RAVE RESTAURANT GROUP, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended June 26, 2022 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 26, 2022. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Results of Operations Overview Rave Restaurant Group, Inc., through its subsidiaries (collectively, the “Company” or “we,” “us” or “our”), 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 25, 2022, franchised and licensed units consisted of the following: Three Months Ended December 25, 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 125 $ 23,633 31 $ 4,853 156 $ 28,486 International Franchised 33 — 33 Six Months Ended December 25, 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 125 $ 47,612 31 $ 10,100 156 $ 57,712 International Franchised 33 — 33 The domestic units were located in 18 states predominantly situated in the southern half of the United States. The international units were located in seven foreign countries. Basic net income per share decreased $0.01 per share to $0.02 per share for the three months ended December 25, 2022, compared to the comparable period in the prior fiscal year. The Company had net income of $0.3 million for the three months ended December 25, 2022 compared to net income of $0.5 million in the comparable period in the prior fiscal year, on revenues of $2.9 million for the three months ended December 25, 2022 compared to $2.7 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 $0.1 million decrease in net income for the three months ended December 25, 2022, compared to the comparable period of the prior year was primarily the result of a $0.1 million increase in income tax expense. Basic net income per share of $0.04 per share was unchanged for the six months ended December 25, 2022, 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 25, 2022 compared to net income of $0.7 million in the comparable period in the prior fiscal year, on revenues of $5.9 million for the six months ended December 25, 2022 compared to $5.3 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 $0.1 million decrease in net income for the six months ended December 25, 2022 compared to the comparable period of the prior year was primarily the result of the $0.6 million increase in revenues partially offset by a $0.5 million increase in expenses and a $0.2 million increase in income tax expense. 14 Index 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. 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. During much of the COVID-19 pandemic, we experienced 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 correspondingly decreased supplier rebates and franchise royalties payable to the Company. In most cases, in-store dining has now resumed subject to seating capacity limitations, social distancing protocols, and/or enhanced cleaning and disinfecting practices. As a result, the adverse impacts of the COVID-19 pandemic have diminished in recent periods. Nonetheless, 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 continue or whether it will recur, what additional restrictions may be enacted, if individuals will be comfortable frequenting our Buffet Units and Pie Five Units, or to what extent off-premises will continue. 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. 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. 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 these meanings 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-based 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. 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. ● “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. 15 Index EBITDA and Adjusted EBITDA Adjusted EBITDA for the fiscal quarter ended December 25, 2022 increased $0.1 million compared to the same period of the prior fiscal year. Year-to-date Adjusted EBITDA increased $0.2 million compared to the same period of 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): RAVE RESTAURANT GROUP, INC. ADJUSTED EBITDA (In thousands) Three Months Ended Six Months Ended December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 Net income $ 348 $ 457 $ 655 $ 742 Interest expense — 23 1 47 Income taxes 140 4 232 7 Depreciation and amortization 53 48 104 92 EBITDA $ 541 $ 532 $ 992 $ 888 Stock-based compensation expense 87 43 173 85 Severance — — — 33 Impairment of long-lived assets and other lease charges — — 5 — Franchisee default and closed store revenue (13 ) (11 ) (13 ) (12 ) Closed and non-operating store costs — 1 — 2 Adjusted EBITDA $ 615 $ 565 $ 1,157 $ 996 Pizza Inn Brand Summary The following tables summarize certain key indicators for the Pizza Inn franchised and licensed domestic units that management believes are useful in evaluating performance: Three Months Ended Six Months Ended December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 Pizza Inn Retail Sales - Total Domestic Units (in thousands, except unit data) (in thousands, except unit data) Domestic Units Buffet Units - Franchised $ 22,223 $ 19,433 $ 44,664 $ 38,078 Delco/Express Units - Franchised 1,342 1,524 2,824 3,166 PIE Units - Licensed 68 58 124 118 Total Domestic Retail Sales $ 23,633 $ 21,015 $ 47,612 $ 41,362 Pizza Inn Comparable Store Retail Sales - Total Domestic $ 22,531 $ $ 20,783 $ 45,042 $ 40,799 Pizza Inn Average Units Open in Period Domestic Units Buffet Units - Franchised 72 70 73 71 Delco/Express Units - Franchised 46 49 46 51 PIE Units - Licensed 8 9 9 10 Total Domestic Units 126 128 128 132 Pizza Inn total domestic retail sales increased by $2.6 million, or 12.5%, for the three months ended December 25, 2022 when compared to the same period of the prior year. The increase in domestic retail sales was primarily the result of the diminished impact of COVID-19 and increased customer engagement. Pizza Inn domestic comparable store retail sales increased by $1.7 million, or 8.4%, for the same reason. For the six months ended December 25, 2022, the improvements in domestic retail sales and comparable store retail sales were primarily due to the diminished impact of COVID-19 and increased customer engagement. 16 Index The following chart summarizes Pizza Inn restaurant activity for the three and six months ended December 25, 2022: Three Months Ended December 25, 2022 Beginning Units Opened Concept Change Closed Ending Units Domestic Units Buffet Units - Franchised 72 1 — — 73 Delco/Express Units - Franchised 47 — — 3 44 PIE Units - Licensed 9 — — 1 8 Total Domestic Units 128 1 — 4 125 International Units (all types) 33 — — — 33 Total Units 161 1 — 4 158 Six Months Ended December 25, 2022 Beginning Units Opened Concept Change Closed Ending Units Domestic Units Buffet Units - Franchised 72 1 — — 73 Delco/Express Units - Franchised 47 — — 3 44 PIE Units - Licensed 9 — — 1 8 Total Domestic Units 128 1 — 4 125 International Units (all types) 31 2 — — 33 Total Units 159 3 — 4 158 There was a net decrease of three units in the total domestic Pizza Inn unit count during the three and six months ended December 25, 2022. For the three and six months ended December 25, 2022, the number of international Pizza Inn units remained stable and increased by two units, respectively. The Company believes the number of both domestic and international Pizza Inn units will increase modestly in future periods. Pie Five Brand Summary The following tables summarize certain key indicators for the Pie Five franchised and Company-owned restaurants that management believes are useful in evaluating performance: Three Months Ended Six Months Ended December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 (in thousands, except unit data) (in thousands, except unit data) Pie Five Retail Sales - Total Units Domestic Units - Franchised $ $ 4,857 $ $ 4,977 $ $ 10,100 $ $ 10,037 Domestic Units - Company-owned — — — — Total Domestic Retail Sales $ $ 4,857 $ $ 4,977 $ $ 10,100 $ $ 10,037 Pie Five Comparable Store Retail Sales - Total $ $ 4,622 $ $ 4,347 $ $ 9,615 $ $ 8,982 Pie Five Average Units Open in Period Domestic Units - Franchised 31 34 31 34 Domestic Units - Company-owned — — — — Total Domestic Units 31 34 31 34 Pie Five system-wide retail sales decreased $0.1 million, or 2.5%, for the three months ended December 25, 2022 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 34 to 31. Comparable store retail sales increased $0.3 million, or 6.3%, during the second quarter of fiscal 2023 compared to the same period of the prior year. For the three months ended December 25, 2022, the decrease in domestic retail sales were primarily the result of the decrease in store count offset by an increase in comparable store retail sales, primarily resulting from the diminished impact of COVID-19 and increased customer engagement. For the six months ended December 25, 2022, the improvements in domestic retail sales and comparable store retail sales were primarily due to the diminished impact of COVID-19 and increased customer engagement. 17 Index The following chart summarizes Pie Five restaurant activity for the three and six months ended December 25, 2022: Three Months Ended December 25, 2022 Beginning Units Opened Transfer Closed Ending Units Domestic - Franchised 31 — — — 31 Domestic - Company-owned — — — — — Total Domestic Units 31 — — — 31 Six Months Ended December 25, 2022 Beginning Units Opened Transfer Closed Ending Units Domestic - Franchised 31 — — — 31 Domestic - Company-owned — — — — — Total Domestic Units 31 — — — 31 The Pie Five units remained stable during the six months ended December 25, 2022. We believe that Pie Five units will eventually increase in future periods. 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 and six months ended December 25, 2022 and December 26, 2021 (in thousands): Three Months Ended December 25, 2022 and December 26, 2021 Pizza Inn Franchising Pie Five Franchising Company-Owned Restaurants Corporate Total Fiscal Quarter Ended Fiscal Quarter Ended Fiscal Quarter Ended Fiscal Quarter Ended Fiscal Quarter Ended December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 REVENUES: Franchise and license revenues $ 2,351 $ 2,154 $ 462 $ 483 $ — $ — $ — $ — $ 2,813 $ 2,637 Rental income — — — — — — 46 46 46 46 Interest income and other — — 8 13 — — (1 ) — 7 13 Total revenues 2,351 2,154 470 496 — — 45 46 2,866 2,696 COSTS AND EXPENSES: General and administrative expenses — — — — — 1 1,453 1,376 1,453 1,377 Franchise expenses 656 571 211 213 — — — — 867 784 Bad debt expense — — — — — — 5 3 5 3 Interest expense — — — — — — — 23 — 23 Depreciation and amortization expense — — — — — — 53 48 53 48 Total costs and expenses 656 571 211 213 — 1 1,511 1,450 2,378 2,235 INCOME/(LOSS) BEFORE TAXES $ 1,695 $ 1,583 $ 259 $ 283 $ — $ (1 ) $ (1,466 ) $ (1,404 ) $ 488 $ 461 18 Index Six Months Ended December 25, 2022 and December 26, 2021 Pizza Inn Franchising Pie Five Franchising Company-Owned Stores Corporate Total Fiscal Year-to-Date Fiscal Year-to-Date Fiscal Year-to-Date Fiscal Year-to-Date Fiscal Year-to-Date December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021 REVENUES: Franchise and license revenues $ 4,820 $ 4,188 $ 950 $ 951 $ — $ — $ — $ — $ 5,770 $ 5,139 Rental Income — — — — — — 93 93 93 93 Interest income and other — — 8 17 — — — — 8 17 Total revenues 4,820 4,188 958 968 — — 93 93 5,871 5,249 COSTS AND EXPENSES: General and administrative expenses — — — — — 2 2,796 2,581 2,796 2,583 Franchise expenses 1,614 1,330 455 440 — — — — 2,069 1,770 Impairment of long-lived assets and other lease charges — — — — — — 5 — 5 — Bad debt expense — — — — — — 9 8 9 8 Interest expense — — — — — — 1 47 1 47 Depreciation and amortization expense — — — — — — 104 92 104 92 Total costs and expenses 1,614 1,330 455 440 — 2 2,915 2,728 4,984 4,500 INCOME/(LOSS) BEFORE TAXES $ 3,206 $ 2,858 $ 503 $ 528 $ — $ (2 ) $ (2,822 ) $ (2,635 ) $ 887 $ 749 19 Index Revenues: Revenues are derived from franchise royalties, franchise fees and supplier and distributor 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 the three month period ended December 25, 2022 and for the same period in the prior fiscal year were $2.9 million and $2.7 million, respectively. The increase in total revenues was driven by increases in Pizza Inn franchise and license fees. Total revenues for the six month period ended December 25, 2022 and for the same period in the prior fiscal year were $5.9 million and $5.2 million, respectively. The increase in total revenues was driven by increases in Pizza Inn franchise and license fees. Pizza Inn Franchise and License Pizza Inn franchise revenues increased to $2.4 million for the three month period ended December 25, 2022 from $2.2 million for to the same period of the prior fiscal year. Pizza Inn franchise revenues increased to $4.8 million for the six month period ended December 25, 2022 from $4.2 million for the same period of the prior fiscal year. The increases were primarily driven by increases in supplier incentives, domestic royalties and advertising fund revenues. Pie Five Franchise and License Pie Five franchise revenues remained relatively stable at $0.5 million for the three month period ended December 25, 2022 as compared to the same period of the prior fiscal year. Pie Five franchise revenues remained relatively stable at $1.0 million for the six month period ended December 25, 2022 as compared to the same period of the prior fiscal year. General and Administrative Expenses Total general and administrative expenses increased $0.1 million to $1.5 million for the three month period ended December 25, 2022 compared to $1.4 million for the same period of the prior fiscal year. Total general and administrative expenses increased $0.2 million to $2.8 million for the six month period ended December 25, 2022 compared to $2.6 million for the same period of the prior fiscal year. The increases in total 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 sale and continuing service of domestic and international franchises. Total franchise expenses increased to $0.9 million for the three month period ended December 25, 2022 compared to $0.8 million for the same period of the prior fiscal year. Total franchise expenses increased to $2.1 million for the six month period ended December 25, 2022 compared to $1.8 million for the same period of the prior fiscal year. The increase was p rimarily due to an increase in payroll and related, advertising, and travel costs. 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 December 25, 2022 compared to zero for the same period of the prior fiscal year. Impairment of long-lived assets and other lease charges was $5 thousand for the six month period ended December 25, 2022 compared to zero for the same period of the prior fiscal year. The increase was primarily due to impaired beverage equipment. 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. For the three month period ended December 25, 2022, bad debt expense was $5 thousand compared to bad debt expense of $3 thousand for the same period in the prior fiscal year. Bad debt expense for the six month period ended December 25, 2022, increased $1 thousand to $9 thousand compared to the comparable period in the prior fiscal year. Interest Expense Interest expense decreased $23 thousand to zero for the three month period ended December 25, 2022 compared to the same fiscal period of the prior year. Interest expense decreased $46 thousand to $1 thousand for the six month period ended December 25, 2022 compared to the same fiscal period of the prior year. In both cases, the decrease was primarily the result of the payment of all outstanding convertible notes during the third quarter of fiscal 2022. 20 Index Amortization and Depreciation Expense Amortization and depreciation expense increased slightly for the three and six months ended December 25, 2022, compared to the same periods of the prior year. In both cases, the increase was primarily the result of higher amortization of intangible assets. Provision for 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 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. Liquidity and Capital Resources During the six month period ended December 25, 2022, the Company's primary source of liquidity was proceeds from operating activities. 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 operating activities was $792 thousand for the six month period ended December 25, 2022 compared to cash provided by operating activities of $14 thousand for the six month period ended December 26, 2021. The primary driver of increased operating cash flow during the six month period ended December 25, 2022 was increa sed collections of accounts receivable related to the employee retention credit. Cash flows from investing activities reflect net proceeds from the sale of assets and capital expenditures for the purchase of Company assets. Cash used in investing activities during the six month period ended December 25, 2022 was $77 thousand compared to cash provided by investing activities of $48 thousand for the six months ended December 25, 2022. Cash flows used in financing activities generally reflect changes in the Company's stock and debt activity during the period. Net cash used by financing activities was $5.0 million for the six month period ended December 25, 2022 compared to net cash used by financing activities of $0.2 million for the six month period ended December 26, 2021. Net cash used by financing activities for the six months ended December 25, 2022 was primarily attributable to repurchases of the Company's stock. Management believes the cash on hand combined with net cash provided by operations will be sufficient to fund operations for the next 12 months and beyond. 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. The Notes matured on February 15, 2022, at which time all principal and unpaid interest was paid in cash. Therefore, as of December 25, 2022 , there were no Notes outstanding. Employee Retention Credit 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, $0.6 million of which was collected in the first quarter of fiscal 2023. 21 Index 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 an allowance for bad debts 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 indicated, 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 operating performance. 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 25, 2022 and December 26, 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not required for a smaller reporting company.