
Units
|
|
|
Opened
|
|
|
Transfer
|
|
|
Closed
|
|
|
Ending
Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic - Franchised
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
Domestic - Company-owned
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total Domestic Units
|
|
|
31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
The Pie Five units remained stable during the three months ended September 25, 2022. We believe that Pie Five units will eventually increase in future periods.
Financial Results
The Company defines its operating segments as Pizza Inn Franchising, Pie Five Franchising and Company-Owned Restaurants. The following is additional business segment
information for the three months ended September 25, 2022 and September 26, 2021 (in thousands):
|
|
Pizza Inn
Franchising
|
|
|
Pie Five
Franchising
|
|
|
Company-Owned
Restaurants
|
|
|
Corporate
|
|
|
Total
|
|
|
|
Fiscal Quarter Ended
|
|
|
Fiscal Quarter Ended
|
|
|
Fiscal Quarter Ended
|
|
|
Fiscal Quarter Ended
|
|
|
Fiscal Quarter Ended
|
|
|
|
September
25,
2022
|
|
|
September
26,
2021
|
|
|
September
25,
2022
|
|
|
September
26,
2021
|
|
|
September
25,
2022
|
|
|
September
26,
2021
|
|
|
September
25,
2022
|
|
|
September
26,
2021
|
|
|
September
25,
2022
|
|
|
September
26,
2021
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise and license revenues
|
|
$
|
2,469
|
|
|
$
|
2,034
|
|
|
$
|
488
|
|
|
$
|
468
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,957
|
|
|
$
|
2,502
|
|
Rental income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47
|
|
|
|
47
|
|
|
|
47
|
|
|
|
47
|
|
Interest income and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
4
|
|
Total revenues
|
|
|
2,469
|
|
|
|
2,034
|
|
|
|
488
|
|
|
|
472
|
|
|
|
—
|
|
|
|
—
|
|
|
|
48
|
|
|
|
47
|
|
|
|
3,005
|
|
|
|
2,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1,343
|
|
|
|
1,205
|
|
|
|
1,343
|
|
|
|
1,206
|
|
Franchise expenses
|
|
|
958
|
|
|
|
759
|
|
|
|
244
|
|
|
|
227
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,202
|
|
|
|
986
|
|
Impairment of long-lived assets and other lease charges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
Bad debt expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
5
|
|
|
|
4
|
|
|
|
5
|
|
Interest expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
24
|
|
|
|
1
|
|
|
|
24
|
|
Depreciation and amortization expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
51
|
|
|
|
44
|
|
|
|
51
|
|
|
|
44
|
|
Total costs and expenses
|
|
|
958
|
|
|
|
759
|
|
|
|
244
|
|
|
|
227
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1,404
|
|
|
|
1,278
|
|
|
|
2,606
|
|
|
|
2,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE TAXES
|
|
$
|
1,511
|
|
|
$
|
1,275
|
|
|
$
|
244
|
|
|
$
|
245
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
(1,356
|
)
|
|
$
|
(1,231
|
)
|
|
$
|
399
|
|
|
$
|
288
|
|
Revenues:
Revenues are derived from franchise royalties, franchise fees and supplier and distributor incentives, advertising funds, area development exclusivity fees and foreign master
license fees, supplier convention funds, sublease rental income, interest and other income, 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, as well as the products sold to franchisees through third-party food distributors. Total revenues for the three month period ended September 25, 2022 and for the same period in the prior
fiscal year were $3.0 million and $2.6 million, respectively.
Pizza Inn Franchise and License
Pizza Inn franchise revenues increased by $0.4 million to $2.5 million for the three month period ended September 25, 2022 as compared to the same period in the prior fiscal year.
The 21.4% increase was driven by increases in supplier incentives, domestic royalties and advertising fund revenues.
Pie Five Franchise and License
Pie Five franchise revenues remained relatively stable at $0.5 million for the three month period ended September 25, 2022 as compared to the same period in the prior fiscal
year.
General and Administrative Expenses
Total general and administrative expenses increased to $1.3 million for the three month period ended September 25, 2022 compared to $1.2 million for the same period of the
prior fiscal year. The 11.5% increase in total general and administrative expenses during the three month period was primarily the result of increased corporate expenses.
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 increased $0.2 million to $1.2 million for the three month period ended September 25, 2022 from $1.0 million for the same period of the prior fiscal year. The increase was primarily due to an increase in payroll and related, advertising,
and travel costs.
Impairment of Long-lived Assets and Other Lease Charges
Impairment of long-lived assets and other lease charges were $5 thousand for the three months ended September 25, 2022 compared to zero for the same fiscal period of the prior
year. The increase was primarily due to writing down beverage equipment.
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. For the three
month period ended September 25, 2022, bad debt expense was $4 thousand compared to the bad debt expense of $5 thousand for the same period in the prior fiscal year.
Interest Expense
Interest expense decreased $23 thousand to $1 thousand for the three month period ended September 25, 2022 compared to the same fiscal period of the prior year. The decrease
was primarily the result of the payment of all outstanding convertible notes during the third quarter of fiscal 2022.
Amortization and Depreciation Expense
Amortization and depreciation expense increased $7 thousand to $51 thousand for the three months ended September 25, 2022, compared to $44 thousand in the same periods of the
prior year. The increase was primarily the result of higher amortization of intangible assets.
Provision for Income Taxes
For the three months ended September 25, 2022, the Company recorded an income tax expense of $92 thousand, most of which is attributable to current state 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.
Liquidity and Capital Resources
During the three month period ended September 25, 2022, the Company's primary source of liquidity was proceeds from operating activities.
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 provided by operating activities was $1.1 million for the three month period ended September 25, 2022 compared to cash used of $0.3 million for the three
month period ended September 26, 2021. The primary driver of increased operating cash flow during the three month period ended September 25, 2022 was increased collections of accounts receivable related to the employee retention credit.
Cash flows from investing activities reflect net proceeds from the sale of assets and capital expenditures for the purchase of Company assets. Cash used in investing activities
during the three month period ended September 25, 2022 was $23 thousand compared to cash provided by investing activities of $19 thousand for the three months ended September 26, 2021.
Cash flows used in financing activities generally reflect changes in the Company's stock and debt activity during the period. Net cash used by financing activities was $1.4
million for the three month period ended September 25, 2022 compared to net cash used by financing activities of $0.1 million for the three month period ended September 26, 2021. Net cash used by financing activities for the three months ended
September 25, 2022 was primarily attributable to repurchases of the Company's common stock.
Management believes the cash on hand combined with net cash provided by operations will be sufficient to fund operations for the next 12 months and beyond.
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 bore 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 was payable in cash or, at the Company’s discretion, in shares of Company common stock. The Notes were secured by a pledge of all outstanding equity securities of our two primary direct operating subsidiaries. The Notes matured
on February 15, 2022, at which time all principal and unpaid interest was paid in cash. Therefore, as of September 25, 2022, there were no Notes outstanding.
Employee Retention Credit
On December 27, 2020, the Consolidated Appropriations Act of 2021 (the “CAA”) was signed into law. The CAA expanded eligibility for an employee retention credit for
companies impacted by the COVID-19 pandemic with fewer than five hundred employees and at least a twenty percent decline in gross receipts compared to the same quarter in 2019, to encourage retention of employees. This payroll tax credit was a
refundable tax credit against certain federal employment taxes. For the fiscal year ended June 26, 2022, the Company recorded $0.7 million of other income for the employee retention credit, $0.6 million of which was collected in the first quarter
of fiscal 2023.
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 an allowance for bad debts to allow for
any amounts which may be unrecoverable based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic trends. Actual realization of accounts receivable could differ materially from the Company’s
estimates.
The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is
evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to their carrying value. If impairment is indicated, the carrying value of an impaired asset is reduced to its fair value,
based on discounted estimated future cash flows.
Franchise revenue consists of income from license fees, royalties, area development and foreign master license agreements, advertising fund revenues, supplier incentive and
convention contribution revenues. Franchise fees, area development and foreign master license agreement fees are amortized into revenue on a straight-line basis over the term of the related contract agreement. Royalties and advertising fund
revenues, which are based on a percentage of franchise retail sales, are recognized as income as retail sales occur. Supplier incentive revenues are recognized as earned, typically as the underlying commodities are shipped.
The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable
temporary differences, and tax planning strategies. The Company assesses whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, using a “more likely than not” standard.
In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. In making such assessment, more weight is given to evidence that can be
objectively verified, including recent operating performance.
The Company accounts for uncertain tax positions in accordance with ASC 740-10, which prescribes a comprehensive model for how a company should recognize, measure, present, and
disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return. ASC 740-10 requires that a company recognize in its financial statements the impact of tax positions that meet a “more likely than
not” threshold, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. As of September 25, 2022 and September 26, 2021, 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.