RAVE RESTAURANT GROUP, INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K and may contain certain forward-looking statements. See “Forward-Looking Statements.” Overview The Company franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants under the trademark “Pizza Inn” and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”. The Company also licenses Pizza Inn Express kiosks (“PIE Units”) under the trademark “Pizza Inn”. We facilitate food, equipment and supply distribution to our domestic and international system of restaurants through agreements with third party distributors. At June 26, 2022, Company-owned and franchised restaurants consisted of the following (in thousands, except unit data): Fiscal Year Ended June 26, 2022 (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 128 $ 87,977 31 $ 20,311 159 $ 108,288 Company-Owned – – – – – – Total Domestic Units 128 $ 87,977 31 $ 20,311 159 $ 108,288 International Franchised 31 – 31 The domestic units were located in 18 states predominately situated in the southern half of the United States. The international restaurants were located in seven foreign countries. The following table summarizes domestic comparable store retail sales for the Company. 52 Weeks Ended June 26, 2022 June 27, 2021 (in thousands) Pizza Inn Domestic Comparable Store Retail Sales $ 83,680 $ 67,097 Pie Five Domestic Comparable Store Retail Sales 19,018 16,243 Total Rave Comparable Store Retail Sales $ 102,698 $ 83,340 Basic and diluted net income per common share increased $0.36 to net income of $0.45 per share for fiscal 2022 compared to a net income of $0.09 per share in the prior fiscal year. Net income increased $6.5 million to net income of $8.0 million for fiscal 2022 compared to a net income of $1.5 million for the prior fiscal year on revenues of $10.7 million for fiscal 2022 as compared to $8.6 million in fiscal 2021. 9 Index Adjusted EBITDA for the fiscal year ended June 26, 2022, improved to $2.8 million compared to $2.0 million for the prior fiscal year. The following table sets forth a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods shown (in thousands): Fiscal Year Ended June 26, 2022 June 27, 2021 Net income $ 8,022 $ 1,520 Interest expense 61 92 Income taxes ( 5,657 ) ( 29 ) Depreciation and amortization 187 167 EBITDA $ 2,613 $ 1,750 Stock compensation expense 169 80 Severance 53 23 Gain on sale of assets — (10 ) Impairment of long-lived assets and other lease charges 6 21 Franchisee default and closed store revenue (38 ) (170 ) Closed and non-operating store costs 3 271 Adjusted EBITDA $ 2,806 $ 1,965 Results of operations for the fiscal years 2022 and 2021 both included 52 weeks. 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 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, 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. Further, the COVID-19 pandemic precipitated significant job losses and a national economic downturn that impacted the demand for restaurant food service. Although most of our domestic restaurants continued to operate under these conditions, we have experienced temporary closures from time to time during the pandemic. In most cases, in-store dining has now resumed subject to seating capacity limitations, social distancing protocols, and enhanced cleaning and disinfecting practices. 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. 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. Any of these changes could materially adversely affect the Company’s future financial performance. However, the ultimate impact of COVID-19 on our future results of operations and liquidity cannot presently be predicted. Pizza Inn Brand Summary The following tables summarize certain key indicators for the Pizza Inn franchised and licensed domestic restaurants that management believes are useful in evaluating performance. 52 Weeks Ended June 26, 2022 June 27, 2021 Pizza Inn Retail Sales - Total Domestic Units (in thousands, except unit data) Domestic Units Buffet Units - Franchised $ 81,546 $ 63,776 Delco/Express Units - Franchised 6,198 6,053 PIE Units - Licensed 233 244 Total Domestic Retail Sales $ 87,977 $ 70,073 Pizza Inn Comparable Store Retail Sales - Total Domestic $ 83,680 $ 67,097 Pizza Inn Average Units Open in Period Domestic Units Buffet Units - Franchised 71 77 Delco/Express Units - Franchised 51 55 PIE Units - Licensed 10 12 Total Domestic Units 132 144 10 Index Pizza Inn total domestic retail sales increased by $17.9 million, or 25.6% compared to the prior year. The increase in domestic retail sales was primarily the result of a moderation in the impact of COVID-19. Pizza Inn domestic comparable store retail sales increased by $16.6 million, or 24.7%, for the same reason. The following chart summarizes Pizza Inn restaurant activity for the fiscal year ended June 26, 2022: Fiscal Year Ended June 26, 2022 Beginning Units Opened Concept Change Closed Ending Units Domestic Units: Buffet Units - Franchised 70 4 1 3 72 Delco/Express Units - Franchised 54 1 (1 ) 7 47 PIE Units - Licensed 11 – – 2 9 Total Domestic Units 135 5 – 12 128 International Units (all types) 32 3 – 4 31 Total Units 167 8 – 16 159 The net decrease of seven domestic units was primarily due to declines in Delco and PIE units. We believe that this trend of net domestic store closures is moderating and will reverse in future periods. The net decrease of one international Pizza Inn unit was primarily due to closure of locations in Kuwait partially offset by new units in the Middle East. We believe that this represents a stabilizing of international unit count. Pie Five Brand Summary The following tables summarize certain key indicators for the Pie Five franchised and Company-owned restaurants that management believes are useful in evaluating performance. 52 Weeks Ended June 26, 2022 June 27, 2021 (in thousands, except unit data) Pie Five Retail Sales - Total Units Domestic Units - Franchised $ 20,311 $ 17,734 Domestic Units - Company-owned — — Total Domestic Retail Sales $ 20,311 $ 17,734 Pie Five Comparable Store Retail Sales - Total $ 19,018 $ 16,243 Pie Five Average Units Open in Period Domestic Units - Franchised 32 37 Domestic Units - Company-owned — — Total Domestic Units 32 37 Pie Five domestic total retail sales increased $2.6 million, or 14.5%, compared to the prior year despite average units open in the period decreasing to 32 from 37 the prior year. Comparable store retail sales increased by $2.8 million, or 17.1% during fiscal 2022 compared to the prior year. The improvement in both total retail sales and comparable store retail sales was primarily the result of a moderation in the impact of COVID-19. 11 Index The following chart summarizes Pie Five restaurant activity for the fiscal year ended June 26, 2022: Fiscal Year Ended June 26, 2022 Beginning Units Opened Closed Ending Units Domestic - Franchised 33 2 4 31 Domestic - Company-owned – – — – Total Domestic Units 33 2 4 31 The net decrease of two Pie Five units during fiscal 2022 was primarily the result of the closure of poor-performing units, which we believe provides us a stronger foundation for future brand growth. We believe that this trend of net store closures will moderate and then reverse in future periods. Pie Five - Company-Owned Restaurants Fiscal Year Ended (in thousands, except store weeks and average data) June 26, 2022 June 27, 2021 Loss from continuing operations before taxes (3 ) (292 ) Impairment, other lease charges and non-operating store costs 3 291 Restaurant operating cash flow — (1 ) 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 to $0.3 million for the fiscal year ended June 26, 2022 compared to the same period of the prior year primarily due to the closure of all remaining Company-owned restaurants. Operating cash flow from Company-owned Pie Five restaurants remained essentially flat in fiscal 2022. 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, 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. • “Comparable store retail sales” includes the retail sales for restaurants that have been open for at least 18 months as of the end of the reporting period. The sales results for a restaurant that was closed temporarily for remodeling or relocation within the same trade area are included in the calculation only for the days that the restaurant was open in both periods being compared. • “Store weeks” represent the total number of full weeks that specified restaurants were open during the period. • “Average units open” reflects the number of restaurants open during a reporting period weighted by the percentage of the weeks in a reporting period that each restaurant was open. • “Average weekly sales” for a specified period is calculated as total retail sales (excluding partial weeks) divided by store weeks in the period. • “Restaurant operating cash flow” represents the pre-tax income earned by Company-owned restaurants before (1) allocated marketing and advertising expenses, (2) depreciation and amortization, (3) impairment and other lease charges, and (4) non-operating store costs. • “Non-operating store costs” represent gain or loss on asset disposal, store closure expenses, lease termination expenses and expenses related to abandoned store sites. • “Franchisee default and closed store revenue/expense” represents the net of accelerated revenues and costs attributable to defaulted area development agreements and closed franchised stores. 12 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 Fiscal Years ended June 26, 2022 and June 27, 2021 (in thousands): Pizza Inn Franchising Pie Five Franchising Company-Owned Stores Corporate Total Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 REVENUES: Franchise and license revenues $ 8,535 $ 6,582 $ 1,950 $ 1,800 $ – $ – $ – $ – $ 10,485 $ 8,382 Restaurant sales — – – – – – – – – – Rental income — – – – – – 186 200 186 200 Interest income and other — – 17 16 – – 4 (5 ) 21 11 Total revenues 8,535 6,582 1,967 1,816 – – 190 195 10,692 8,593 COSTS AND EXPENSES: Cost of sales — – – – 1 264 – – 1 264 General and administrative expenses — – – – 2 7 5,444 4,703 5,446 4,710 Franchise expenses 2,313 1,377 971 1,017 – – – – 3,284 2,394 Gain on sale of assets — – – – – – – (10 ) – (10 ) Impairment of long-lived assets and other lease charges — – – – – 21 6 – 6 21 Bad debt expense — – – – – – 46 121 46 121 Interest expense — – – – – – 61 92 61 92 Amortization and depreciation expense — – – – – – 187 167 187 167 Total costs and expenses 2,313 1,377 971 1,017 3 292 5,744 5,073 9,031 7,759 OTHER INCOME: Gain on forgiveness of PPP loan — — — — — — — 657 — 657 Employee retention credit — — — — — — 704 — 704 — Total other income — — — — — — 704 657 704 657 INCOME/(LOSS) BEFORE TAXES $ 6,222 $ 5,205 $ 996 $ 799 $ (3 ) $ (292 ) $ (4,850 ) $ (4,221 ) $ 2,365 $ 1,491 Revenues: Revenues are derived from franchise royalties, franchise fees and supplier and distributer incentives, advertising funds, area development exclusivity fees and foreign master license fees, supplier convention funds, sublease rental income, interest and other income, and sales by Company-owned restaurants. The volume of supplier incentive revenues is dependent on the level of chain-wide retail sales, which are impacted by changes in comparable store sales and restaurant count, as well as the products sold to franchisees through third-party food distributors. Total revenues for fiscal 2022 and fiscal 2021 were $10.7 million and $8.6 million, respectively. Pizza Inn Franchise and License Revenues Pizza Inn franchise revenues increased by $1.9 million to $8.5 million in fiscal 2022 compared to $6.6 million in fiscal 2021. The 29.7% increase was primarily the result of a moderation in the impact of COVID-19. 13 Index Pie Five Franchise and License Revenues Pie Five franchise revenues increased by $0.2 million to $2.0 million for fiscal 2022 compared to $1.8 million for fiscal 2021. The 8.3% increase was primarily the result of a moderation in the impact of COVID-19. Restaurant Sales We had no restaurant sales, which consist of revenue generated by Company-owned restaurants, in fiscal 2022 or fiscal 2021 because we closed our single remaining Company-owned restaurant during the third quarter of fiscal 2020. Costs and Expenses: Cost of Sales Cost of sales primarily includes food and supply costs, labor costs, and lease costs directly related to Company-owned restaurant sales. These costs decreased to $1 thousand for fiscal 2022 compared to $264 thousand in fiscal 2021. The decrease was primarily the result of the closure of the remaining Company-owned stores during the third quarter of fiscal 2020 partially offset by ongoing lease costs directly related to closed Company-owned stores. General and Administrative Expenses Total general and administrative expenses increased to $5.4 million for fiscal 2022 compared to $4.7 million in the prior fiscal year. The $0.7 million, or 15.6%, increase in total general and administrative expenses was primarily the result of increased employment , legal , and travel expenses. Franchise Expenses Franchise expenses include general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. Total franchise expenses increased $0.9 million to $3.3 million in fiscal 2022 from $2.4 million in the prior fiscal year. Pizza Inn franchise expenses increased $0.9 million to $2.3 million in fiscal 2022 compared to $1.4 million in the prior fiscal year primarily as a result of an increase in payroll and related, advertising, and travel costs. Pie Five franchise expenses of $1.0 million in fiscal 2022 remained essentially unchanged from the prior year. Gain on Sale of Assets The Company’s gain on sale of assets reflects the net difference between the sale price of assets and the net carrying value of the assets at the time of sale. Gain on sale of assets decreased to zero in fiscal 2022 compared to $10 thousand in the prior year. Impairment Expenses Impairment of long-lived assets and other lease charges were $6 thousand for fiscal 2022 compared to $21 thousand for fiscal 2021. Impairment of long-lived assets and other lease charges for Company-owned restaurants was zero in fiscal 2022 compared to $21 thousand in fiscal 2021 primarily due to a reduction in lease charges for closed stores. 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 decreased by $75 thousand to $46 thousand in fiscal 2022 compared to $121 th ousand in fiscal 2021 primarily related to domestic accounts receivable. Interest Expense Interest expense decreased $31 thousand for fiscal 2022 to $61 thousand compared to $92 thousand in the prior year. Amortization and Depreciation Expense Amortization and depreciation expense increased $20 thousand to $187 thousand in fiscal 2022 compared to $167 thousand in fiscal 2021 primarily as a result of higher amortization of equipment. 14 Index Other Income Other income represents non-recurring income that is not derived from the operations of the Company. The Company had a $0.7 million refundable employee retention tax credit during fiscal 2022 compared to $0.7 million in loan forgiveness during fiscal 2021, both of which were the result of governmental actions to mitigate the economic impacts of the COVID-19 pandemic. (See, “Liquidity and Capital Resources – Employee Retention Credit” and “- PPP Loan,” below.) Management does not presently expect similar benefits to be available in subsequent periods. Provision for Income Tax For the year ended June 26, 2022, t he Company recorded an income tax benefit of $5. 7 million including federal deferred tax benefit of $5.5 million and current/deferred state tax benefit of $0. 2 million. As of June 26, 2022, the Company had net operating loss carryforwards totaling $23.1 million that are available to reduce future taxable income and will begin to expire in 2032 , of which $1.8 million are limited to 80% and do not expire. Tax returns for fiscal 2013 and after will remain open to examination by federal and state tax authorities for three to four years following the tax year in which net operating losses or tax credits are utilized. The Company was not subject to income tax examinations by any tax authority as of June 26, 2022. The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for the valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also considered in determining the amount of the recorded valuation allowance. The Company has reversed the full amount of the valuation allowance as of June 26, 2022. The reversal of the valuation allowance resulted in a tax benefit of $5.7 million in fiscal 2022 compared to a negligible tax benefit in fiscal 2021 . There are no material uncertain tax positions. Management’s position is that all relevant requirements are met and necessary returns have been filed, and therefore the tax positions taken on the tax returns would be sustained upon examination. Liquidity and Capital Resources Sources and Uses of Funds Our primary sources of liquidity are cash flows from operating activities, loan proceeds, and proceeds from the sale of securities. Cash flows from operating activities generally reflect net income adjusted for certain non-cash items including depreciation and amortization, changes in deferred taxes, share based compensation, and changes in working capital. Cash provided by operations was $1.4 million in fiscal 2022 compared to cash provided by operations of $1.5 million in fiscal year 2021. Cash flows from investing activities primarily reflect net proceeds from sale of assets and capital expenditures for the purchase of Company assets. Cash provided by investing activities was $0.3 million in fiscal 2022 compared to cash used by investing activities of $0.2 million in fiscal 2021. The $0.5 million increase in cash provided by investing activities was primarily the result of payments on notes receivable from prior sales of assets. Cash flows from financing activities generally reflect changes in the Company’s borrowings and securities activity during the period. Net cash used by financing activities was $2.3 million for the fiscal year ended June 26, 2022 compared to net cash provided by financing activities of $3.9 million for the fiscal year June 27, 2021. The cash used by financing activities in fiscal 2022 was primarily the result of $1.6 million used to retire all outstanding convertible notes, as well as $0.5 million used to repurchase shares of the Company’s common stock and $0.2 million used to repay a short term loan. The cash provided by financing activities in fiscal 2021 was primarily attributable to proceeds from sales of stock in an at-the-market offering. PPP Loan Forgiveness and Employee Retention Credit 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 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. 15 Index On December 27, 2020, the Consolidated Appropriations Act of 2021 (the “CAA”) was signed into law. The CAA expanded eligibility for an employee retention credit for companies impacted by the COVID-19 pandemic with fewer than five hundred employees and at least a twenty percent decline in gross receipts compared to the same quarter in 2019, to encourage retention of employees. This payroll tax credit was a refundable tax credit against certain federal employment taxes. For the fiscal year ended June 26, 2022, the Company recorded $0.7 million of other income for the employee retention credit. The Company has also benefitted from the CAA guidance to treat expenses associated with the PPP loan forgiveness as tax deductible. 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 $5.0 million from time to time through B. Riley FBR acting as agent (the “2017 ATM Offering”). The 2017 ATM Offering was undertaken pursuant to Rule 415 and a shelf Registration Statement on Form S-3 which was declared effective by the SEC on November 6, 2017. Through June 27, 2021, the Company had sold an aggregate of 3,064,342 shares in the 2017 ATM Offering, realizing aggregate gross proceeds of $4.4 million. The 2017 ATM Offering expired 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 (“Notes”). Shareholders exercised subscription rights to purchase all 30,000 of the Notes at the par value of $100 per Note, resulting in gross offering proceeds to the Company of $3.0 million. The Notes bore interest at the rate of 4% per annum on the principal or par value of $100 per note, payable annually in arrears on February 15 of each year, commencing February 15, 2018. Interest was payable in cash or, at the Company’s discretion, in shares of Company common stock. The Notes were secured by a pledge of all outstanding equity securities of our two primary direct operating subsidiaries. During the fiscal year ended June 26, 2022, no Notes were converted to common shares. The Notes matured on February 15, 2022, at which time all principal and unpaid interest was paid in cash. Therefore, as of June 26, 2022, there were no Notes outstanding. Liquidity We expect to fund continuing operations and planned capital expenditures for the next fiscal year primarily from cash on hand and operating cash flow. Based on budgeted and year-to-date cash flow information, we believe that we have sufficient liquidity to satisfy our cash requirements for the 2023 fiscal year and beyond. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and various other assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically. Actual results could differ materially from estimates. The Company believes the following critical accounting policies require estimates about the effect of matters that are inherently uncertain, are susceptible to change, and therefore require subjective judgments. Changes in the estimates and judgments could significantly impact the Company’s results of operations and financial condition in future periods. Accounts receivable consist primarily of receivables generated from franchise royalties and supplier concessions. The Company records a provision for doubtful receivables to allow for any amounts which may be unrecoverable based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic trends. Actual realization of accounts receivable could differ materially from the Company’s estimates. The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use and eventual disposition of the assets compared to their carrying value. If impairment is indicated, the carrying value of an impaired asset is reduced to its fair value, based on discounted estimated future cash flows. The Company recognized pre-tax, non-cash impairment charges of $6 thousand and $21 thousand during fiscal years 2022 and 2021, respectively. The Company had $0.2 million in sublease income during fiscal year 2022. The Company had lease charges related to closed units of $0.7 million partially offset by $0.2 million in sublease income during fiscal year 2021. 16 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. Based on this analysis, the Company reversed the full amount of the previous valuation allowance as of June 26, 2022. 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 June 26, 2022 and June 27, 2021, the Company had no uncertain tax positions. The Company assesses its exposures to loss contingencies from legal matters based upon factors such as the current status of the cases and consultations with external counsel and provides for the exposure by accruing an amount if it is judged to be probable and can be reasonably estimated. If the actual loss from a contingency differs from management’s estimate, operating results could be adversely impacted. Leases The Company determines if an arrangement is a lease at inception of the arrangement. To the extent that it can be determined that an arrangement represents a lease, it is classified as either an operating lease or a finance lease. The Company does not currently have any finance leases. The Company capitalizes operating leases on the Condensed Consolidated Balance Sheets through a right of use asset and a corresponding lease liability. Right of use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Short-term leases that have an initial term of one year or less are not capitalized. The Company does not presently have any short-term leases . Operating lease right of use assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. In addition to the present value of lease payments, the operating lease right of use asset also includes any lease payments made to the lessor prior to lease commencement less any lease incentives and initial direct costs incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Nature of Leases The Company leases certain office space, restaurant space, and information technology equipment under non-cancelable leases to support its operations. A more detailed description of significant lease types is included below. Office Agreements The Company rents office space from third parties for its corporate location. Office agreements are typically structured with non-cancelable terms of one to 10 years. The Company has concluded that its office agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term. Restaurant Space Agreements The Company rents restaurant space from third parties for its Company-owned restaurants. Restaurant space agreements are typically structured with non-cancelable terms of one to 10 years. The Company has concluded that its restaurant agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term. 17 Index The Company also subleases some of its restaurant space to third parties. The Company’s two subleases have terms that end in 2023 and 2025. The sublease agreements are noncancelable through the end of the term and both parties have substantive rights to terminate the lease when the term is complete. Sublease agreements are not capitalized and are recorded as rental income in the period that rent is received. As of June 26, 2022, the Company had no Company-owned restaurants. Information Technology Equipment The Company rents information technology equipment, primarily printers and copiers, from a third party for its corporate office location. Information technology equipment agreements are typically structured with non-cancelable terms of one to five years. The Company has concluded that its information technology equipment commitments are operating leases. Discount Rate Leases typically do not provide an implicit rate. Accordingly, the Company is required to use an incremental borrowing rate in determining the present value of lease payments based on the information available at commencement date. The Company’s incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company uses the implicit rate in the limited circumstances in which that rate is readily determinable. Lease Guarantees The Company has guaranteed the financial responsibilities of certain franchised store leases. These guaranteed leases are not considered operating leases because the Company does not have the right to control the underlying asset. If the franchisee abandons the lease and fails to meet the lease’s financial obligations, the lessor may assign the lease to the Company for the remainder of the term. If the Company does not expect to assign the abandoned lease to a new franchisee within 12 months, the lease will be considered an operating lease and a right-of-use asset and lease liability will be recognized. Practical Expedients and Accounting Policy Elections Certain lease agreements include lease and non-lease components. For all existing asset classes with multiple component types, the Company has utilized the practical expedient that exempts it from separating lease components from non-lease components. Accordingly, the Company accounts for the lease and non-lease components in an arrangement as a single lease component. In addition, for all existing asset classes, the Company has made an accounting policy election not to apply the lease recognition requirements to short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). Accordingly, we recognize lease payments related to our short-term leases in our income statements on a straight-line basis over the lease term which has not changed from our prior recognition. To the extent that there are variable lease payments, we recognize those payments in our income statements in the period in which the obligation for those payments is incurred. The components of total lease expense for the fiscal year ended June 26, 2022, the majority of which is included in general and administrative expense, are as follows (in thousands): Fiscal Year Ended June 26, 2022 Operating lease cost $ 498 Sublease income (186 ) Total lease expense, net of sublease income $ 312 Supplemental cash flow information related to operating leases is included in the table below (in thousands): Fiscal Year Ended June 26, 2022 Cash paid for amounts included in the measurement of lease liabilities $ 551 18 Index Supplemental balance sheet information related to operating leases is included in the table below (in thousands): Fiscal Year Ended June 26, 2022 Operating lease right of use assets, net $ 1,664 Operating lease liabilities, current 490 Operating lease liabilities, net of current portion 1,421 Weighted average remaining lease term and weighted average discount rate for operating leases are as follows: Fiscal Year Ended June 26, 2022 Weighted average remaining lease term 3.1 Years Weighted average discount rate 4.0 % Operating lease liabilities with enforceable contract terms that are greater than one year mature as follows (in thousands): Operating Leases 2023 $ 558 2024 511 2025 433 2026 382 Thereafter 191 Total operating lease payments $ 2,075 Less: imputed interest (164 ) Total operating lease liability $ 1,911 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not required for a smaller reporting company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See information set forth on Index to Consolidated Financial Statements and Supplementary Data appearing on page F-1 of this report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.