RAVE RESTAURANT GROUP, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended June 28, 2020 and may contain certain forward-looking statements that are based on current management expectations. Generally, verbs in the future tense and the words “believe,” “expect,” “anticipate,” “estimate,” “intends,” “opinion,” “potential” and similar expressions identify forward-looking statements. Forward-looking statements in this report include, without limitation, statements relating to our business objectives, our customers and franchisees, our liquidity and capital resources, and the impact of our historical and potential business strategies on our business, financial condition, and operating results. Our actual results could differ materially from our expectations. Further information concerning our business, including additional factors that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, are set forth in our Annual Report on Form 10-K for the year ended June 28, 2020. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Results of Operations Overview Rave Restaurant Group, Inc., through its subsidiaries (collectively, the “Company” or “we,” “us” or “our”) operates and franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants under the trademark “Pizza Inn” and operates and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”. The Company also licenses Pizza Inn Express, or PIE, kiosks (“PIE Units”) under the trademark “Pizza Inn”. We facilitate food, equipment and supply distribution to our domestic and international system of restaurants through agreements with third party distributors. At September 27, 2020, Company-owned, franchised and licensed units consisted of the following: Three Months Ended September 27, 2020 (in thousands, except unit data) Pizza Inn Pie Five All Concepts Ending Units Retail Sales Ending Units Retail Sales Ending Units Retail Sales Domestic Franchised/Licensed 146 $ 16,319 39 $ 4,507 185 $ 20,826 Company-Owned — — — — — — Total Domestic Units 146 $ 16,319 39 $ 4,507 185 $ 20,826 International Franchised 32 — 32 Domestic units are located in 21 states predominantly situated in the southern half of the United States. International units are located in six foreign countries. Basic net income per common share decreased $0.02 per share to $0.00 per share for the three months ended September 27, 2020, compared to basic net income of $0.02 per share in the comparable period in the prior fiscal year. The Company had net income of $76 thousand for the three months ended September 27, 2020 compared to net income of $0.2 million in the comparable period in the prior fiscal year, on revenues of $1.9 million for the three months ended September 27, 2020 compared to $2.9 million in the comparable period in the prior fiscal year. The decline in revenue was primarily due to decreases in restaurant sales, franchise royalties and franchise license fees. These declines and the decreased net income for the three months ended September 27, 2020, co mpared to the comparable period of the prior year were primarily the result of the effects of the COVID-19 pandemic. COVID-19 Pandemic On March 11, 2020, the World Health Organization declared the outbreak of novel coronavirus (COVID-19) as a pandemic, and the disease has spread rapidly throughout the United States and the world. Federal, state and local responses to the COVID-19 pandemic, as well as our internal efforts to protect costumers, 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. 14 Index 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. 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. Adjusted EBITDA Adjusted EBITDA for the fiscal quarter ended September 27, 2020, decreased $0.2 million compared to the same period of the prior fiscal year. The following table sets forth a reconciliation of net income to Adjusted EBITDA for the periods shown (in thousands): RAVE RESTAURANT GROUP, INC. ADJUSTED EBITDA (In thousands) Three Months Ended September 27 , 2020 September 29 , 2019 Net income $ 76 $ 237 Interest expense 23 27 Income taxes 2 73 Depreciation and amortization 44 47 EBITDA $ 145 $ 384 Gain on sale/disposal of assets — (11 ) Impairment of long-lived assets and other lease charges 17 148 Franchisee default and closed store revenue (67 ) (147 ) Closed and non-operating store costs 82 6 Adjusted EBITDA $ 177 $ 380 Pizza Inn Brand Summary The following tables summarize certain key indicators for the Pizza Inn franchised and licensed domestic units that management believes are useful in evaluating performance. Three Months Ended September 27 , 2020 September 29 , 2019 Pizza Inn Retail Sales - Total Domestic Units (in thousands, except unit data) Domestic Units Buffet Units - Franchised $ 14,724 $ 20,285 Delco/Express Units - Franchised 1,536 1,545 PIE Units - Licensed 59 64 Total Domestic Retail Sales $ 16,319 $ 21,894 Pizza Inn Comparable Store Retail Sales - Total Domestic 15,812 20,155 Pizza Inn Average Units Open in Period Domestic Units Buffet Units - Franchised 79 84 Delco/Express Units - Franchised 55 59 PIE Units - Licensed 12 9 Total Domestic Units 146 152 15 Index Total Pizza Inn domestic retail sales decreased $5.6 million, or 25.5%, for the three months ended September 27, 2020 when compared to the same period of the prior year. Pizza Inn domestic comparable store retail sales decreased by $4.3 million, or 21.5%, for the three months ended September 27, 2020 when compared to the same period of the prior year. We believe that the declines in domestic retail sales and domestic comparable store retail sales were primarily the result of the COVID-19 pandemic. The following chart summarizes Pizza Inn unit activity for the three months ended September 27, 2020: Three Months Ended September 27, 2020 Beginning Units Opened Concept Change Closed Ending Units Domestic Units Buffet Units - Franchised 83 — — 4 79 Delco/Express Units - Franchised 55 — — — 55 PIE Units - Licensed 13 — — 1 12 Total Domestic Units 151 — — 5 146 International Units (all types) 38 1 — 7 32 Total Units 189 1 — 12 178 There was a net decrease of five domestic Pizza Inn unit during the three months ended September 27, 2020. We believe the net closure of Pizza Inn units will continue in the near term and eventually reverse in future periods. During the quarter, the number of international Pizza Inn units decreased by a net six units. We expect international units to increase modestly in future periods. Pie Five Brand Summary The following tables summarize certain key indicators for the Pie Five franchised and Company-owned restaurants that management believes are useful in evaluating performance. Three Months Ended September 27 , 2020 September 29 , 2019 (in thousands, except unit data) Pie Five Retail Sales - Total Units Domestic Units - Franchised $ 4,507 $ 8,728 Domestic Units - Company-owned — 108 Total Domestic Retail Sales $ 4,507 $ 8,836 Pie Five Comparable Store Retail Sales - Total $ 4,039 $ 5,268 Pie Five Average Units Open in Period Domestic Units - Franchised 39 57 Domestic Units - Company-owned — 1 Total Domestic Units 39 58 Pie Five system-wide retail sales decreased $4.3 million, or 49.0%, for the three months ended September 27, 2020 when compared to the same period of the prior year. Pie-Five comparable store retail sales decreased by $1.2 million, or 23.3%, for the three months ended September 27, 2020 w hen compared to the same period of the prior year. We believe that the decline in Pie Five system-wide retail sales was primarily the result of the COVID-19 pandemic and a lower average number of units open during the period. Compared to the same fiscal quarter of the prior year, average units open in the period decreased from 58 to 39. We believe that the decline in Pie Five comparable store retail sales was also primarily the result of the COVID-19 pandemic. 16 Index The following chart summarizes Pie Five Unit activity for the three months ended September 27, 2020: Three Months Ended September 27, 2020 Beginning Units Opened Transfer Closed Ending Units Domestic - Franchised 42 1 — 4 39 Domestic - Company-owned — — — — — Total Domestic Units 42 1 — 4 39 The net decrease of 3 Pie Five units during the three months ended September 27, 2020 was primarily the result of the closure of poor-performing stores. We believe the net closure of Pie Five units will continue in the near term and eventually reverse in future periods. Pie Five - Company-Owned Restaurants Three Months Ended (in thousands, except store weeks and average data) September 27 , September 29 , 2020 2019 Store weeks (excluding partial weeks) — 13 Average weekly sales — 8,308 Average number of units — 1 Restaurant sales (excluding partial weeks) — 108 Restaurant sales — 108 Loss before taxes (100 ) (203 ) Allocated marketing and advertising expenses — 5 Impairment, other lease charges and non-operating store costs 100 154 Restaurant operating cash flow — (44 ) Average weekly sales for Company-owned Pie Five Units decreased $8,308, or 100%, to zero for the three months ended September 27, 2020 compared to $8,308 for the same period of the prior fiscal year. Company-owned Pie Five restaurant operating cash flow increased $44 thousand during the first quarter of fiscal 2020 compared to the same period of prior year. Loss before taxes for Company-owned Pie Five stores decreased $0.1 million for the three months ende d September 27, 2020 compared to the same period of the prior year. The decreased loss was primarily the result of the closure of all remaining Company-owned stores during fiscal year 2020. Non-GAAP Financial Measures and Other Terms The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”). However, the Company also presents and discusses certain non-GAAP financial measures that it believes are useful to investors as measures of operating performance. Management may also use such non-GAAP financial measures in evaluating the effectiveness of business strategies and for planning and budgeting purposes. However, these non-GAAP financial measures should not be viewed as an alternative or substitute for the results reflected in the Company’s GAAP financial statements. We consider EBITDA and Adjusted EBITDA to be important supplemental measures of operating performance that are commonly used by securities analysts, investors and other parties interested in our industry. We believe that EBITDA is helpful to investors in evaluating our results of operations without the impact of expenses affected by financing methods, accounting methods and the tax environment. We believe that Adjusted EBITDA provides additional useful information to investors by excluding non-operational or non-recurring expenses to provide a measure of operating performance that is more comparable from period to period. We believe that restaurant operating cash flow is a useful metric to investors in evaluating the ongoing operating performance of Company-owned restaurants and comparing such store operating performance from period to period. Management also uses these non-GAAP financial measures for evaluating operating performance, assessing the effectiveness of business strategies, projecting future capital needs, budgeting and other planning purposes. The following key performance indicators presented herein, some of which represent non-GAAP financial measures, have the meaning and are calculated as follows: ● “EBITDA” represents earnings before interest, taxes, depreciation and amortization. ● “Adjusted EBITDA” represents earnings before interest, taxes, depreciation and amortization, stock compensation expense, 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. 17 Index Financial Results The Company defines its operating segments as Pizza Inn Franchising, Pie Five Franchising and Company-Owned Restaurants. The following is additional business segment information for the three months ended September 27, 2020 and September 29, 2019 (in thousan ds): Pizza Inn Franchising Pie Five Franchising Company-Owned Restaurants Corporate Total Fiscal Quarter Ended Fiscal Quarter Ended Fiscal Quarter Ended Fiscal Quarter Ended Fiscal Quarter Ended September 27 , 2020 September 29 , 2019 September 27 , 2020 September 29 , 2019 September 27 , 2020 September 29 , 2019 September 27 , 2020 September 29 , 2019 September 27 , 2020 September 29 , 2019 REVENUES: Franchise and license revenues $ 1,380 $ 1,864 $ 476 $ 852 $ — $ — $ — $ — $ 1,856 $ 2,716 Restaurant sales — — — — — 108 — — — 108 Rental income — — — — — — 48 41 48 41 Interest income and other — — — — — — (1 ) 11 (1 ) 11 Total revenues 1,380 1,864 476 852 — 108 47 52 1,903 2,876 COSTS AND EXPENSES: Cost of sales — — — — 78 134 — — 78 134 General and administrative expenses — — — — 5 29 1,084 1,334 1,089 1,363 Franchise expenses 280 452 267 414 — — — — 547 866 Gain on sale of assets — — — — — — — (11 ) — (11 ) Impairment of long-lived assets and other lease charges — — — — 17 148 — — 17 148 Bad debt expense (recovery) — — — — — — 27 (8 ) 27 (8 ) Interest expense — — — — — — 23 27 23 27 Amortization and depreciation expense — — — — — — 44 47 44 47 Total costs and expenses 280 452 267 414 100 311 1,178 1,389 1,825 2,566 INCOME/(LOSS) BEFORE TAXES $ 1,100 $ 1,412 $ 209 $ 438 $ (100 ) $ (203 ) $ (1,131 ) $ (1,337 ) $ 78 $ 310 18 Index 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, and the products sold to franchisees through third-party food distributors . Total revenues for the three month period ended September 27, 2020 an d for the same period in the prior fiscal year were $1.9 million and $2.9 million, respectively. The decrease in total revenues was driven by the effects of the COVID-19 pandemic, franchised restaurant closures, and the closures of all remaining Company-owned restaurants during fiscal 2020. Pizza Inn Franchise Revenues Pizza Inn franchise and license revenues decreased by $0.5 million to $1.4 million for the three month period ended September 27, 2020 . The decline was driven by decreases in supplier incentives, domestic royalties and brand advertising fund revenues primarily due to the effects of the COVID-19 pandemic. Pie Five Franchise Revenues Pie Five franchise and license revenues decreased by $0.4 million to $0.5 million for the three month period ended September 27, 2020 . The decline was driven by decreases in supplier incentives, domestic royalties and brand advertising fund revenues due to fewer retail stores and the effects of the COVID-19 pandemic. Restaurant Sales Restaurant sales, which consist of revenue generated by Company-owned restaurants, decreased $0.1 million for the fiscal quarter ended September 27, 2020 compared to the fiscal quarter ended September 29, 2019 . The decrease was due to closure of all remaining Company-owned stores during fiscal 2020. Costs and Expenses: Cost of Sales - Total Total cost of sales, which primarily includes food and supply costs, la bor, and general and administrative expenses directly related to Company-owned restaurant sales, decreased to $78 thousand for the three month period ended September 27, 2020 from the $134 thousand in the three month period ended September 29, 2019. The decrease in costs of sales in the three month period reflects the closure of all Company-owned restaurants. The remaining cost of sales was the result of continuing general and administrative expenses (primarily rent and utilities) attributable to closed stores. General and Administrative Expenses Total general and administrative expenses decreased $0.3 million to $1.1 million for the three month period ended September 27, 2020 compared to $1.4 million for the same period of the prior fiscal year. The decrease was primarily the result of decreased corporate overhead. Franchise Expenses Franchise expenses include general and administrative expenses directly related to the continuing service of domestic and international franchises. Franchise expenses decreased to $0.5 million for the three month period ended September 27, 2020 compared to $0.9 million for the same period in the prior fiscal year. Gain on Sale of Assets Gain on sale of assets declined to zero in the first quarter of fiscal 2021 compared to an $11 thousand gain during the same period of fiscal 2020 due to decreased disposal activity from previously closed Company-owned restaurants. Impairment of Long-lived Assets and Other Lease Charges Impairment of long-lived assets and other lease charges was $17 thousand for the three month period ended September 27, 2020 compared to $148 thousand for the same period in the prior fiscal year. For both three month periods, these charges related to lease termination expenses. 19 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 for the three month period ended September 27, 2020 , increased $35 thousand as compared to the comparable period in the prior fiscal year. Interest Expense Interest expense remained stable in the three month period ended September 27, 2020 compared to the same fiscal period of the prior year. Depreciation and Amortization Expense Depreciation and amortization remained stable in the three month period ended September 27, 2020 compared to the same fiscal period of the prior year. Provision for Income Tax For the three months ended September 27, 2020, the Company recorded income tax expense of $2 thousand, all of which was attributable to current state taxes. The Company utilized net operating loss carryforwards to offset federal taxes. The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for 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 of September 27, 2020, the Company had established a full valuation allowance of $6.5 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 three month period ended September 27, 2020, our liquidity remained relatively stable. 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 used by operating activities was $7 thousand for the three month period ended September 27, 2020 compared to cash provided of $132 thousand for the three month period ended September 29, 2019. The primary driver of decreased cash flows during the three month period ended September 27, 2020 was liabilities related to operating leases. Cash flows from investing activities reflect net proceeds from the sale of assets and capital expenditures for the purchase of Company assets. Cash used by investing activities of $23 thousand during the three month period ended September 27, 2020 was primarily attributable to capital expenditures of $27 thousand partially offset by $4 thousand in payments received on notes receivable. Cash provided by investing activities during the three month period ended September 29, 2019 of $27 thousand was primarily attributed to $44 thousand in payments received on notes receivable offset by capital expenditures of $17 thousand. Cash flows from financing activities generally reflect changes in th e Company’s stock and debt activity during the period. Net cash flow used by financing activities was $3 thousand for the three month period ended September 27, 2020 compared to $2 thousand for the three month period ended September 29, 2019. Cash flows from financing activities for the three months ended September 27, 2020 and September 29, 2019 were both attributable to equity issuance costs. Although we have taken aggressive measures to control expenses, we expect significantly reduced cash flow from operations during the second quarter of fiscal 2021 as a result of the COVID-19 pandemic. However, management believes the cash on hand combined with cash from operations, net proceeds from government loan programs and proceeds from sales of common stock through the 2017 ATM Offering will be sufficient to fund operations for the next 12 months. 2017 ATM Offering On December 5, 2017, the Company entered into an At Market Issuance Sales Agreement with B. Riley FBR, Inc. (“B. Riley FBR”) pursuant to which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $5,000,000 from time to time through B. Riley FBR acting as agent (the “2017 ATM Offering”). The 2017 ATM Offering has been undertaken pursuant to Rule 415 and a shelf Registration Statement on Form S-3 which was declared effective by the SEC on November 6, 2017. Through September 27, 2020 , the Company had sold an aggregate of 524,660 shares in the 2017 ATM Offering, realizing aggregate gross proceeds of $0.7 million. Subsequent to September 27, 2020, the Company has sold 2,539,682 shares of its common stock at an average sale price of $1.48 per share pursuant to the 2017 ATM Offering, realizing aggregate gross proceeds of $3.8 million. The 2017 ATM Offering expired on November 6, 2020. 20 Index Convertible Notes On March 3, 2017, the Company completed a registered shareholder rights offering of its 4% Convertible Senior Notes due 2022 (“Notes”). Shareholders exercised subscription rights to purchase all 30,000 of the Notes at the par value of $100 per Note, resulting in gross offering proceeds to the Company of $3.0 million. The Notes bear interest at the rate of 4% per annum on the principal or par value of $100 per note, payable annually in arrears on February 15 of each year, commencing February 15, 2018. Interest is payable in cash or, at the Company’s discretion, in shares of Company common stock. The Notes mature on February 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 the three month period ende d September 27, 2020, no Notes were converted to common shares. As of September 27, 2020, $1.6 m illion in par value of the Notes were outstanding. PPP Loan On April 13, 2020, the Company received the proceeds from a loan in the amount of $0.7 million (the “PPP Loan”) from JPMorgan 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 the U.S. Small Business Administration (“SBA”). The PPP Loan is unsecured by the Company and is guaranteed by the SBA. All or a portion of the PPP Loan may be forgiven by the SBA upon application by the Company accompanied by documentation of expenditures in accordance with SBA requirements under the PPP. In the event all or any portion of the PPP Loan is forgiven, the amount forgiven will be applied to outstanding principal. The PPP Loan matures on April 10, 2022 and bears interest at a rate of 0.98% per annum. No payment is due until a forgiveness decision is received from the SBA. We presently expect to receive a forgiveness decision in the second half of fiscal 2021. Any amounts not forgiven are payable in equal monthly installments of principal and interest as necessary to fully amortize the outstanding principal balance by the maturity date. We may prepay the PPP Loan at any time prior to the maturity with no repayment penalties. The PPP Loan is evidenced by a promissory note dated April 10, 2020, which contains various certifications and agreements related to the PPP, as well customary default and other provisions. 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 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. 21 Index 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 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. A s of September 27, 2020 and September 29, 2019, 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not required for a smaller reporting company.