What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-04 compared with 2021-11-04 · 297 added, 253 removed, 120 unchanged (82% of the section changed)

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 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 ended June 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.

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 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 ended June 27, 2021.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

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

Rave Restaurant Group, Inc., through its subsidiaries (collectively, the “Company” or “we,” “us” or “our”) franchises pizza buffet

(“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants under the trademark “Pizza Inn” and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie

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 26, 2021, franchised and licensed units consisted of the following:

Three Months Ended September 26, 2021

Rave Restaurant Group, Inc., through its subsidiaries (collectively, the “Company” or “we,” “us” or “our”) franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express

(“Express Units”) restaurants under the trademark “Pizza Inn” and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”.

The Company also licenses Pizza Inn Express, or PIE, kiosks

(“PIE Units”) under the trademark “Pizza Inn”.

We facilitate food, equipment and supply distribution to our domestic and international system of restaurants through agreements with third party distributors.

At December 26, 2021, franchised and

licensed units consisted of the following:

Three Months Ended December 26, 2021

(in thousands, except unit data)

1 unchanged sentence

International Franchised

Six Months Ending December 26, 2021

(in thousands, except unit data)

Domestic Franchised/Licensed

International Franchised

Domestic units are located in 19 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 increased $0.02 per share to $0.02 per share for the three months ended September 26, 2021,

compared to basic net income of $0.00 per share in the comparable period in the prior fiscal year.

The Company had net income of $285 thousand for the three months ended September 26, 2021 compared to net income of $76 thousand in the comparable

period in the prior fiscal year, on revenues of $2.6 million for the three months ended September 26, 2021 compared to $1.9 million in the comparable period in the prior fiscal year.

The increase in revenue was primarily due to increases in

franchise royalties, advertising funds contributions, and supplier convention funds.

International units are located in seven foreign countries.

Basic net income per share increased $0.02 per share to $0.03 per share for the three months ended December 26, 2021, compared to the comparable period in the prior fiscal year.

The Company had

net income of $0.5 million for the three months ended December 26, 2021 compared to net income of $0.1 million in the comparable period in the prior fiscal year, on revenues of $2.7 million for the three months ended December 26, 2021 compared to

$2.1 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 $0.4 million increase in

net income for the three months ended December 26, 2021, compared to the comparable period of the prior year was primarily the result of a $0.6 million increase in revenues partially offset by a $0.2 million increase in expenses.

Basic net income per share increased $0.03 per share to $0.04 per share for the six months ended December 26, 2021, compared to the comparable period in the prior fiscal year.

The Company had net

income of $0.7 million for the six months ended December 26, 2021 compared to net income of $0.2 million in the comparable period in the prior fiscal year, on revenues of $5.2 million for the six months ended December 26, 2021 compared to $4.0

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 six months ended December 26, 2021 compared to the comparable period of the prior year was primarily the result of a $1.2 million increase in revenues offset by a $0.6 increase in expenses.

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 customers, franchisees and employees, have severely disrupted our business

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 carryout 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, a labor shortage in restaurant service workers, 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

We have not experienced any significant shortages of supplies or any significant delays in receiving our food or beverage inventories, restaurant supplies or products, but disruption of supply chains as a result of COVID-19 or other

factors could cause difficulty in obtaining inventories or supplies in the foreseeable future.

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.

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

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.

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 the

Company’s domestic restaurants have continued to operate under these conditions, the Company has 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 could be materially adversely impacted by the pandemic and its aftermath.

We expect that some Buffet Units and Pie Five Units could continue to be subject to capacity restrictions for some time as social

distancing protocols remain in place.

During the fourth quarter of fiscal 2020, we participated in a government-sponsored loan program.

“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.

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.

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, to what extent the labor shortage will continue, if individuals will be comfortable

returning to our Buffet Units and Pie Five Units following social distancing protocols, or if distributions of supply chains will cause difficulty in obtaining inventories or supplies in the foreseeable future.

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.

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

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.

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, 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

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.

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:

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

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

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, 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, which may be segmented by brand or domestic/international locations.

“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.

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.

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 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.

“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.

“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.

Adjusted EBITDA

Adjusted EBITDA for the fiscal quarter ended September 26, 2021 increased $0.3 million compared to the same period of the prior

Adjusted EBITDA for the fiscal quarter ended December 26, 2021 increased $0.4 million compared to the same period of the prior fiscal year.

Year-to-date Adjusted EBITDA increased $0.6 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):

3 unchanged sentences

Three Months Ended

September 26,

September 27,

Six Months Ended

Interest expense

Income tax expense

Depreciation and amortization

Stock compensation expense

(Gain) loss on sale of assets

Impairment of long-lived assets and other lease charges

3 unchanged sentences

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:

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 26,

September 27,

Six Months Ended

Pizza Inn Retail Sales - Total Domestic Units

(in thousands, except unit data)

Domestic Units

10 unchanged sentences

Total Domestic Units

Total Pizza Inn domestic retail sales increased $4.0 million, or 24.7%, for the three months ended September 26, 2021 when compared to

the same period of the prior year.

Pizza Inn domestic comparable store retail sales increased by $4.0 million, or 25.0%, for the three months ended September 26, 2021 when compared to the same period of the prior year.

The following chart summarizes Pizza Inn unit activity for the three months ended September 26, 2021:

Three Months Ended September 26, 2021

Total Pizza Inn domestic retail sales increased $5.3 million, or 33.4%, for the three months ended December 26, 2021 when compared to the same period of the prior year.

Pizza Inn domestic

comparable store retail sales increased by $4.8 million, or 31.0%, for the three months ended December 26, 2021 when compared to the same period of the prior year.

Total Pizza Inn domestic retail sales increased $9.3 million, or 29.0%, for the six months ended December 26, 2021 when compared to the same period of the prior year.

Pizza Inn domestic

comparable store retail sales increased by $8.8 million, or 28.3%, for the six months ended December 26, 2021 when compared to the same period of the prior year.

The following chart summarizes Pizza Inn unit activity for the three and six months ended December 26, 2021:

Three Months Ended December 26, 2021

Domestic Units

4 unchanged sentences

International Units (all types)

There was a net decrease of two domestic Pizza Inn units during the three months ended September 26, 2021.

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 remained stable.

We expect international units to increase modestly in future

Six Months Ended December 26, 2021

Domestic Units

Buffet Units - Franchised

Delco/Express Units - Franchised

PIE Units - Licensed

Total Domestic Units

International Units (all types)

There was a net decrease of five domestic Pizza Inn units during the three months ended December 26, 2021 and a net decrease of seven units in the total domestic Pizza Inn unit count during the

six months ended December 26, 2021.

For the three and six months ended December 26, 2021, the number of international Pizza Inn units increased by one unit.

The Company believes the modest net closure of domestic Pizza Inn units will continue in

the near term and eventually reverse 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:

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 26,

September 27,

Six Months Ended

(in thousands, except unit data)

Pie Five Retail Sales - Total Units

7 unchanged sentences

Total Domestic Units

Pie Five system-wide retail sales increased $0.6 million, or 12.3%, for the three months ended September 26, 2021 when compared to the

same period of the prior year.

Pie-Five comparable store retail sales increased by $0.7 million, or 17.5%, for the three months ended September 26, 2021 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 39 to 33.

The following chart summarizes Pie Five Unit activity for the three months ended September 26, 2021:

Three Months Ended September 26,

Pie Five system-wide retail sales increased $0.6 million, or 14.9%, for the three months ended December 26, 2021 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 38 to 34.

Comparable store retail sales increased $0.6 million, or 15.1%, during the second quarter of fiscal 2022 compared to the same period of the prior year.

Pie Five system-wide retail sales increased $1.2 million, or 13.5%, for the six month period ended December 26, 2021 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 40 to 34.

Comparable store retail sales increased $1.3 million, or 16.3%, during the six month period ended December 26, 2021 compared to the same period

of the prior fiscal year.

The following chart summarizes Pie Five Unit activity for the three and six months ended December 26, 2021:

Three Months Ended December 26, 2021

Domestic - Franchised

1 unchanged sentence

Total Domestic Units

Pie Five units remained stable during the three months ended September 26, 2021.

We believe that Pie Five units will eventually

increase in future periods.

Six Months Ended December 26, 2021

Domestic - Franchised

Domestic - Company-owned

Total Domestic Units

There was a net increase of one Pie Five unit during the three and six months ended December 26, 2021.

The Company believes the stabilization of Pie Five units will continue in the near term and

expects Pie Five units to increase modestly in future periods.

Pie Five - Company-Owned Restaurants

We closed our single remaining Company-owned Pie Five restaurant during the third quarter of fiscal 2020.

Loss from continuing

operations before taxes for Company-owned Pie Five stores decreased $99 thousand for the three months ended September 26, 2021 to $1 thousand compared to $100 thousand during the same period of the prior year.

The decreased loss was the result of

the closure of all remaining Company-owned restaurants.

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 $78 thousand for the three months ended December 26, 2021 to $1 thousand compared to $79 thousand during the same period of the prior year.

Loss from continuing operations before taxes for the Company-owned Pie Five stores

decreased $177 thousand for the six months ended December 26, 2021 to $2 thousand compared to $179 thousand during the same period of the prior year.

The decreased loss was the result of the closure of all remaining Company-owned restaurants.

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 26, 2021 and September 27, 2020 (in thousands):

The following is additional business segment information for the three and

six months ended December 26, 2021 and December 27, 2020 (in thousands):

Three Months Ended December 26, 2021 and December 27, 2020

Company-Owned

4 unchanged sentences

Fiscal Quarter Ended

September 26,

September 27,

September 26,

September 27,

September 26,

September 27,

September 26,

September 27,

September 26,

September 27,

Franchise and license revenues

Restaurant sales

Rental income

5 unchanged sentences

Franchise expenses

Loss (gain) on sale of assets

(Gain) loss on sale of assets

Impairment of long-lived assets

and other lease charges

Bad debt expense

Interest expense

Depreciation and amortization expense

Total costs and expenses

INCOME/(LOSS) BEFORE TAXES

Six Months Ended December 26, 2021 and December 27, 2020

Company-Owned

Fiscal Year-to-Date

Franchise and license revenues

Restaurant sales

Rental Income

Interest income and other

Total revenues

COSTS AND EXPENSES:

Cost of sales

General and administrative expenses

Franchise expenses

(Gain) loss on sale of assets

Impairment of long-lived assets and other lease charges

4 unchanged sentences

INCOME/(LOSS) BEFORE TAXES

Revenues are derived from franchise royalties, franchise license fees, supplier and distributor incentives,

advertising funds, area development exclusivity fees and foreign master license fees, and supplier convention funds.

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 26, 2021 and for the same period in the prior fiscal year were $2.6

million and $1.9 million, respectively.

The increase in revenue was primarily due to increases in franchise royalties, advertising funds contributions, and supplier convention funds.

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 ended December 26, 2021 and for the same period in the prior fiscal year were $2.7 million and $2.1 million, respectively.

The increase in total revenues

was driven by increases in Pizza Inn and Pie Five franchise and license revenues.

Total revenues for the six month period ended December 26, 2021 and for the same period in the prior fiscal year were $5.2 million and $4.0 million, respectively.

The increase in total revenues

was driven by increases in Pizza Inn and Pie Five franchise and license revenues.

Pizza Inn Franchise Revenues

Pizza Inn franchise and license revenues increased by $0.7 million to $2.0 million for the three month period ended September 26,

2021 as compared to the same period in the prior fiscal year.

The increase was driven by increases in supplier incentives, domestic royalties and advertising fund revenues.

Pizza Inn franchise and license revenues increased by $0.5 million to $2.2 million for the three month period ended December 26, 2021 compared to the same period of the prior year.

franchise and license revenues increased to $4.2 million for the six month period ended December 26, 2021 from $3.0 million for the same period of the prior fiscal year.

Pie Five Franchise Revenues

Pie Five franchise and license revenues remained relatively stable at $0.5 million for the three month period ended September 26,

2021 as compared to the same period in the prior fiscal year.

Pie Five franchise and license revenues increased by $41 thousand to $483 thousand for the three month

period ended December 26, 2021 compared to the same period of the prior fiscal year.

The increase was primarily driven by increases in supplier incentives and domestic royalties revenues.

Pie Five franchise and license revenues increased to

$951 thousand for the six month period ended December 26, 2021 compared to $918 thousand for the same period in the prior fiscal year for the same reason.

Costs and Expenses:

Cost of Sales

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 zero for the three month period ended September 26, 2021 from the $78 thousand in the three month period ended September 27, 2020.

The decrease in costs of sales in the three month period reflects the

closure of the single remaining Company-owned restaurant and the end of associated general and administrative expenses (primarily rent and utilities) attributable to closed stores.

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 zero for the

three and six month period ended December 26, 2021 because we closed 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 $1.2 million for the three month period ended September 26, 2021

compared to $1.1 million for the same period of the prior fiscal year.

The increase was primarily the result of increased advertising spend.

Total general and administrative expenses increased $0.2 million to $1.4 million for the three month period ended December 26, 2021 compared to $1.2 million for the same period of the prior

Total general and administrative expenses increased to $2.6 million for the six month period ended December 26, 2021 compared to $2.3 million for the six month period ended December 27, 2020.

The increases in general and

administrative expenses during both the three and six 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 $1.0 million for the three month period ended September 26, 2021 compared to $0.5 million for the same period in the prior fiscal year.

Franchise expenses include general and administrative expenses directly related to the continuing service of domestic and international franchises.

Franchise expenses increased to $0.8 million

for the three month period ended December 26, 2021 compared to $0.6 million for the same period of the prior fiscal year.

Franchise expenses increased to $1.8 million for the six month period ended December 26, 2021 compared to $1.2 million for

the six month period ended December 27, 2020.

In both cases, the increases were primarily due to an increase in advertising expenses and higher convention expense.

Loss (Gain) on Sale of Assets

We had no sale of assets in either the fiscal quarter ended September 26, 2021 or the comparable fiscal quarter ended September 27,

There was no gain on sale of assets for the three and six months ended December 26,

2021 or for the comparable prior year periods.

Impairment of Long-lived Assets and Other Lease Charges

Impairment of long-lived assets and other lease charges was zero for the three month period ended September 26, 2021 compared to $17

thousand for the same period in the prior fiscal year.

The decline was due to the end of lease termination expenses in the second quarter of fiscal 2021.

Impairment of long-lived assets and other lease charges was zero for the three month period ended December 26, 2021 compared to $4 thousand for the same period in the prior fiscal year.

Impairment of long-lived assets and other lease charges was zero for the six month period ended December 26, 2021 compared to $21 thousand for the same period of the prior fiscal year.

For the three and six month periods ended December 26, 2021,

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.

Bad debt expense for the three month period ended September 26, 2021 decreased $22 thousand as compared to the comparable period in the prior fiscal year.

The Company monitors franchisee receivable balances and adjusts credit terms when necessary to minimize the Company’s exposure to high risk accounts receivable.

For the three month period ended

December 26, 2021, bad debt expense was $3 thousand compared to the bad debt expense of $88 thousand for the same period in the prior fiscal year.

Bad debt expense for the six month period ended December 26, 2021, decreased $107 thousand to $8

thousand compared to the comparable period in the prior fiscal year.

In both cases, the decrease was primarily the result of the collection of outstanding amounts during the third quarter of fiscal 2021.

Interest Expense

Interest expense remained stable in the three month period ended September 26, 2021 compared to the same fiscal period of the prior

Interest expense remained relatively stable for the three and six month periods ended December 26, 2021 compared to the same fiscal periods of the prior year.

Depreciation and Amortization Expense

Depreciation and amortization remained stable in the three month period ended September 26, 2021 compared to the same fiscal period

of the prior year.

Depreciation and amortization expense increased slightly for the three and six months ended December 26, 2021, 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 months ended September 26, 2021, the Company recorded an income tax expense of $3 thousand, all of which is

attributable to current state taxes.

The Company utilized net operating losses 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 26, 2021, the Company had established a full valuation allowance of $6.3 million against its

deferred tax assets.

The Company will continue to review the need for an adjustment to the valuation allowance.

For the six months ended December 26, 2021, the Company recorded an income tax expense of $4 thousand and $7 thousand, respectively, all of which is attributable to current state taxes.

Company utilized net operating losses 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 December 26, 2021, the Company had established a full valuation allowance of $6.2 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 26, 2021, our primary source of liquidity was cash flow from operating activities.

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 $343 thousand for the three month period ended September 26, 2021 compared to cash used of $7 thousand for the three month period ended September 27, 2020.

The primary driver of decreased cash flows during the three month period ended September 26, 2021 was liabilities related

to accrued expenses.

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 of $19 thousand during the three month period ended September 26, 2021 was primarily attributable to payments received on notes receivable of $57 thousand partially offset by $27 thousand used

in the purchase of intangible assets definite-lived.

Cash used in investing activities during the three month period ended September 27, 2020 of $23 thousand was primarily attributed to capital expenditures of $27 thousand partially offset by $4

thousand in payments received on notes receivable.

During the six month period ended December 26, 2021, the Company’s primary source of liquidity was proceeds from investing activities.

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 $14 thousand for the six month period ended

December 26, 2021 compared to cash used of $307 thousand for the six month period ended December 27, 2020.

The primary driver of increased operating cash flow during the six month period ended December

26, 2021 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 six

month period ended December 26, 2021 was $48 thousand, attributable to payments received on notes receivable from fixed asset sales of $94 thousand being partially offset by the purchase of intangible assets definite-lived of $34 thousand.

flows provided by investing activities were zero for the six months ended December 27, 2020.

Cash flows from financing activities generally reflect changes in the Company’s stock and debt activity during the period.

flow used by financing activities was $130 thousand for the three month period ended September 26, 2021 compared to $3 thousand for the three month period ended September 27, 2020.

Cash flows from financing activities for the three months ended

September 26, 2021 was attributable to the short term loan.

Cash flows from financing activities for the three months ended September 27, 2020 was attributable to equity issuance costs.

As a result of the COVID-19 pandemic, we have taken aggressive measures to control expenses and expect modest cash flow from

operations during the second quarter of fiscal 2022.

Management believes the cash on hand combined with cash from operations will be sufficient to fund operations for the next 12 months.

Net cash flow used by financing activities was $0.2 million for the six

month period ended December 26, 2021 compared to cash provided by financing activities of $3.6 million for the six month period ended December 27, 2020.

Cash flows from financing activities for the six months ended December 26, 2021 were

primarily attributable to payment of a short term loan.

As a result of the COVID-19 pandemic, the Company has taken aggressive measures to control expenses and expect modest cash flow from operations during the third and fourth quarters of fiscal

However, management believes the cash on hand combined with cash from operations 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.

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”) 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 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 26, 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.

2017 ATM Offering was 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 November 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 on November 6, 2020.

Convertible Notes

On March 3, 2017, the Company completed a registered shareholder rights offering of its 4% Convertible Senior Notes due 2022

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.

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.

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.

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 ended September 26, 2021, none of the Notes were converted to common shares.

As of September 26, 2021,

$1.6 million in par value of the Notes were outstanding, offset by $13 thousand of unamortized debt issue costs and unamortized debt discounts.

During the six month period ended December 26, 2021, no Notes were converted to common shares.

As of December 26, 2021, $1.6 million in par value of the Notes were outstanding.

intends to pay off all amounts due under the Notes in cash at maturity.

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.

“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.

pursuant to the Paycheck Protection Program of the

Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.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.

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 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.

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.

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

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.

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.

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 of September 26, 2021 and September 27, 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.

The Company accounts for uncertain tax positions in accordance with ASC 740-10, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its

financial statements uncertain tax positions that it has taken or expects to take on a tax return.

ASC 740-10 requires that a company recognize in its financial statements the impact of tax positions that meet a “more likely than not” threshold,

based on the technical merits of the position.

The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon

ultimate settlement.

As of December 26, 2021 and December 27, 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.

Quantitative and Qualitative Disclosures About Market Risk

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Item 2. Management’s Discussion and Analysis