RAVE RESTAURANT GROUP, INC. 10-Q

Item 1. Financial Statements RAVE RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended December 25 , 2022 December 26 , 2021 December 25 , 2022 December 26 , 2021 REVENUES: $ 2,866 $ 2,696 $ 5,871 $ 5,249 COSTS AND EXPENSES: General and administrative expenses 1,453 1,377 2,796 2,583 Franchise expenses 867 784 2,069 1,770 Impairment of long-lived assets and other lease charges — — 5 — Bad debt expense 5 3 9 8 Interest expense — 23 1 47 Depreciation and amortization expense 53 48 104 92 Total costs and expenses 2,378 2,235 4,984 4,500 INCOME BEFORE TAXES 488 461 887 749 Income tax expense ( 140 ) ( 4 ) ( 232 ) ( 7 ) NET INCOME $ 348 $ 457 $ 655 $ 742 INCOME PER SHARE OF COMMON STOCK - BASIC: $ 0.02 $ 0.03 $ 0.04 $ 0.04 INCOME PER SHARE OF COMMON STOCK - DILUTED: $ 0.02 $ 0.02 $ 0.04 $ 0.04 Weighted average common shares outstanding - basic 16,351 18,005 16,491 18,005 Weighted average common and potential dilutive common shares outstanding 16,351 18,803 16,491 18,803 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 Index RAVE RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands , except share amounts) (Unaudited) December 25 , 2022 June 26 , 2022 ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,429 $ 7,723 Accounts receivable, less allowance for bad debts of $ 32 and $ 27 , respectively 1,276 1,981 Notes receivable, current 167 172 Property held for sale 9 — Deferred contract charges, current 34 36 Prepaid expenses and other current assets 105 146 Total current assets 5,020 10,058 LONG-TERM ASSETS Property, plant and equipment, net 304 365 Operating lease right of use asset, net 1,447 1,664 Intangible assets definite-lived, net 312 232 Notes receivable, net of current portion 132 201 Deferred tax asset, net 5,590 5,772 Deferred contract charges, net of current portion 224 224 Total assets $ 13,029 $ 18,516 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable - trade $ 578 $ 669 Accrued expenses 487 1,082 Other current liabilities 1 81 Operating lease liability, current 498 490 Short term loan — 30 Deferred revenues, current 292 538 Total current liabilities 1,856 2,890 LONG-TERM LIABILITIES Operating lease liability, net of current portion 1,172 1,421 Deferred revenues, net of current portion 740 793 Total liabilities 3,768 5,104 COMMITMENTS AND CONTINGENCIES (SEE NOTE D) SHAREHOLDERS’ EQUITY Common stock, $ 0.01 par value; authorized 26,000,000 shares; issued 25,090,058 and 25,090,058 shares, respectively; outstanding 14,154,453 and 17,511,430 shares, respectively 251 251 Additional paid-in capital 37,557 37,384 Retained earnings 1,481 826 Treasury stock at cost Shares in treasury: 10,935,605 and 7,578,628 respectively ( 30,028 ) ( 25,049 ) Total shareholders’ equity 9,261 13,412 Total liabilities and shareholders’ equity $ 13,029 $ 18,516 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4 Index RAVE RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) (Unaudited) Common Stock Treasury Stock Shares Amount Additional Paid-in Capital Accumulated Deficit Shares Amount Total Balance, June 27, 2021 25,090 $ 251 $ 37,215 $ ( 7,196 ) ( 7,085 ) $ ( 24,537 ) $ 5,733 Stock-based compensation expense — — 42 — — — 42 Net income — — — 285 — — 285 Balance, September 26, 2021 25,090 $ 251 $ 37,257 $ ( 6,911 ) ( 7,085 ) $ ( 24,537 ) $ 6,060 Stock-based compensation expense — — 43 — — — 43 Net income — — — 457 — — 457 Balance, December 26, 2021 25,090 $ 251 $ 37,300 $ ( 6,454 ) ( 7,085 ) $ ( 24,537 ) $ 6,560 Common Stock Treasury Stock Shares Amount Additional Paid-in Capital Retained Earnings Shares Amount Total Balance, June 26, 2022 25,090 $ 251 $ 37,384 $ 826 ( 7,579 ) $ ( 25,049 ) $ 13,412 Stock-based compensation expense — — 86 — — — 86 Purchase of treasury stock — — — — ( 1,111 ) ( 1,384 ) ( 1,384 ) Net income — — — 307 — — 307 Balance, September 25, 2022 25,090 $ 251 $ 37,470 $ 1,133 ( 8,690 ) $ ( 26,433 ) $ 12,421 Stock-based compensation expense — — 87 — — — 87 Purchase of treasury stock — — — — ( 2,246 ) ( 3,595 ) ( 3,595 ) Net income — — — 348 — — 348 Balance, December 25, 2022 25,090 $ 251 $ 37,557 $ 1,481 ( 10,936 ) $ ( 30,028 ) $ 9,261 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 Index RAVE RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands ) (Unaudited) Six Months Ended December 25 , 2022 December 26 , 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 655 $ 742 Adjustments to reconcile net income to cash provided by operating activities: Impairment of long-lived assets and other lease charges 5 — Stock-based compensation expense 173 85 Depreciation and amortization 70 72 Amortization of operating right of use assets 217 209 Amortization of intangible assets definite-lived 34 20 Amortization of debt issue costs — 14 Allowance for bad debts 9 8 Deferred income tax 182 — Changes in operating assets and liabilities: Accounts receivable 696 ( 74 ) Notes receivable 14 46 Deferred contract charges 2 ( 12 ) Prepaid expenses and other 41 110 Accounts payable - trade ( 91 ) ( 43 ) Accrued expenses ( 675 ) ( 394 ) Operating lease liability ( 241 ) ( 230 ) Deferred revenues ( 299 ) ( 539 ) Cash provided by operating activities 792 14 CASH FLOWS FROM INVESTING ACTIVITIES: Payments received on notes receivable 60 94 Purchase of intangible assets definite-lived ( 114 ) ( 34 ) Purchase of property, plant and equipment ( 23 ) ( 12 ) Cash (used in)/provided by investing activities ( 77 ) 48 CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock ( 4,979 ) — Payments on short term loan ( 30 ) ( 160 ) Cash (used in) financing activities ( 5,009 ) ( 160 ) Net (decrease) in cash and cash equivalents ( 4,294 ) ( 98 ) Cash and cash equivalents, beginning of period 7,723 8,330 Cash and cash equivalents, end of period $ 3,429 $ 8,232 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID FOR: Income taxes $ 91 $ 8 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 Index RAVE RESTAURANT GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. The accompanying condensed consolidated financial statements of Rave Restaurant Group, Inc. have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 26, 2022. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as noted, all adjustments are of a normal recurring nature. Results of operations for the fiscal periods presented are not necessarily indicative of fiscal year-end results. Note A - Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Rave Restaurant Group, Inc. and its subsidiaries, all of which are wholly owned. All appropriate inter-company balances and transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Fiscal Quarters The three and six month periods ended December 25, 2022 and December 26, 2021 each contained 13 weeks and 26 weeks, respectively. Use of Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect its reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and other various assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically. Actual results could differ materially from estimates. Revenue Recognition Revenue is measured based on consideration specified in contracts with customers and excludes incentives and amounts collected on behalf of third parties, primarily sales tax. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. The following describes principal activities, separated by major product or service, from which the Company generates its revenues: Franchise Revenues Franchise revenues consist of 1) franchise royalties, 2) supplier and distributor incentive revenues, 3) franchise license fees, 4) area development exclusivity fees and foreign master license fees, 5) advertising funds, and 6) supplier convention funds. Franchise royalties, which are based on a percentage of franchise restaurant sales, are recognized as sales occur. Supplier and distributor incentive revenues are recognized when title to the underlying commodities transfer. Franchise license fees are typically billed upon execution of the franchise agreement and amortized over the term of the franchise agreement which can range from five to 20 years. Fees received for renewal periods are amortized over the life of the renewal period. 7 Index Area development exclusivity fees and foreign master license fees are typically billed upon execution of the area development and foreign master license agreements. Area development exclusivity fees are included in deferred revenue in the accompanying Condensed Consolidated Balance Sheets and allocated on a pro rata basis to all stores opened under that specific development agreement. Area development exclusivity fees that include rights to sub-franchise are amortized as revenue over the term of the contract. Advertising fund contributions for Pie Five and Pizza Inn units represent contributions collected where we have control over the activities of the fund. Contributions are based on a percentage of net retail sales. We have determined that we are the principal in these arrangements, and advertising fund contributions and expenditures are, therefore, reported on a gross basis in the Condensed Consolidated Statements of Income. In general, we expect such advertising fund contributions and expenditures to be largely offsetting and, therefore, do not expect a significant impact on our reported income before income taxes. Our obligation related to these funds is to develop and conduct advertising activities. Supplier convention funds are deferred until the obligations of the agreement are met and the event takes place. Rental Income The Company 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. Total revenues consist of the following (in thousands): Three Months Ended December 25, 2022 December 26, 2021 Franchise royalties $ 1,171 $ 1,095 Supplier and distributor incentive revenues 1,145 1,129 Franchise license fees 40 39 Area development exclusivity fees and foreign master license fees 5 5 Advertising funds contributions 453 367 Rental income 46 47 Other 6 14 $ 2,866 $ 2,696 Six Months Ended December 25, 2022 December 26, 2021 Franchise royalties $ 2,385 $ 2,178 Supplier and distributor incentive revenues 2,215 1,995 Franchise license fees 70 70 Area development exclusivity fees and foreign master license fees 9 9 Advertising funds contributions 919 744 Supplier convention funds 172 142 Rental income 93 93 Other 8 18 $ 5,871 $ 5,249 Stock-Based Compensation The Company accounts for stock options using the fair value recognition provisions of the authoritative guidance on share-based payments. The Company uses the Black-Scholes formula to estimate the value of stock-based compensation for options granted to employees and directors and expects to continue to use this acceptable option valuation model in the future. The authoritative guidance also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow. Restricted stock units (“RSUs”) represent the right to receive shares of common stock upon the satisfaction of vesting requirements, performance criteria and other terms and conditions. Compensation cost for RSUs is measured as an amount equal to the fair value of the RSUs on the date of grant and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on the best estimate of the ultimate achievement level. 8 Index Note B - 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 ten 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 agreement subsequent to the primary term. Restaurant Space Agreements The Company rents restaurant space from third parties for its Company-owned restaurants. Restaurant space agreements are typically structured with non-cancelable terms of one to 10 years . The Company has concluded that its restaurant agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term. The Company 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 December 25, 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 interest rate. Accordingly, the Company is required to use its incremental borrowing rate in determining the present value of lease payments based on the information available at the lease 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 for 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. 9 Index 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, leases that, at commencement, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). Accordingly, we recognize lease payments related to short-term leases in our income statements on a straight-line basis over the lease term. To the extent that there are variable lease payments, we recognize those payments in our Condensed Consolidated Statements of Income the period in which the obligation for those payments is incurred. The components of total lease expense for the six months ended December 25, 2022, the majority of which is included in general and administrative expense in the accompanying Condensed Consolidated Statements of Income, are as follows (in thousands): Six Months Ended December 25, 2022 Operating lease cost $ 248 Rental income ( 93 ) Total lease expense, net of sublease income $ 155 Supplemental cash flow information related to operating leases is included in the table below (in thousands): Six Months Ended December 25, 2022 Cash paid for amounts included in the measurement of lease liabilities $ 276 Weighted average remaining lease term and weighted average discount rate for operating leases are as follows: December 25, 2022 Weighted average remaining lease term 2.6 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 $ 281 2024 511 2025 433 2026 382 Thereafter 191 Total operating lease payments $ 1,798 Less: imputed interest ( 128 ) Total operating lease liability $ 1,670 Note C - Stock Purchase Plan On May 23, 2007, the Company’s board of directors approved a stock purchase plan (the “2007 Stock Purchase Plan”) authorizing the purchase on our behalf of up to 1,016,000 shares of our common stock in the open market or in privately negotiated transactions. On June 2, 2008, the Company’s board of directors amended the 2007 Stock Purchase Plan to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares. On April 22, 2009, the Company’s board of directors amended the 2007 Stock Purchase Plan again to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 3,016,000 shares. On June 28, 2022, the Company’s board of directors amended the 2007 Stock Purchase Plan again to increase the number of shares of common stock the Company may repurchase by 5,000,000 shares to a total of 8,016,000 shares. The 2007 Stock Purchase Plan does not have an expiration date. The following table furnishes information for purchases made pursuant to the 2007 Stock Purchase Plan during fiscal 2023: Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plan Maximum Number of Shares that May Yet Be Purchased Under the Plan June 27, 2022 - July 31, 2022 891,350 $ 1.20 3,552,399 4,463,601 August 1, 2022 - August 28, 2022 219,541 1.35 3,771,940 4,244,060 August 29, 2022 - September 25, 2022 0 0 3,771,940 4,244,060 September 26, 2022 - October 30, 2022 0 0 3,771,940 4,244,060 October 31, 2022 - November 27, 2022 0 0 3,771,940 4,244,060 November 28, 2022 - December 25, 2022 2,246,086 1.60 6,018,026 1,997,974 Total 3,356,977 $ 1.48 The Company’s ability to purchase shares of our common stock is subject to various laws, regulations and policies as well as the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company may also purchase shares of our common stock other than pursuant to the 2007 Stock Purchase Plan or other publicly announced plans or programs. On December 21, 2022, the Company entered into a Stock Purchase Agreement with Hallmark Financial Services, Inc. (“Hallmark”) pursuant to which the Company purchased from certain direct or indirect subsidiaries of Hallmark an aggregate of 2,246,086 shares of the Company’s common stock at a price of $ 1.60 per share, resulting in an aggregate purchase price of $ 3,593,738 . The price per share represented the average closing price of the Company’s common stock on the Nasdaq Capital Market for the preceding 15 trading days. The transaction was approved by the Audit Committee of the Company, which consists of all of the independent directors of the Company. The Chairman of the Company, Mark E. Schwarz, who is also the Executive Chairman and Chief Executive Officer of Hallmark, recused himself from all deliberations with respect to the Stock Purchase Agreement with Hallmark. 10 Index Note D - Commitments and Contingencies On January 6, 2020, the Company’s former Chief Executive Officer, Scott Crane, filed suit in the U.S. District Court for the Eastern District of Texas alleging various claims in connection with the Company’s termination of his employment in July 2019. In general, the suit asserted that the Company terminated Mr. Crane for the purpose of depriving him of certain equity compensation that would otherwise have become due to him on October 15, 2019. The case proceeded to a jury trial, which resulted in a verdict in favor of Crane on his breach of contract claim. On February 9, 2022, the Court entered a $ 1.9 million judgment against the Company inclusive of attorney fees, court costs and pre-judgment interest. The Company has filed an appeal of the judgment to the Fifth Circuit Court of Appeals. The Company is subject to other various claims and contingencies related to employment agreements, franchise disputes, lawsuits, taxes, food product purchase contracts and other matters arising out of the normal course of business. Management believes that any such claims and actions currently pending are either covered by insurance or would not have a material adverse effect on the Company’s annual results of operations or financial condition if decided in a manner that is unfavorable to the Company. Note E - Stock-Based Compensation Stock Options: For the three and six months ended December 25, 2022, the Company recognized stock-based compensation expense related to stock options of $ 4 thousand and $ 8 thousand, respectively. For the three and six months ended December 26, 2021, the Company recognized stock-based compensation expense related to stock options of zero and zero , respectively. As of December 25, 2022, there was $ 8 thousand unamortized stock-based compensation expense related to stock options. The following table summarizes the number of shares of the Company’s common stock subject to outstanding stock options: Six Months Ended December 25, 2022 December 26, 2021 Shares Shares Outstanding at beginning of year 111,750 166,750 Granted 40,000 — Exercised — — Forfeited/Canceled/Expired — — Outstanding at end of period 151,750 166,750 Exercisable at end of period 111,750 166,750 Restricted Stock Units: For the three and six months ended December 25, 2022, the Company had stock-based compensation expense of $ 82 thousand and $ 165 thousand, respectively, related to RSUs. For the three and six months ended December 26, 2021, the Company had stock-based compensation expense of $ 42 thousand and $ 85 thousand, respectively, related to RSUs. As of December 25, 2022, there was $ 412 thousand unamortized stock-based compensation expense related to RSUs. A summary of the status of restricted stock units as of December 25, 2022, and changes during the six months then ended is presented below: Unvested at June 26 , 2022 885,688 Granted — Issued — Forfeited — Unvested at December 25 , 2022 885,688 11 Index Note F - Earnings per Share (EPS) The following table shows the reconciliation of the numerator and denominator of the basic EPS calculation to the numerator and denominator of the diluted EPS calculation (in thousands, except per share amounts): Three Months Ended Six Months Ended December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 Net income available to common stockholders $ 348 $ 457 $ 655 $ 742 BASIC: Weighted average common shares 16,351 18,005 16,491 18,005 Net income per common share $ 0.02 $ 0.03 $ 0.04 $ 0.04 DILUTED: Weighted average common shares 16,351 18,005 16,491 18,005 Convertible notes — 798 — 798 Dilutive stock options — — — — Weighted average common shares outstanding 16,351 18,803 16,491 18,803 Net income per common share $ 0.02 $ 0.02 $ 0.04 $ 0.04 For the three and six months ended December 25, 2022, exercisable options to purchase 111,750 shares of common stock at exercise prices from $ 3.95 to $ 13.11 were excluded from the computation of diluted EPS because they had an intrinsic value of zero . For the three and six months ended December 26, 2021, exercisable options to purchase 166,750 shares of common stock at exercise prices ranging from $ 3.11 to $ 13.11 were excluded from the computation of diluted EPS because they had an intrinsic value of zero . Note G - Income Taxes For the three and six months ended December 25, 2022, the Company recorded an income tax expense of $ 140 thousand and $ 232 thousand, respectively. For the three and six months ended December 26, 2021, the Company recorded an income tax expense of $ 4 thousand and $ 7 thousand, respectively. For the three months ended December 25, 2022, the federal and state tax expense were $ 100 thousand and $ 40 thousand, respectively. For the six months ended December 25, 2022, the federal and state tax expense were $ 182 thousand and $ 50 thousand, respectively. 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. Note H - Segment Reporting The Company has three reportable operating segments as determined by management using the “management approach” as defined by ASC 280 Disclosures about Segments of an Enterprise and Related Information: (1) Pizza Inn Franchising, (2) Pie Five Franchising and (3) Company-Owned Restaurants. These segments are a result of differences in the nature of the products and services sold. Corporate administration costs, which include, but are not limited to, general accounting, human resources, legal and credit and collections, are partially allocated to the three operating segments. Other revenue consists of nonrecurring items. The Pizza Inn and Pie Five Franchising segments establish franchisees, licensees and territorial rights. Revenue for these segments are derived from franchise royalties, franchise fees, sale of area development and foreign master license rights, incentive payments from third party suppliers and distributors, advertising funds, and supplier convention funds. Assets for these segments include equipment, furniture and fixtures. The Company-Owned Restaurants segment includes sales and operating results for all Company-owned restaurants. Assets for this segment include equipment, furniture and fixtures for the Company-owned restaurants. As of December 25, 2022, the Company did not operate any Company-owned restaurants. Corporate administration and other assets primarily include cash and short-term investments, as well as furniture and fixtures located at the corporate office and trademarks and other intangible assets. All assets are located within the United States. 12 Index Summarized in the following tables are net sales and operating revenues, depreciation and amortization expense, income from continuing operations before taxes, capital expenditures and assets for the Company’s reportable segments as of the three and six months ended December 25, 2022 and December 26, 2021 (in thousands): Three Months Ended Six Months Ended December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 Net sales and operating revenues: Pizza Inn Franchising $ 2,351 $ 2,154 $ 4,820 $ 4,188 Pie Five Franchising 470 496 958 968 Company-Owned Restaurants — — — — Corporate administration and other 45 46 93 93 Consolidated revenues $ 2,866 $ 2,696 $ 5,871 $ 5,249 Depreciation and amortization: Corporate administration and other $ 53 $ 48 $ 104 $ 92 Depreciation and amortization $ 53 $ 48 $ 104 $ 92 Income before taxes: Pizza Inn Franchising $ 1,695 $ 1,583 $ 3,206 $ 2,858 Pie Five Franchising 259 283 503 528 Company-Owned Restaurants — ( 1 ) — ( 2 ) Combined 1,954 1,865 3,709 3,384 Corporate administration and other ( 1,466 ) ( 1,404 ) ( 2,822 ) ( 2,635 ) Income before taxes $ 488 $ 461 $ 887 $ 749 Geographic information (revenues): United States $ 2,799 $ 2,620 $ 5,728 $ 5,096 Foreign countries 67 76 143 153 Consolidated revenues $ 2,866 $ 2,696 $ 5,871 $ 5,249 13 Index