RAVE RESTAURANT GROUP, INC. Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes appearing elsewhere in this Annual
Report on Form 10-K and may contain certain forward-looking statements. See
"Forward-Looking Statements."
Overview
The Company franchises pizza buffet ("Buffet Units"), delivery/carry-out ("Delco
Units") and express ("Express Units") restaurants under the trademark "Pizza
Inn " and franchises fast casual pizza restaurants ("Pie Five Units") under the
trademarks "Pie Five Pizza Company " or "Pie Five". The Company also licenses
Pizza Inn Express kiosks ("PIE Units") under the trademark "Pizza Inn". We
facilitate food, equipment and supply distribution to our domestic and
international system of restaurants through agreements with third party
distributors. At June 27, 2021 , Company-owned and franchised restaurants
consisted of the following (in thousands, except unit data):
Fiscal Year Ended June 27, 2021
(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 135$ 70,073 33$ 17,734 168$ 87,807 Company-Owned - - - - - - Total Domestic Units 135$ 70,073 33$ 17,734 168$ 87,807 International Franchised 32 - 32
The domestic units were located in 19 states predominately situated in the
southern half of
The following table summarizes domestic comparable store retail sales for the
Company.
52 Weeks Ended
June 27 , June 28,
2021 2020
(in thousands)
$ 83,719 $ 85,452 Basic net income per common share increased$0.37 to net income of$0.09 per share for fiscal 2021 compared to a net loss of$(0.28) per share in the prior fiscal year. Diluted net income per common share increased$0.37 to net income of$0.09 per share for fiscal 2021 compared to a net loss of$(0.28) per share in the prior fiscal year. Net income increased$5.7 million to net income of$1.5 million for fiscal 2021 compared to a net loss of$4.2 million for the prior fiscal year on revenues of$8.6 million for fiscal 2021 as compared to$10.0 million in fiscal 2020. 9
--------------------------------------------------------------------------------
Index
Adjusted EBITDA for the fiscal year endedJune 27, 2021 , improved to$2.0 million compared to$0.6 million for the prior fiscal year. The following table sets forth a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods shown (in thousands): Fiscal Year Ended June 27, June 28, 2021 2020 Net income (loss)$ 1,520 $ (4,233 ) Interest expense 92 95 Income taxes (29 ) 4,078 Depreciation and amortization 167
186
EBITDA$ 1,750 $
126
Stock compensation expense (income) 80 (104 ) Severance 23 157 Gain on sale of assets (10 ) (24 ) Impairment of long-lived assets and other lease charges 21
880
Franchisee default and closed store revenue (170 ) (606 ) Closed and non-operating store costs 271 137 Adjusted EBITDA$ 1,965 $ 566
Results of operations for the fiscal years 2021 and 2020 both included 52 weeks.
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 has precipitated significant job losses and a national economic downturn that typically impacts the demand for restaurant food service. Although most of our domestic restaurants have continued to operate under these conditions, we have experienced temporary closures from time to time during the pandemic. The COVID-19 pandemic has resulted in dramatically reduced aggregate in-store retail sales at Buffet Units and Pie Five Units, modestly offset by increased aggregate carry-out and delivery sales. The decreased aggregate retail sales have correspondingly decreased supplier rebates and franchise royalties payable to the Company. During the fourth quarter of fiscal 2020, we participated in a government-sponsored loan program. (See, "Liquidity and Capital Resources--PPP Loan," below.) We also 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. We expect that Buffet Units and Pie Five Units will continue to be subject to capacity restrictions for some time as social distancing protocols remain in place. Additionally, an outbreak or perceived outbreak of COVID-19 connected to restaurant dining could cause negative publicity directed at any of our brands and cause customers to avoid our restaurants. We cannot predict how long the pandemic will last or whether it will reoccur, what additional restrictions may be enacted, to what extent off-premises dining will continue, or if individuals will be comfortable returning to our Buffet Units and Pie Five Units following social distancing protocols. Any of these changes could materially adversely affect the Company's future financial performance. However, the ultimate impact of COVID-19 on our future results of operations and liquidity cannot presently be predicted.Pizza Inn Brand Summary The following tables summarize certain key indicators for the Pizza Inn franchised and licensed domestic restaurants that management believes are useful in evaluating performance. 52 Weeks Ended June 27, June 28, 2021 2020 Pizza Inn Retail Sales - Total Domestic Units (in thousands, except unit data) Domestic Units Buffet Units - Franchised $ 63,776 $ 71,267 Delco/Express Units - Franchised 6,053 6,200 PIE Units - Licensed 244 289 Total Domestic Retail Sales $ 70,073 $ 77,756
Pizza Inn Average Units Open in Period Domestic Units Buffet Units - Franchised 77 85 Delco/Express Units - Franchised 55 57 PIE Units - Licensed 12 10 Total Domestic Units 144 152 10
--------------------------------------------------------------------------------
Index
Pizza Inn total domestic retail sales decreased by
The following chart summarizes Pizza Inn restaurant activity for the fiscal year endedJune 27, 2021 : Fiscal Year Ended June 27, 2021 Beginning Concept Ending Units Opened Change Closed Units Domestic Units: Buffet Units - Franchised 83 1 (1 ) 13 70 Delco/Express Units - Franchised 55 2 1 4 54 PIE Units - Licensed 13 - - 2 11 Total Domestic Units 151 3 - 19 135 International Units (all types) 38 3 - 9 32 Total Units 189 6 - 28 167 The net decrease of 16 domestic units was primarily due to declines in Buffet, Delco, and PIE units. The net decrease of six international Pizza Inn units was primarily due to closure of underperforming units inBangladesh partially offset by new units in theMiddle East . We believe that this represents a stabilizing of international unit count. Pie Five Brand Summary The following tables summarize certain key indicators for the Pie Five franchised and Company-owned restaurants that management believes are useful in evaluating performance. 52 Weeks Ended June 27, June 28, 2021 2020 (in thousands, except unit data) Pie Five Retail Sales - Total Units Domestic Units - Franchised $ 17,734 $ 25,771 Domestic Units - Company-owned - 240 Total Domestic Retail Sales $
17,734 $ 26,011
Pie Five Comparable Store Retail Sales - Total $
15,612 $ 16,640
Pie Five Average Units Open in Period Domestic Units - Franchised 37 53 Domestic Units - Company-owned - 1 Total Domestic Units 37 54 Pie Five domestic total retail sales decreased$8.3 million , or 31.8%, compared to the prior year. Average units open in the period decreased to 37 from 54 the prior year. Comparable store retail sales decreased by$1.0 million , or 6.2% during fiscal 2021 compared to the prior year. 11
--------------------------------------------------------------------------------
Index
The following chart summarizes Pie Five restaurant activity for the fiscal year endedJune 27, 2021 : Fiscal Year Ended June 27, 2021 Beginning Ending Units Opened Closed Units Domestic - Franchised 42 1 10 33 Domestic - Company-owned - - - - Total Domestic Units 42 1 10 33 The net decrease of 9 Pie Five units during fiscal 2021 was primarily the result of the closure of poor-performing units, which we believe provides us a stronger foundation for future brand growth. We believe that this trend of net store closures will moderate and then reverse in future periods. Pie Five - Company-Owned Restaurants Fiscal Year Ended (in thousands, except store weeks and average data) June 27,
2021 2020
Store weeks (excluding partial weeks) - 30 Average weekly sales - 8,108 Average number of units - 1 Restaurant sales (excluding partial weeks) - 240 Restaurant sales - 240 Loss from continuing operations before taxes (292 ) (1,006 ) Allocated marketing and advertising expenses - 12 Depreciation/amortization expense - - Impairment, other lease charges and non-operating store costs 291 810 Restaurant operating cash flow (1
) (184 )
We closed our single remaining Company-owned Pie Five restaurant during the third quarter of fiscal 2020. Average weekly sales for Company-owned Pie Five restaurants also decreased$8.1 thousand , or 100.0%, to zero for the fiscal year endedJune 27, 2021 . Loss from continuing operations before taxes for Company-owned Pie Five stores decreased$0.7 million for the fiscal year endedJune 27, 2021 compared to the same period of the prior year primarily due to the closure of all remaining Company-owned restaurants. Similarly, operating cash flow from Company-owned Pie Five restaurants improved by$183 thousand to$1 thousand cash used in fiscal 2021 compared to$184 thousand cash used in fiscal 2020.
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. We believe that restaurant operating cash flow is a useful metric to investors in evaluating the ongoing operating performance of Company-owned restaurants and comparing such store operating performance from period to period. Management also uses these non-GAAP financial measures for evaluating operating performance, assessing the effectiveness of business strategies, projecting future capital needs, budgeting and other planning purposes.
The following key performance indicators presented herein, some of which represent non-GAAP financial measures, have the meaning and are calculated as follows:
• "EBITDA" represents earnings before interest, taxes, depreciation and
amortization.
• "Adjusted EBITDA" represents earnings before interest, taxes, depreciation and
amortization, stock compensation expense, 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.
12
--------------------------------------------------------------------------------
Index
• "Retail sales" represents the restaurant sales reported by our franchisees and
Company-owned restaurants, which may be segmented by brand or
domestic/international locations.
• "Comparable store retail sales" includes the retail sales for restaurants that
have been open for at least 18 months as of the end of the reporting period.
The sales results for a restaurant that was closed temporarily for remodeling
or relocation within the same trade area are included in the calculation only
for the days that the restaurant was open in both periods being compared.
• "Store weeks" represent the total number of full weeks that specified
restaurants were open during the period.
• "Average units open" reflects the number of restaurants open during a reporting
period weighted by the percentage of the weeks in a reporting period that each
restaurant was open.
• "Average weekly sales" for a specified period is calculated as total retail
sales (excluding partial weeks) divided by store weeks in the period.
• "Restaurant operating cash flow" represents the pre-tax income earned by
Company-owned restaurants before (1) allocated marketing and advertising
expenses, (2) depreciation and amortization, (3) impairment and other lease
charges, and (4) 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.
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 Fiscal Years endedJune 27, 2021 andJune 28, 2020 (in thousands): Pizza Inn Pie Five Company-Owned Franchising Franchising Stores Corporate Total Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fiscal
Year Ended
June 27, June 28, June 27, June
28,
June 28,
2021 2020 2021 2020 2021 2020 2021 2020 2021 2020
REVENUES:
Franchise and
license revenues $ 6,582 $ 6,662 $ 1,800 $ 2,891 $ - $ - $ - $ - $ 8,382 $ 9,553
Restaurant sales - - - - - 240 - - - 240
Rental income - - - - - - 200 195 200 195
Interest income and
other - - 16 3 - - (5 ) 37 11 40
Total revenues 6,582 6,662 1,816 2,894 - 240 195 232 8,593 10,028
COSTS AND EXPENSES:
Cost of sales - - - - 264 439 - - 264 439
General and
administrative
expenses - - - - 7 90 4,703 5,413 4,710 5,503
Franchise expenses 1,377 1,297 1,017 1,754 - - - - 2,394 3,051
Gain on sale of
assets - - - - - - (10 ) (24 ) (10 ) (24 )
Impairment of
long-lived assets
and other lease
charges - - - - 21 717 - 163 21 880
Bad debt - - - - - - 121 53 121 53
Interest expense - - - - - - 92 95 92 95
Amortization and
depreciation
expense - - - - - - 167 186 167 186
Total costs and
expenses 1,377 1,297 1,017 1,754 292 1,246 5,073 5,886 7,759 10,183
OTHER INCOME:
Gain on forgiveness
of PPP loan - - - - - - (657 ) - (657 ) -
Total other income - - - - - - (657 ) - (657 ) -
INCOME/(LOSS)
BEFORE TAXES $ 5,205 $ 5,365 $ 799 $ 1,140 $ (292 ) $ (1,006 ) $ (4,221 ) $ (5,654 ) $ 1,491 $ (155 )
13--------------------------------------------------------------------------------
Index Revenues: Revenues are derived from franchise royalties, franchise fees and supplier and distributer 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, and the products sold to franchisees through third-party food distributors. Total revenues for fiscal 2021 and fiscal 2020 were$8.6 million and$10.0 million , respectively.
Pizza Inn franchise revenues decreased by$0.1 million to$6.6 million in fiscal 2021 compared to$6.7 million in fiscal 2020. The 1.2% decrease was primarily due to the effects of COVID-19.
Pie Five Franchise and License Revenues
Pie Five franchise revenues decreased by$1.1 million to$1.8 million for fiscal 2021 compared to$2.9 million for fiscal 2020. The 37.7% decrease was primarily due to reduced restaurant count and the effects of COVID-19.
Restaurant Sales
We had no restaurant sales, which consist of revenue generated by Company-owned restaurants, in fiscal 2021 because we closed our single remaining Company-owned restaurant during the third quarter of fiscal 2020.
Costs and Expenses:
Cost of Sales
Cost of sales primarily includes food and supply costs, labor costs, and lease costs directly related to Company-owned restaurant sales. These costs decreased 39.9%, or$175 thousand , to$264 thousand for fiscal 2021 compared to$439 thousand in fiscal 2020. The decrease was primarily the result of the closure of all remaining Company-owned stores during the third quarter of fiscal 2020 offset by ongoing lease costs directly related to the closed Company-owned stores.
General and Administrative Expenses
Total general and administrative expenses decreased$0.8 million to$4.7 million for fiscal 2021 compared to$5.5 million for the prior fiscal year. General and administrative expenses for Company-owned restaurants decreased$83 thousand to$7 thousand for fiscal 2021 compared to$90 thousand for the prior fiscal year primarily as a result of the closure of all remaining Company-owned stores during the third quarter of fiscal 2020. General and administrative expenses for corporate decreased$0.7 million to$4.7 million for fiscal 2021 compared to$5.4 million for the prior year primarily as a result of a decrease in Pie Five advertising costs and payroll and related partially offset by an increase inPizza Inn advertising costs.
Franchise Expenses
Franchise expenses include general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. Total franchise expenses decreased$0.7 million to$2.4 million in fiscal 2021 from$3.1 million in the prior fiscal year. Pizza Inn franchise expenses increased$0.1 million to$1.4 million in fiscal 2021 compared to$1.3 million in the prior fiscal year primarily as a result of an increase in payroll and related, advertising, and travel costs partially offset by a decrease in convention costs. Pie Five franchise expenses decreased by$0.8 million to$1.0 million in fiscal 2021 compared to$1.8 million in the prior fiscal year primarily as a result of a reduction in advertising costs.
Gain on Sale of Assets
The Company's gain on sale of assets reflects the net difference between the sale price of assets and the net carrying value of the assets at the time of sale. Gain on sale of assets decreased to$10 thousand in fiscal 2021 compared to$24 thousand in the prior year.
Impairment Expenses
Impairment of long-lived assets and other lease charges were$21 thousand for fiscal 2021 compared to$880 thousand for fiscal 2020. Impairment of long-lived assets and other lease charges for Company-owned restaurants decreased to$21 thousand in fiscal 2021 compared to$717 thousand in fiscal 2020 primarily due to a reduction in lease charges for closed stores. 14
--------------------------------------------------------------------------------
Index Bad Debt Expense
The Company monitors franchisee receivable balances and adjusts credit terms
when necessary to minimize the Company's exposure to high risk accounts
receivable. Bad debt expense increased by
Interest Expense
Interest expense decreased
Amortization and Depreciation Expense
Amortization and depreciation expense decreased$19 thousand to$167 thousand in fiscal 2021 compared to$186 thousand in fiscal 2020 primarily as a result of lower amortization of software.
Provision for Income Tax
The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for the valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. The Company has continued to maintain a full valuation allowance for the year endedJune 27, 2021 . At the end of tax year endedJune 27, 2021 , the Company had net operating loss carryforwards totaling$23.6 million that are available to reduce future taxable income and will begin to expire in 2032. Under the Tax Cuts and Jobs Act, approximately$1.78 million of the loss carryforwards are limited to 80% and do not expire. As ofJune 27, 2021 , tax years remained open to examination fromJune 24, 2012 , by the federal and state tax authorities, for three or four years from the tax year in which net operating losses or tax credits are utilized. The Company was not subject to any open income tax examinations by any tax authority as ofJune 27, 2021 . There are no material uncertain tax positions. Management's position is that all relevant requirements are met and necessary returns have been filed, and therefore the tax positions taken on the tax returns would be sustained upon examination. OnMarch 27, 2020 ,President Trump signed into law the CARES Act. The legislation enacts various measures to assist companies affected by the COVID-19 pandemic. Key income tax-related provisions of the bill include temporary modifications to net operating loss utilization and carryback limitations, allowance of refundable alternative minimum tax credits, reduced limitation of charitable contributions, reduced limitations of business interest expense, and technical corrections to depreciation of qualified improvement property. OnDecember 27, 2020 ,President Trump signed into law the Consolidated Appropriations Act, an omnibus spending bill that includes an array of COVID-related tax relief for individuals and businesses. The tax-related measures contained in the Act revise and expand provisions enacted earlier in the year by the Families First Coronavirus Response Act and the CARES Act. The Act also extends a number of expiring tax provisions. Additionally, the Act provides for a 100% deduction for certain business meals incurred in calendar years 2021 and 2022, which are currently deductible at 50% for years endingDecember 31, 2020 . The Company determined that income tax effects related to the passage of the Consolidated Appropriations Act were not material to the financial statements for the year endedJune 27, 2021 . Liquidity and Capital Resources
Sources and Uses of Funds
Our primary sources of liquidity are cash flows from operating activities, loan proceeds, and proceeds from the sale of securities.
Cash flows from operating activities generally reflect net income adjusted for certain non-cash items including depreciation and amortization, changes in deferred taxes, share based compensation, and changes in working capital. Cash provided by operations was$1.5 million in fiscal 2021 compared to cash used in operations of$0.4 million in fiscal year 2020. The increase in operating cash flow was primarily attributable to an increase in net income and the decrease in deferred income tax. Cash flows from investing activities reflect net proceeds from sale of assets and capital expenditures for the purchase of Company assets. Cash used by investing activities was$0.2 million in fiscal 2021 compared to cash provided by investing activities of$0.1 million in fiscal 2020. 15
--------------------------------------------------------------------------------
Index
Cash flows from financing activities generally reflect changes in the Company's borrowings and securities activity during the period. Net cash provided by financing activities was$3.9 million and$1.0 million for the fiscal years endedJune 27, 2021 andJune 28, 2020 , respectively. Cash flows from financing activities for fiscal 2021 were primarily the result of proceeds sales of stock in an at-the-market offering. Cash flows from financing activities for fiscal 2020 were primarily the result of proceeds from a government-sponsored loan program and sales of stock in the at-the-market offering.
We expect cash flow from operations during fiscal 2022 to continue to be negatively impacted by the COVID-19 pandemic. However, management believes the cash on hand combined with cash from operations will be sufficient to fund operations for the next 12 months.
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 . (the "Lender") pursuant to the Paycheck Protection Program (the "PPP") 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. 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 may offer and sell shares of its common stock having an aggregate offering price of up to$5.0 million from time to time throughB. Riley FBR acting as agent (the "2017 ATM Offering"). The 2017 ATM Offering is being undertaken pursuant to Rule 415 and a shelf Registration Statement on Form S-3 which was declared effective by theSEC onNovember 6, 2017 . ThroughJune 27, 2021 , the Company had sold an aggregate of 3,064,342 shares in the 2017 ATM Offering, realizing aggregate gross proceeds of$4.4 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 bear 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 is payable in cash or, at the Company's discretion, in shares of Company common stock. The Notes mature onFebruary 15, 2022 , at which time all principal and unpaid interest will be payable in cash or, at the Company's discretion, in shares of Company common stock. The Notes are secured by a pledge of all outstanding equity securities of our two primary direct operating subsidiaries. Noteholders may convert their Notes to common stock as of the 15th day of any calendar month, unless the Company sooner elects to redeem the Notes. The conversion price is$2.00 per share of common stock. Accrued interest will be paid through the effective date of the conversion in cash or, at the Company's sole discretion, in shares of Company common stock. During fiscal 2021, none of the Notes were converted to common shares. As ofJune 27, 2021 ,$1.6 million in par value of the Notes was outstanding, offset by$28 thousand of unamortized debt issue costs and unamortized debt discounts.
Liquidity
We expect to fund continuing operations and planned capital expenditures for the next fiscal year primarily from cash on hand and operating cash flow. Based on budgeted and year-to-date cash flow information, we believe that we have sufficient liquidity to satisfy our cash requirements for the 2022 fiscal year.
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.
16--------------------------------------------------------------------------------
Index
The Company believes the following critical accounting policies require estimates about the effect of matters that are inherently uncertain, are susceptible to change, and therefore require subjective judgments. Changes in the estimates and judgments could significantly impact the Company's results of operations and financial condition in future periods. Accounts receivable consist primarily of receivables generated from franchise royalties and supplier concessions. The Company records a provision for doubtful receivables to allow for any amounts which may be unrecoverable based upon an analysis of the Company's prior collection experience, customer creditworthiness and current economic trends. Actual realization of accounts receivable could differ materially from the Company's estimates. The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use and eventual disposition of the assets compared to their carrying value. If impairment is indicated, the carrying value of an impaired asset is reduced to its fair value, based on discounted estimated future cash flows. During fiscal year 2021, the Company tested its long-lived assets for impairment and recognized$21 thousand in pre-tax, non-cash impairment charges. The Company had lease charges related to closed units of$0.7 million partially offset by$0.2 million in sublease income. Franchise revenue consists of income from license fees, royalties, area development and foreign master license agreements, advertising fund revenues, supplier incentive and convention contribution revenues. Franchise fees, area development and foreign master license agreement fees are amortized into revenue on a straight-line basis over the term of the related contract agreement. Royalties and advertising fund revenues, which are based on a percentage of franchise retail sales, are recognized as income as retail sales occur. Supplier incentive revenues are recognized as earned, typically as the underlying commodities are shipped. The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. The Company assesses whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, using a "more likely than not" standard. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. In making such assessment, more weight is given to evidence that can be objectively verified, including recent losses. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. The Company has continued to maintain a full valuation allowance for the year endedJune 27, 2021 . 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 ofJune 27, 2021 andJune 28, 2020 , 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. Leases The Company determines if an arrangement is a lease at inception of the arrangement. To the extent that it can be determined that an arrangement represents a lease, it is classified as either an operating lease or a finance lease. The Company does not currently have any finance leases. The Company capitalizes operating leases on the Condensed Consolidated Balance Sheets through a right of use asset and a corresponding lease liability. Right of use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Short-term leases that have an initial term of one year or less are not capitalized but are disclosed below. Short-term lease costs exclude expenses related to leases with a lease term of one month or less. Operating lease right of use assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. In addition to the present value of lease payments, the operating lease right of use asset also includes any lease payments made to the lessor prior to lease commencement less any lease incentives and initial direct costs incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. 17
--------------------------------------------------------------------------------
Index Nature of Leases
The Company leases certain office space, restaurant space, and information technology equipment under non-cancelable leases to support its operations. A more detailed description of significant lease types is included below.
Office Agreements
The Company rents office space from third parties for its corporate location. Office agreements are typically structured with non-cancelable terms of one to 10 years. The Company has concluded that its office agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term.
Restaurant Space Agreements
The Company rents restaurant space from third parties for its Company-owned restaurants. Restaurant space agreements are typically structured with non-cancelable terms of one to 10 years. The Company has concluded that its restaurant agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term. The Company also subleases some of its restaurant space to third parties. The Company's two subleases have terms that end in 2023 and 2025. The sublease agreements are noncancelable through the end of the term and both parties have substantive rights to terminate the lease when the term is complete. Sublease agreements are not capitalized and are recorded as rental income in the period that rent is received.
As of
Information Technology Equipment
The Company rents information technology equipment, primarily printers and copiers, from a third party for its corporate office location. Information technology equipment agreements are typically structured with non-cancelable terms of one to five years. The Company has concluded that its information technology equipment commitments are operating leases.
Discount Rate
Leases typically do not provide an implicit rate. Accordingly, the Company is required to use incremental borrowing rate in determining the present value of lease payments based on the information available at commencement date. The Company's incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company uses the implicit rate in the limited circumstances in which that rate is readily determinable. Lease Guarantees The Company has guaranteed the financial responsibilities of certain franchised store leases. These guaranteed leases are not considered operating leases because the Company does not have the right to control the underlying asset. If the franchisee abandons the lease and fails to meet the lease's financial obligations, the lessor may assign the lease to the Company for the remainder of the term. If the Company does not expect to assign the abandoned lease to a new franchisee within 12 months, the lease will be considered an operating lease and a right-of-use asset and liability will be recognized.
Practical Expedients and Accounting Policy Elections
Certain lease agreements include lease and non-lease components. For all
existing asset classes with multiple component types, the Company has utilized
the practical expedient that exempts it from separating lease components from
non-lease components. Accordingly, the Company accounts for the lease and
non-lease components in an arrangement as a single lease component.
In addition, for all existing asset classes, the Company has made an accounting
policy election not to apply the lease recognition requirements to short-term
leases (that is, a lease that, at commencement, has a lease term of 12 months or
less and does not include an option to purchase the underlying asset that the
Company is reasonably certain to exercise). Accordingly, we recognize lease
payments related to our short-term leases in our statement of operations on a
straight-line basis over the lease term which has not changed from our prior
recognition. To the extent that there are variable lease payments, we recognize
those payments in our statement of operations in the period in which the
obligation for those payments is incurred.
18--------------------------------------------------------------------------------
Index
The components of total lease expense for the fiscal year endedJune 27, 2021 , the majority of which is included in general and administrative expense, are as follows (in thousands): Fiscal Year Ended June 27, 2021 Operating lease cost $ 705 Sublease income (200 ) Total lease expense, net of sublease income $ 505
Supplemental cash flow information related to operating leases is included in the table below (in thousands):
Fiscal Year Ended
June 27, 2021
Cash paid for amounts included in the measurement of lease liabilities $ 755
Supplemental balance sheet information related to operating leases is included in the table below (in thousands):
Fiscal Year Ended
June 27, 2021
Operating lease right of use assets, net $ 2,085
Operating lease liabilities, current 465
Operating lease liabilities, net of current portion 1,911
Weighted average remaining lease term and weighted average discount rate for operating leases are as follows:
Fiscal Year Ended
June 27, 2021
Weighted average remaining lease term 4.0 Years
Weighted average discount rate 4.0 %
Operating lease liabilities with enforceable contract terms that are greater than one year mature as follows (in thousands):
Operating Leases
2022 $ 551
2023 558
2024 511
2025 433
2026 382
Thereafter 191
Total operating lease payments $ 2,626
Less: imputed interest (250 )
Total operating lease liability $ 2,376
© Edgar Online, source
