RAVE RESTAURANT GROUP, INC. 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 endedJune 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 endedJune 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 OverviewRave 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 licensesPizza 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. AtMarch 26, 2023 , franchised and licensed units consisted of the following: Three Months EndedMarch 26, 2023 (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 122$ 25,689 30$ 4,998 152$ 30,687 International Franchised 33 - 33 Nine Months EndedMarch 26, 2023 (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 122$ 73,301 30$ 15,098 152$ 88,399 International Franchised 33 - 33
The domestic units were located in 18 states predominantly situated in the
southern half of
Basic net income per share decreased$0.01 per share to$0.02 per share for the three months endedMarch 26, 2023 , compared to the comparable period in the prior fiscal year. The Company had net income of$0.3 million for the three months endedMarch 26, 2023 compared to net income of$0.5 million in the comparable period in the prior fiscal year, on revenues of$3.0 million for the three months endedMarch 26, 2023 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 and advertising fund contributions. The$0.2 million decrease in net income for the three months endedMarch 26, 2023 , compared to the comparable period of the prior year was primarily the result of a$0.1 million increase in income tax expense. Basic net income per share decreased$0.01 per share to$0.06 per share for the nine months endedMarch 26, 2023 , compared to the comparable period in the prior fiscal year. The Company had net income of$1.0 million for the nine months endedMarch 26, 2023 compared to net income of$1.2 million in the comparable period in the prior fiscal year, on revenues of$8.8 million for the nine months endedMarch 26, 2023 compared to$7.9 million in the comparable period in the prior fiscal year. The increase in revenue was primarily due to increases in franchise royalties, supplier and distribution incentives, and advertising fund contributions. The$0.2 million decrease in net income for the nine months endedMarch 26, 2023 compared to the comparable period of the prior year was primarily the result of the$1.0 million increase in revenues partially offset by a$0.9 million increase in expenses and a$0.3 million increase in income tax expense. 14
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COVID-19 Pandemic
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of novel coronavirus (COVID-19) as a pandemic, and the disease spread rapidly throughoutthe 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 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 withUnited 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.
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? "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 remained relatively stable at$0.6 million for the fiscal quarter endedMarch 26, 2023 compared to the same period of the prior fiscal year. Year-to-date Adjusted EBITDA 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 Nine Months Ended March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022 Net income $ 323 $ 493 $ 978 $ 1,235 Interest expense - 14 1 61 Income taxes 115 3 347 10 Depreciation and amortization 54 46 158 138 EBITDA $ 492 $
556 $ 1,484 $ 1,444 Stock-based compensation expense
86 42 259 127
Severance - - - 33
Impairment of long-lived assets and other
lease charges - - 5 -
Franchisee default and closed store revenue (10 ) (9 ) (23 ) (21 )
Closed and non-operating store costs - 1 - 3
Adjusted EBITDA $ 568 $ 590 $ 1,725 $ 1,586
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 Nine Months Ended
March 26, 2023 March
27, 2022
(in thousands, except unit data) (in thousands, except unit data)
Domestic Units
Buffet Units - Franchised $ 24,303 $ 20,676 $ 68,967 $ 58,754
Delco/Express Units - Franchised 1,356 1,494 4,180 4,660
PIE Units - Licensed 30 58 154 176
Total Domestic Retail Sales $ 25,689 $ 22,228 $ 73,301 $ 63,590
Pizza Inn Comparable Store Retail Sales -
Total Domestic $ 25,321 $ Pizza Inn Average Units Open in Period Domestic Units Buffet Units - Franchised 73 70 73 71 Delco/Express Units - Franchised 43 49 44 51 PIE Units - Licensed 8 9 9 10 Total Domestic Units 124 128 126 132 16
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Pizza Inn total domestic retail sales increased by$3.5 million , or 15.6%, for the three months endedMarch 26, 2023 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$3.4 million , or 15.6%, for the same reason. For the nine months endedMarch 26, 2023 , the improvements in domestic retail sales and comparable store retail sales were primarily due to the diminished impact of COVID-19 and increased customer engagement.
The following chart summarizes Pizza Inn restaurant activity for the three and
nine months ended
Three Months Ended March 26, 2023
Beginning Concept Ending
Units Opened Change Closed Units
Domestic Units
Buffet Units - Franchised 73 - - - 73
Delco/Express Units - Franchised 44 - - 3 41
PIE Units - Licensed 8 - - - 8
Total Domestic Units 125 - - 3 122
International Units (all types) 33 - - - 33
Total Units 158 - - 3 155
Nine Months Ended March 26, 2023
Beginning Concept Ending
Units Opened Change Closed Units
Domestic Units
Buffet Units - Franchised 72 1 - - 73
Delco/Express Units - Franchised 47 - - 6 41
PIE Units - Licensed 9 - - 1 8
Total Domestic Units 128 1 - 7 122
International Units (all types) 31 2 - - 33
Total Units 159 3 - 7 155
There was a net decrease of three and six units in the total domestic Pizza Inn
unit count during the three and nine months ended March 26, 2023 , respectively.
For the three and nine months ended March 26, 2023 , the number of international
Pizza Inn units remained stable and increased by two units, respectively. 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 Nine Months Ended
March 26, March 27, March 26, March 27,
2023 2022 2023 2022
(in thousands, except unit data) (in thousands, except unit data)
Pie Five Retail Sales - Total Units
Domestic Units - Franchised $ $ 4,998 $
- - - -
Total Domestic Retail Sales $ $ 4,998 $
Pie Five Comparable Store Retail Sales - Total $
Pie Five Average Units Open in Period
Domestic Units - Franchised 31 34 31 33
Domestic Units - Company-owned - - - -
Total Domestic Units 31 34 31 33
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Pie Five system-wide retail sales increased$0.1 million , or 2.6%, for the three months endedMarch 26, 2023 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 34 to 31. Comparable store retail sales increased$0.4 million , or 8.1%, during the third quarter of fiscal 2023 compared to the same period of the prior year. For the three months endedMarch 26, 2023 , the increase in domestic retail sales were primarily the result of the increase in comparable store retail sales, primarily resulting from the diminished impact of COVID-19 and increased customer engagement, offset by a decrease in store count. For the nine months endedMarch 26, 2023 , the improvements in domestic retail sales and comparable store retail sales were primarily due to the diminished impact of COVID-19 and increased customer engagement.
The following chart summarizes Pie Five restaurant activity for the three and
nine months ended
Three Months Ended March 26, 2023
Beginning Ending
Units Opened Transfer Closed Units
Domestic - Franchised 31 - - 1 30
Domestic - Company-owned - - - - -
Total Domestic Units 31 - - 1 30
Nine Months Ended March 26, 2023
Beginning Ending
Units Opened Transfer Closed Units
Domestic - Franchised 31 - - 1 30
Domestic - Company-owned - - - - -
Total Domestic Units 31 - - 1 30
There was a net decrease of one unit in the total domestic Pie Five unit count
during the three and nine months ended March 26, 2023 . We believe that Pie Five
units will eventually increase in future periods.
Financial Results
The Company defines its operating segments asPizza Inn Franchising ,Pie Five Franchising and Company-Owned Restaurants . The following is additional business segment information for the three and nine months endedMarch 26, 2023 andMarch 27, 2022 (in thousands):
Three Months Ended
Pizza Inn Pie Five Company-Owned
Franchising Franchising Restaurants Corporate Total
Fiscal Quarter Ended Fiscal Quarter Ended Fiscal Quarter Ended Fiscal Quarter Ended Fiscal Quarter Ended
March 26 , March 27 , March 26 , March 27 , March 26 , March 27 , March 26 , March 27 , March 26 , March 27,
2023 2022 2023 2022 2023 2022 2023 2022 2023 2022
REVENUES:
Franchise and license
revenues $ 2,450 $ 2,091 $ 462 $ 482 $ - $ - $ - $ - $ 2,912 $ 2,573
Rental income - - - - - - 47 47 47 47
Interest income and other - - 11 - - - - - 11 -
Total revenues 2,450 2,091 473 482 - - 47 47 2,970 2,620
COSTS AND EXPENSES:
Cost of sales - - - - - 1 - - - 1
General and administrative
expenses - - - - - - 1,486 1,357 1,486 1,357
Franchise expenses 749 443 215 262 - - - - 964 705
Bad debt expense - - - - - - 28 1 28 1
Interest expense - - - - - - - 14 - 14
Depreciation and
amortization expense - - - - - - 54 46 54 46
Total costs and expenses 749 443 215 262 - 1 1,568 1,418 2,532 2,124
INCOME/(LOSS) BEFORE TAXES $ 1,701 $ 1,648 $ 258 $ 220 $ - $ (1 ) $ (1,521 ) $ (1,371 ) $ 438 $ 496
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Nine Months Ended
Pizza Inn Pie Five Company-Owned
Franchising Franchising Stores Corporate Total
Fiscal Year-to-Date Fiscal Year-to-Date Fiscal Year-to-Date Fiscal Year-to-Date Fiscal Year-to-Date
March 26, March 27, March 26, March 27, March 26, March 27, March 26,
March 27, March 26, March 27,
2023 2022 2023 2022 2023 2022 2023 2022 2023 2022
REVENUES:
Franchise and license
revenues $ 7,270 $ 6,279 $ 1,412 $ 1,433 $ - $ - $ - $ - $ 8,682 $ 7,712
Rental Income - - - - - - 140 140 140 140
Interest income and other - - 19 17 - - - - 19 17
Total revenues 7,270 6,279 1,431 1,450 - - 140 140 8,841 7,869
COSTS AND EXPENSES:
Cost of sales - - - - - 1 - - - 1
General and administrative
expenses - - - - - 2 4,282 3,938 4,282 3,940
Franchise expenses 2,363 1,773 670 702 - - - - 3,033 2,475
Impairment of long-lived
assets and other lease
charges - - - - - - 5 - 5 -
Bad debt expense - - - - - - 37 9 37 9
Interest expense - - - - - - 1 61 1 61
Depreciation and
amortization expense - - - - - - 158 138 158 138
Total costs and expenses 2,363 1,773 670 702 - 3 4,483 4,146 7,516 6,624
INCOME/(LOSS) BEFORE TAXES $ 4,907 $ 4,506 $ 761 $ 748 $ - $ (3 ) $ (4,343 ) $ (4,006 ) $ 1,325 $ 1,245
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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 endedMarch 26, 2023 and for the same period in the prior fiscal year were$3.0 million and$2.6 million , respectively. The increase in total revenues was driven by increases inPizza Inn franchise and license fees. Total revenues for the nine month period endedMarch 26, 2023 and for the same period in the prior fiscal year were$8.8 million and$7.9 million , respectively. The increase in total revenues was driven by increases inPizza Inn franchise and license fees.
Pizza Inn franchise revenues increased to$2.5 million for the three month period endedMarch 26, 2023 from$2.1 million for to the same period of the prior fiscal year. Pizza Inn franchise revenues increased to$7.3 million for the nine month period endedMarch 26, 2023 from$6.3 million for the same period of the prior fiscal year. The increases were primarily 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 endedMarch 26, 2023 as compared to the same period of the prior fiscal year. Pie Five franchise revenues remained relatively stable at$1.4 million for the nine month period endedMarch 26, 2023 as compared to the same period of the prior fiscal year.
General and Administrative Expenses
Total general and administrative expenses increased$0.1 million to$1.5 million for the three month period endedMarch 26, 2023 compared to$1.4 million for the same period of the prior fiscal year. Total general and administrative expenses increased$0.3 million to$4.3 million for the nine month period endedMarch 26, 2023 compared to$4.0 million for the same period of the prior fiscal year. The increases in total general and administrative expenses during both the three and nine month periods were 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 to$1.0 million for the three month period endedMarch 26, 2023 compared to$0.7 million for the same period of the prior fiscal year. Total franchise expenses increased to$3.0 million for the nine month period endedMarch 26, 2023 compared to$2.5 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 was zero for the three month period endedMarch 26, 2023 compared to zero for the same period of the prior fiscal year. Impairment of long-lived assets and other lease charges was$5 thousand for the nine month period endedMarch 26, 2023 compared to zero for the same period of the prior fiscal year. The increase was primarily due to impaired 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 endedMarch 26, 2023 , bad debt expense was$28 thousand compared to bad debt expense of$1 thousand for the same period in the prior fiscal year. Bad debt expense for the nine month period endedMarch 26, 2023 , increased$28 thousand to$37 thousand compared to the comparable period in the prior fiscal year.
Interest Expense
Interest expense decreased$14 thousand to zero for the three month period endedMarch 26, 2023 compared to the same fiscal period of the prior year. Interest expense decreased$60 thousand to$1 thousand for the nine month period endedMarch 26, 2023 compared to the same fiscal period of the prior year. In both cases, the decrease was primarily the result of the payment of all outstanding convertible notes during the third quarter of fiscal 2022. 20
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Amortization and Depreciation Expense
Amortization and depreciation expense increased slightly for the three and nine months endedMarch 26, 2023 , compared to the same periods of the prior year. In both cases, the increase was primarily the result of higher amortization of intangible assets.
Provision for Income Taxes
For the three and nine months endedMarch 26, 2023 , the Company recorded an income tax expense of$115 thousand and$347 thousand , respectively. For the three and nine months endedMarch 27, 2022 , the Company recorded an income tax expense of$3 thousand and$10 thousand , respectively. The increase for both the three and nine months ended as ofMarch 26, 2023 is due to the full recognition of the Company's deferred tax asset which occurred during the fourth quarter of 2022. For the nine months endedMarch 26, 2023 , the federal and state tax expense were$272 thousand and$75 thousand , respectively.
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 nine month period ended
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$1.2 million for the nine month period endedMarch 26, 2023 compared to cash provided by operating activities of$0.5 million for the nine month period endedMarch 27, 2022 . The primary driver of increased operating cash flow during the nine month period endedMarch 26, 2023 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, capital expenditures for the purchase of Company assets and intangibles, and payments received on notes receivable. Cash used in investing activities during the nine month period endedMarch 26, 2023 was$0.1 million compared to cash provided by investing activities of$0.2 million for the nine months endedMarch 27, 2022 . Cash flows used in financing activities generally reflect changes in the Company's stock and debt activity during the period. Net cash used in financing activities was$5.0 million for the nine month period endedMarch 26, 2023 compared to net cash used in financing activities of$1.8 million for the nine month period endedMarch 27, 2022 . Net cash used by financing activities for the nine months endedMarch 26, 2023 was primarily attributable to repurchases of the Company's 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.
Convertible Notes
OnMarch 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 onFebruary 15 of each year, commencingFebruary 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 onFebruary 15, 2022 , at which time all principal and unpaid interest was paid in cash. Therefore, as ofMarch 26, 2023 , there were no Notes outstanding.
Employee Retention Credit
OnDecember 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 endedJune 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. 21
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires the
Company's management to make estimates and assumptions that affect our reported
amounts of assets, liabilities, revenues, expenses and related disclosure of
contingent liabilities. The Company bases its estimates on historical experience
and various other assumptions that it believes are reasonable under the
circumstances. Estimates and assumptions are reviewed periodically. Actual
results could differ materially from estimates.
The Company believes the following critical accounting policies require
estimates about the effect of matters that are inherently uncertain, are
susceptible to change, and therefore require subjective judgments. Changes in
the estimates and judgments could significantly impact the Company's results of
operations and financial condition in future periods.
Accounts receivable consist primarily of receivables generated from franchise
royalties and supplier concessions. The Company records 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 March 26, 2023 and March 27, 2022 , 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.
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