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 27, 2021 and may contain certain forward-looking statements that are based on current management expectations. Generally, verbs in the future tense and the words "believe," "expect," "anticipate," "estimate," "intends," "opinion," "potential" and similar expressions identify forward-looking statements. Forward-looking statements in this report include, without limitation, statements relating to our business objectives, our customers and franchisees, our liquidity and capital resources, and the impact of our historical and potential business strategies on our business, financial condition, and operating results. Our actual results could differ materially from our expectations. Further information concerning our business, including additional factors that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, are set forth in our Annual Report on Form 10-K for the year endedJune 27, 2021 . These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Results of Operations 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 27, 2022 , franchised and licensed units consisted of the following: Three Months EndedMarch 27, 2022 (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 128$ 22,228 33$ 4,870 161$ 27,098 International Franchised 31 - 31 14
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Nine Months EndedMarch 27, 2022 (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 128$ 63,590 33$ 14,907 161$ 78,497 International Franchised 31 - 31
Domestic units are located in 18 states predominantly situated in the southern
half of
Basic net income per share increased$0.01 per share to$0.03 per share for the three months endedMarch 27, 2022 , compared to the comparable period in the prior fiscal year. The Company had net income of$0.5 million for the three months endedMarch 27, 2022 compared to net income of$0.4 million in the comparable period in the prior fiscal year, on revenues of$2.6 million for the three months endedMarch 27, 2022 compared to$2.2 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. The$0.1 million increase in net income for the three months endedMarch 27, 2022 , compared to the comparable period of the prior year was primarily the result of the$0.4 million increase in revenues partially offset by a$0.3 million increase in expenses. Basic net income per share increased$0.04 per share to$0.07 per share for the nine months endedMarch 27, 2022 , compared to the comparable period in the prior fiscal year. The Company had net income of$1.2 million for the nine months endedMarch 27, 2022 compared to net income of$0.6 million in the comparable period in the prior fiscal year, on revenues of$7.9 million for the nine months endedMarch 27, 2022 compared to$6.2 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$0.6 million increase in net income for the nine months endedMarch 27, 2022 compared to the comparable period of the prior year was primarily the result of the$1.7 million increase in revenues partially offset by a$1.1 million increase in expenses.
COVID-19 Pandemic
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of novel coronavirus (COVID-19) as a pandemic, and the disease has 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, have severely disrupted our business operations. Most of the domestic Pizza Inn buffet restaurants and Pie Five restaurants are in areas that were for varying periods subject to "shelter-in-place" and social distancing restrictions prohibiting in-store sales and, therefore, were limited to carry-out and/or delivery orders. In some areas, these restrictions limited non-essential movement outside the home, which discouraged or even precluded carry-out orders. In most cases, in-store dining has now resumed subject to seating capacity limitations, social distancing protocols, and enhanced cleaning and disinfecting practices. Further, the COVID-19 pandemic precipitated significant job losses and a national economic downturn that impacted the demand for restaurant food service. Although most of the Company's domestic restaurants continued to operate under these conditions, the Company experienced temporary closures from time to time during the pandemic. The COVID-19 pandemic has resulted in dramatically reduced aggregate in-store retail sales at Buffet Units and Pie Five Units, modestly offset by increased aggregate carry-out and delivery sales. The decreased aggregate retail sales have correspondingly decreased supplier rebates and franchise royalties payable to the Company. During the fourth quarter of fiscal 2020, we participated in a government-sponsored loan program. (See, "Liquidity and Capital Resources--PPP Loan," below.) The Company also temporarily furloughed certain employees and reduced base salary by 20% for all remaining employees for the fourth quarter of fiscal 2020, as well as reducing other expenses. While the Company will remain focused on controlling expenses, future results of operations are likely to be materially adversely impacted by the pandemic and its aftermath. Although the impact of COVID-19 has moderated during fiscal 2022, the Company expects that Buffet Units and Pie Five Units in many areas will continue to be subject to capacity restrictions for some time as social distancing protocols remain in place. Additionally, an outbreak or perceived outbreak of COVID-19 connected to restaurant dining could cause negative publicity directed at any of our brands and cause customers to avoid our restaurants. We cannot predict how long the pandemic will last or whether it will reoccur, what additional restrictions may be enacted, to what extent off-premises dining will continue, or if individuals will be comfortable returning to our Buffet Units and Pie Five Units following social distancing protocols. Any of these changes could materially adversely affect the Company's future financial performance. However, the ultimate impact of COVID-19 on the Company's future results of operations and liquidity cannot presently be predicted. 15
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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. The Company considers 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 the Company's industry. The Company believes that EBITDA is helpful to investors in evaluating the Company's results of operations without the impact of expenses affected by financing methods, accounting methods and the tax environment. The Company believes 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. The Company believes 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, 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.
? "Restaurant operating cash flow" represents the pre-tax income earned by
Company-owned restaurants before (1) allocated marketing and advertising
expenses, (2) impairment and other lease charges, and (3) non-operating store
costs.
? "Non-operating store costs" represent gain or loss on asset disposal, store
closure expenses, lease termination expenses and expenses related to abandoned
store sites.
? "Franchisee default and closed store revenue/expense" represents the net of
accelerated revenues and costs attributable to defaulted area development
agreements and closed franchised stores.
EBITDA and Adjusted EBITDA
Adjusted EBITDA for the fiscal quarter endedMarch 27, 2022 increased$0.2 million compared to the same period of the prior fiscal year. Year-to-date Adjusted EBITDA increased$0.8 million compared to the same period of the prior fiscal year. The following table sets forth a reconciliation of net income to Adjusted EBITDA for the periods shown (in thousands): RAVE RESTAURANT GROUP, INC. EBITDA and ADJUSTED EBITDA (In thousands) Three Months Ended Nine Months Ended March 27, March 28, March 27, March 28, 2022 2021 2022 2021 Net income$ 493 $ 416 $ 1,235 $ 594 Interest expense 14 23 61 69 Income tax expense 3 1 10 5 Depreciation and amortization 46 41 138 128 EBITDA$ 556 $ 481 $ 1,444 $ 796 Stock compensation expense 42 39 127 39 Severance - - 33 - Gain on sale of assets - (156 ) - (156 ) Impairment of long-lived assets and other lease charges - - - 21 Franchisee default and closed store revenue (9 ) (43 ) (21 ) (154 ) Closed and non-operating store costs 1 77 3 235 Adjusted EBITDA$ 590 $ 398 $ 1,586 $ 781 16
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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 27, March 28, March 27, March 28,
2022 2021 2022 2021
(in thousands, except unit data)
Domestic Units
Buffet Units - Franchised $ 20,676 $ 16,042 $ 58,754 $ 45,057
Delco/Express Units - Franchised 1,494 1,393 4,660 4,339
PIE Units - Licensed 58 68 176 183
Total Domestic Retail Sales $ 22,228 $ 17,503 $ 63,590 $ 49,579
Pizza Inn Comparable Store Retail Sales -
Total Domestic $ 20,845 $ 16,976 $ 60,877 $ 47,045
Pizza Inn Average Units Open in Period
Domestic Units
Buffet Units - Franchised 70 75 71 78
Delco/Express Units - Franchised 49 54 51 55
PIE Units - Licensed 9 11 10 12
Total Domestic Units 128 140 132 145
Total Pizza Inn domestic retail sales increased $4.7 million , or 27.0%, for the
three months ended March 27, 2022 when compared to the same period of the prior
year. Pizza Inn domestic comparable store retail sales increased by $3.9
million , or 22.8%, for the three months ended March 27, 2022 when compared to
the same period of the prior year. Total Pizza Inn domestic retail sales
increased $14.0 million , or 28.3%, for the nine months ended March 27, 2022 when
compared to the same period of the prior year. Pizza Inn domestic comparable
store retail sales increased by $13.8 million , or 29.4%, for the nine months
ended March 27, 2022 when compared to the same period of the prior year. For
both the three and nine months ended March 27, 2022 , the improvements in
domestic retail sales and comparable store retail sales were primarily the
result of a moderation in the impact of COVID-19.
The following chart summarizes Pizza Inn unit activity for the three and nine
months ended March 27, 2022 :
Three Months Ended March 27, 2022
Beginning Concept Ending
Units Opened Change Closed Units
Domestic Units
Buffet Units - Franchised 70 1 1 1 71
Delco/Express Units - Franchised 49 1 (1 ) 1 48
PIE Units - Licensed 9 - - - 9
Total Domestic Units 128 2 - 2 128
International Units (all types) 33 1 - 3 31
Total Units 161 3 - 5 159
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Nine Months Ended March 27, 2022
Beginning Concept Ending
Units Opened Change Closed Units
Domestic Units
Buffet Units - Franchised 70 3 1 3 71
Delco/Express Units - Franchised 54 1 (1 ) 6 48
PIE Units - Licensed 11 - - 2 9
Total Domestic Units 135 4 - 11 128
International Units (all types) 32 2 - 3 31
Total Units 167 6 - 14 159
The domestic Pizza Inn units remained stable during the three months ended March
27, 2022 . There was a net decrease of seven units in the total domestic Pizza
Inn unit count during the nine months ended March 27, 2022 . For the three and
nine months ended March 27, 2022 , the number of international Pizza Inn units
decreased by two units and one unit, respectively. The Company believes the
number of domestic Pizza Inn units will stabilize in the near term and increase
modestly in future periods. The Company expects international units to increase
moderately 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 27, March 28, March 27, March 28,
2022 2021 2022 2021
(in thousands, except unit data) (in thousands, except unit data)
Pie Five Retail Sales - Total Units
Domestic Units - Franchised $ 4,870 $ 4,074 $ 14,907 $ 12,913
Domestic Units - Company-owned - - - -
Total Domestic Retail Sales $ 4,870 $ 4,074 $ 14,907 $ 12,913
Pie Five Comparable Store Retail Sales - Total $ 4,519 $
3,722 $ 13,884 $ 11,848
Pie Five Average Units Open in Period
Domestic Units - Franchised 34 36 33 39
Domestic Units - Company-owned - - - -
Total Domestic Units 34 36 33 39
Pie Five system-wide retail sales increased $0.8 million , or 19.5%, for the
three months ended March 27, 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 36 to 34. Comparable store retail sales increased
$0.8 million , or 21.4%, during the third quarter of fiscal 2022 compared to the
same period of the prior year. Pie Five system-wide retail sales increased $2.0
million , or 15.4%, for the nine month period ended March 27, 2022 when compared
to the same period of the prior year. Year-to-date fiscal 2022 compared to
year-to-date of the prior year, average units open in the period decreased from
39 to 33. Comparable store retail sales increased $2.0 million , or 17.2%, during
the nine month period ended March 27, 2022 compared to the same period of the
prior fiscal year. For both the three and nine months ended March 27, 2022 , the
improvements in domestic retail sales and comparable store retail sales were
primarily the result of a moderation in the impact of COVID-19.
The following chart summarizes Pie Five Unit activity for the three and nine
months ended March 27, 2022 :
Three Months Ended March 27, 2022
Beginning Ending
Units Opened Transfer Closed Units
Domestic - Franchised 34 1 - 2 33
Domestic - Company-owned - - - - -
Total Domestic Units 34 1 - 2 33
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Index
Nine Months Ended March 27, 2022
Beginning Ending
Units Opened Transfer Closed Units
Domestic - Franchised 33 2 - 2 33
Domestic - Company-owned - - - - -
Total Domestic Units 33 2 - 2 33
There was a net decrease of one Pie Five unit during the three months ended
The Company closed its single remaining Company-owned Pie Five restaurant during the third quarter of fiscal 2020. Loss from continuing operations before taxes for the Company-owned Pie Five stores decreased$76 thousand for the three months endedMarch 27, 2022 to$1 thousand compared to$77 thousand during the same period of the prior year. Loss from continuing operations before taxes for the Company-owned Pie Five stores decreased$253 thousand for the nine months endedMarch 27, 2022 to$3 thousand compared to$256 thousand during the same period of the prior year. The decreased loss was the result of the closure of all remaining Company-owned restaurants. Our long-term strategy is expected to include Company-owned stores. 19
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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 27, 2022 andMarch 28, 2021 (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 27 , March 28 , March 27 , March 28 , March 27 , March 28 , March 27 , March 28 , March 27 , March 28,
2022 2021 2022 2021 2022 2021 2022
2021 2022 2021
REVENUES:
Franchise and license
revenues $ 2,091 $ 1,714 $ 482 $ 418 $ - $ - $
- $ -
- - - - - - - - - -
Rental income - - - - - - 47 51 47 51
Interest income and other - - - - - - - - - -
Total revenues 2,091 1,714 482 418 - - 47 51 2,620 2,183
COSTS AND EXPENSES:
Cost of sales - - - - 1 76 - - 1 76
General and administrative
expenses - - - - - 1 1,357 1,249 1,357 1,250
Franchise expenses 443 375 262 254 - - - - 705 629
Gain on sale of assets - - - - - - - (156 ) - (156 )
Impairment of long-lived
assets
and other lease charges - - - - - - - - - -
Bad debt expense (recovery) - - - - - - 1 (97 ) 1 (97 )
Interest expense - - - - - - 14 23 14 23
Depreciation and amortization
expense - - - - - - 46 41 46 41
Total costs and expenses 443 375 262 254 1 77 1,418 1,060 2,124 1,766
INCOME/(LOSS) BEFORE TAXES
20
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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 27, March 28, March 27, March 28, March 27, March 28, March 27,
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
REVENUES:
Franchise and license
revenues $ 6,279 $ 4,718 $ 1,433 $ 1,336 $ - $ - $ - $ - $ 7,712 $ 6,054
Restaurant sales - - - - - - - - - -
Rental Income - - - - - - 140 151 140 151
Interest income and other - - 17 14 - - - (5 ) 17 9
Total revenues 6,279 4,718 1,450 1,350 - - 140 146 7,869 6,214
COSTS AND EXPENSES:
Cost of sales - - - - 1 229 - - 1 229
General and administrative
expenses - - - - 2 6 3,938 3,518 3,940 3,524
Franchise expenses 1,773 995 702 787 - - - - 2,475 1,782
Gain on sale of assets - - - - - - - (156 ) - (156 )
Impairment of long-lived
assets and other lease
charges - - - - - 21 - - - 21
Bad debt expense (recovery) - - - - - - 9 18 9 18
Interest expense - - - - - - 61 69 61 69
Depreciation and amortization
expense - - - - - - 138 128 138 128
Total costs and expenses 1,773 995 702 787 3 256 4,146 3,577 6,624 5,615
INCOME/(LOSS) BEFORE TAXES $ 4,506 $ 3,723 $ 748 $ 563 $ (3 ) $ (256 ) $ (4,006 ) $ (3,431 ) $ 1,245 $ 599
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Revenues:
Revenues are derived from franchise royalties, franchise license fees, supplier and distributor incentives, advertising funds, area development exclusivity fees and foreign master license fees, supplier 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, as well as the products sold to franchisees through third-party food distributors. Total revenues for the three month period endedMarch 27, 2022 and for the same period in the prior fiscal year were$2.6 million and$2.2 million , respectively. The increase in total revenues was driven by increases inPizza Inn and Pie Five franchise and license revenues. Total revenues for the nine month period endedMarch 27, 2022 and for the same period in the prior fiscal year were$7.9 million and$6.2 million , respectively. The increase in total revenues was driven by increases inPizza Inn and Pie Five franchise and license revenues.
Pizza Inn franchise and license revenues increased by$0.4 million to$2.1 million for the three month period endedMarch 27, 2022 compared to the same period of the prior year. Pizza Inn franchise and license revenues increased to$6.3 million for the nine month period endedMarch 27, 2022 from$4.7 million for the same period of the prior fiscal year. The increases were primarily driven by increases in supplier incentives and domestic royalties revenues.
Pie Five Franchise Revenues
Pie Five franchise and license revenues increased by$0.1 million to$0.5 million for the three month period endedMarch 27, 2022 compared to the same period of the prior fiscal year. Pie Five franchise and license revenues increased to$1.4 million for the nine month period endedMarch 27, 2022 compared to$1.3 million for the same period in the prior fiscal year. The increases were primarily driven by increases in supplier incentives and domestic royalties revenues. 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$1 thousand for the three and nine month period endedMarch 27, 2022 as a result of the closure of all of the remaining Company-owned restaurants during the third quarter of fiscal 2020.
General and Administrative Expenses
Total general and administrative expenses increased$0.1 million to$1.4 million for the three month period endedMarch 27, 2022 compared to$1.3 million for the same period of the prior fiscal year. Total general and administrative expenses increased to$3.9 million for the nine month period endedMarch 27, 2022 compared to$3.5 million for the nine month period endedMarch 28, 2021 . The increases in 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 continuing service of domestic and international franchises. Franchise expenses increased to$0.7 million for the three month period endedMarch 27, 2022 compared to$0.6 million for the same period of the prior fiscal year. Franchise expenses increased to$2.5 million for the nine month period endedMarch 27, 2022 compared to$1.8 million for the nine month period endedMarch 28, 2021 . In both cases, the increases were primarily due to an increase in advertising expenses.
Gain on Sale of Assets
Gain on sale of assets declined to zero for the three and nine months ended
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Impairment of Long-lived Assets and Other Lease Charges
Impairment of long-lived assets and other lease charges was zero for both the three month period endedMarch 27, 2022 and the comparable period in the prior fiscal year. Impairment of long-lived assets and other lease charges was zero for the nine month period endedMarch 27, 2022 compared to$21 thousand for the same period of the prior fiscal year. For the three and nine month periods endedMarch 27, 2022 , there were no 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. For the three month period endedMarch 27, 2022 , bad debt expense was$1 thousand compared to the bad debt recovery of$97 thousand for the same period in the prior fiscal year. Bad debt expense for the nine month period endedMarch 27, 2022 , decreased$9 thousand to$9 thousand compared to the comparable period in the prior fiscal year.
Interest Expense
Interest expense decreased$9 thousand to$14 thousand for the three month period endedMarch 27, 2022 compared to the same fiscal period of the prior year. Interest expense decreased$8 thousand to$61 thousand for the nine month period endedMarch 27, 2022 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.
Depreciation and Amortization Expense
Depreciation and amortization expense increased slightly for the three and nine months endedMarch 27, 2022 , compared to the same periods of the prior year. In both cases, the increase was primarily the result of increases in corporate equipment depreciation.
Provision for Income Tax
For the three and nine months ended
The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. As ofMarch 27, 2022 , the Company had established a full valuation allowance of$6.1 million against its deferred tax assets. The Company will continue to review the need for an adjustment to the valuation allowance. Liquidity and Capital Resources
During the nine month period ended
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 was$525 thousand for the nine month period endedMarch 27, 2022 compared to cash used of$357 thousand for the nine month period endedMarch 28, 2021 . The primary driver of increased operating cash flow during the nine month period endedMarch 27, 2022 was increased net income. Cash flows from investing activities reflect net proceeds from the sale of assets and capital expenditures for the purchase of Company assets. Cash provided by investing activities during the nine month period endedMarch 27, 2022 was$169 thousand , attributable to payments received on notes receivable from fixed asset sales of$240 thousand being partially offset by the purchase of definite-lived intangible assets of$46 thousand and the purchase of property, plant, and equipment of$25 thousand . Cash flows provided by investing activities were$11 thousand for the nine months endedMarch 28, 2021 . Cash flows from financing activities generally reflect changes in the Company's stock and debt activity during the period. Net cash used by financing activities was$1.8 million for the nine month period endedMarch 27, 2022 compared to net cash provided by financing activities of$3.6 million for the nine month period endedMarch 28, 2021 . Net cash used by financing activities for the nine months endedMarch 27, 2022 was primarily attributable to the payment of all outstanding convertible notes during the third quarter of fiscal 2022. 23
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As a result of the COVID-19 pandemic, the Company has taken aggressive measures to control expenses and expects modest cash flow from operations during the fourth quarter of fiscal 2022. However, management believes the cash on hand combined with net cash provided by operations will be sufficient to fund operations for the next 12 months.
2017 ATM Offering
OnDecember 5, 2017 , the Company entered into an At Market Issuance Sales Agreement withB. Riley FBR, Inc. ("B. Riley FBR") pursuant to which the Company could offer and sell shares of its common stock having an aggregate offering price of up to$5,000,000 from time to time throughB. Riley FBR acting as agent (the "2017 ATM Offering"). The 2017 ATM Offering was undertaken pursuant to Rule 415 and a shelf Registration Statement on Form S-3 which was declared effective by theSEC onNovember 6, 2017 . ThroughNovember 6, 2020 , the Company had sold an aggregate of 3,064,342 shares in the 2017 ATM Offering, realizing aggregate gross proceeds of$4.5 million . The 2017 ATM Offering expired onNovember 6, 2020 . 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. During the nine month period endedMarch 27, 2022 , no Notes were converted to common shares. The Notes matured onFebruary 15, 2022 , at which time all principal and unpaid interest was paid in cash. As ofMarch 27, 2022 , there were no Notes outstanding.
PPP Loan
OnApril 13, 2020 , the Company received the proceeds from a loan in the amount of$0.7 million (the "PPP Loan") fromJPMorgan Chase Bank, N.A . pursuant to the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") administered by theU.S. Small Business Administration ("SBA"). The PPP Loan was unsecured by the Company and was guaranteed by the SBA. We applied for and received a forgiveness decision in the fourth quarter of fiscal 2021, such that all of the PPP Loan was forgiven at that time. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires the Company's management to make estimates and assumptions that affect the Company's reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and various other assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically. Actual results could differ materially from estimates. The Company believes the following critical accounting policies require estimates about the effect of matters that are inherently uncertain, are susceptible to change, and therefore require subjective judgments. Changes in the estimates and judgments could significantly impact the Company's results of operations and financial condition in future periods. Accounts receivable consist primarily of receivables generated from franchise royalties and supplier incentives. The Company records a provision for doubtful receivables to allow for any amounts which may be unrecoverable based upon an analysis of the Company's prior collection experience, customer creditworthiness and current economic trends. Actual realization of accounts receivable could differ materially from the Company's estimates. The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to their carrying value. If impairment is recognized, the carrying value of an impaired asset is reduced to its fair value, based on discounted estimated future cash flows. Franchise revenue consists of income from license fees, royalties, area development and foreign master license agreements, advertising fund revenues, supplier incentive and convention contribution revenues. Franchise fees, area development and foreign master license agreement fees are amortized into revenue on a straight-line basis over the term of the related contract agreement. Royalties and advertising fund revenues, which are based on a percentage of franchise retail sales, are recognized as income as retail sales occur. Supplier incentive revenues are recognized as earned, typically as the underlying commodities are shipped. 24
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Index
The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. The Company assesses whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, using a "more likely than not" standard. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. In making such assessment, more weight is given to evidence that can be objectively verified, including recent losses. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. The Company accounts for uncertain tax positions in accordance with ASC 740-10, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return. ASC 740-10 requires that a company recognize in its financial statements the impact of tax positions that meet a "more likely than not" threshold, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As ofMarch 27, 2022 andMarch 28, 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.
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