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, our Annual Report on Form 10-K for the year ended June 30, 2024, together with our Quarterly Report on Form 10-Q for the period ended September 29, 2024, 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 30, 2024, as well as our Quarterly Report on Form 10-Q for the period ended September 29, 2024. 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”), express restaurants (“Express Units”) and ghost kitchens (“Pizza Inn Ghost Kitchen Units”) under the trademark “Pizza Inn” and franchises fast casual pizza restaurants (“Pie Five Units”) and ghost kitchens (“Pie Five Ghost Kitchen 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 29, 2024, franchised and licensed units consisted of the following: Three Months Ended December 29, 2024 (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 102 $ 25,855 20 $ 2,711 122 $ 28,566 International Franchised 27 $ 1,893 — $ — 27 $ 1,893 Six Months Ended December 29, 2024 (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 102 $ 51,225 20 $ 5,689 122 $ 56,914 International Franchised 27 $ 3,667 — $ — 27 $ 3,667 The domestic units were located in 15 states predominantly situated in the southern half of the United States. The international units were located in eight foreign countries. 14 Table of Contents 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, 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. ● “Average units open” reflects the number of restaurants open during a reporting period weighted by the percentage of the days in a reporting period that each restaurant was open. ● “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. EBITDA and Adjusted EBITDA Adjusted EBITDA for the fiscal quarter ended December 29, 2024 increased $0.3 million compared to the same period of the prior fiscal year. Year-to-date Adjusted EBITDA increased $0.4 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 29, 2024 December 24, 2023 December 29, 2024 December 24, 2023 Net income $ 607 $ 553 $ 1,133 $ 939 Interest income (87 ) (46 ) (169 ) (48 ) Income taxes 144 (13 ) 313 119 Depreciation and amortization 53 57 96 112 EBITDA $ 717 $ 551 $ 1,373 $ 1,122 Stock-based compensation expense 53 3 126 82 Severance 5 — 5 — Franchisee default and closed store revenue 32 (18 ) 23 (82 ) Adjusted EBITDA $ 807 $ 536 $ 1,527 $ 1,122 15 Table of Contents 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 29, 2024 December 24, 2023 December 29, 2024 December 24, 2023 Pizza Inn Retail Sales - Total Domestic Units (in thousands, except unit data) (in thousands, except unit data) Buffet Units - Franchised $ 25,030 $ 24,558 $ 49,529 $ 49,569 Delco/Express Units - Franchised 820 968 1,679 1,967 PIE Units - Licensed 4 17 14 37 Pizza Inn Ghost Kitchen Units - Franchised 1 — 3 — Total Domestic Retail Sales $ 25,855 $ 25,543 $ 51,225 $ 51,573 Pizza Inn Comparable Store Retail Sales - Total Domestic $ 24,752 $ 24,565 $ 48,756 $ 49,089 Pizza Inn Average Units Open in Period Buffet Units - Franchised 78 75 78 77 Delco/Express Units - Franchised 23 32 23 36 PIE Units - Licensed 1 4 1 5 Pizza Inn Ghost Kitchen Units - Franchised 1 — 1 — Total Domestic Units 103 111 103 118 Pizza Inn total domestic retail sales increased by $0.3 million, or 1.2%, for the three months ended December 29, 2024 when compared to the same period of the prior year. Compared to the same fiscal quarter of the prior year, average Buffet Units open in the period increased from 75 to 78. Comparable store retail sales increased by $0.2 million, or 0.8%, for the three month period ended December 29, 2024 as compared to the same period of the prior fiscal year. For the three months ended December 29, 2024, the increase in domestic retail sales were primarily the result of the increase in Buffet Units, supplemented by an increase in comparable domestic store retail sales. Pizza Inn total domestic retail sales decreased by $0.3 million, or 0.7%, for the six months ended December 29, 2024 when compared to the same period of the prior year. Compared to the same fiscal period of the prior year, average Buffet Units open in the period increased from 77 to 78. Comparable store retail sales decreased by $0.3 million, or 0.7%, for the six month period ended December 29, 2024 as compared to the same period of the prior fiscal year. For the six months ended December 29, 2024, the decrease in domestic retail sales were primarily the result of the decrease in comparable domestic store retail sales, offset by an increase in Buffet Units. 16 Table of Contents The following chart summarizes Pizza Inn restaurant activity for the three and six months ended December 29, 2024: Three Months Ended December 29, 2024 Beginning Units Opened Concept Change Transfer Closed Ending Units Buffet Units - Franchised 77 1 — 3 1 77 Delco/Express Units - Franchised 23 — — — — 23 PIE Units - Licensed 1 — — — — 1 Pizza Inn Ghost Kitchen Units - Franchised 1 — — — — 1 Total Domestic Units 102 1 — 3 1 102 International Units (all types) 26 3 — — 2 27 Total Units 128 4 — 3 3 129 Six Months Ended December 29, 2024 Beginning Units Opened Concept Change Transfer Closed Ending Units Buffet Units - Franchised 78 1 — 3 2 77 Delco/Express Units - Franchised 23 — — — — 23 PIE Units - Licensed 3 — — — 2 1 Pizza Inn Ghost Kitchen Units - Franchised 1 — — — — 1 Total Domestic Units 105 1 — 3 4 102 International Units (all types) 24 5 — — 2 27 Total Units 129 6 — 3 6 129 There was a net decrease of zero and three units in the total domestic Pizza Inn unit count during the three and six months ended December 29, 2024, respectively. There were three unit transfers between franchisees in the total domestic Pizza Inn unit count during the three and six months ended December 29, 2024. For the three and six months ended December 29, 2024, the number of international Pizza Inn units increased by one and three units, respectively. There were zero transfers in the total international Pizza Inn unit count during the three and six months ended December 29, 2024. 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 restaurants that management believes are useful in evaluating performance: Three Months Ended Six Months Ended December 29, 2024 December 24, 2023 December 29, 2024 December 24, 2023 Pie Five Retail Sales - Total Units (in thousands, except unit data) (in thousands, except unit data) Pie Five Units - Franchised $ 2,627 $ 4,304 $ 5,512 $ 9,071 Pie Five Ghost Kitchen Units - Franchised 84 — 177 — Total Domestic Retail Sales $ 2,711 $ 4,304 $ 5,689 $ 9,071 Pie Five Comparable Store Retail Sales - Total $ 2,626 $ 2,963 $ 5,509 $ 6,119 Pie Five Average Units Open in Period Pie Five Units - Franchised 18 25 18 26 Pie Five Ghost Kitchen Units - Franchised 2 — 2 — Total Domestic Units 20 25 20 26 17 Table of Contents Pie Five total domestic retail sales decreased by $1.6 million, or 37.0%, for the three months ended December 29, 2024 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 25 to 20. Comparable store retail sales decreased by $0.3 million, or 11.4%, for the three month period ended December 29, 2024 as compared to the same period of the prior fiscal year. For the three months ended December 29, 2024, the decrease in domestic retail sales were primarily the result of the decrease in store count, supplemented by a decrease in comparable store retail sales. Pie Five total domestic retail sales decreased by $3.4 million, or 37.3%, for the six months ended December 29, 2024 when compared to the same period of the prior year. Compared to the same fiscal period of the prior year, average units open in the period decreased from 26 to 20. Comparable store retail sales decreased by $0.6 million, or 10.0%, for the six month period ended December 29, 2024 as compared to the same period of the prior fiscal year. For the six months ended December 29, 2024, the decrease in domestic retail sales were primarily the result of the decrease in store count, supplemented by a decrease in comparable store retail sales. The following chart summarizes Pie Five restaurant activity for the three and six months ended December 29, 2024: Three Months Ended December 29, 2024 Beginning Units Opened Concept Change Transfer Closed Ending Units Pie Five Units - Franchised 18 — — — — 18 Pie Five Ghost Kitchen Units - Franchised 2 — — — — 2 Total Domestic Units 20 — — — — 20 Six Months Ended December 29, 2024 Beginning Units Opened Concept Change Transfer Closed Ending Units Pie Five Units - Franchised 18 — — — — 18 Pie Five Ghost Kitchen Units - Franchised 2 — — — — 2 Total Domestic Units 20 — — — — 20 The Pie Five units remained stable during the three and six months ended December 29, 2024. There were zero transfers in the total domestic Pie Five unit count during the three and six months ended December 29, 2024. We believe that Pie Five units will decrease modestly in future periods. 18 Table of Contents Financial Results In addition to Corporate overhead support, the Company defines its operating segments as Pizza Inn Franchising and Pie Five Franchising. The following is additional business segment information for the three and six months ended December 29, 2024 and December 24, 2023 (in thousands): Three Months Ended December 29, 2024 and December 24, 2023 Pizza Inn Franchising Pie Five Franchising Corporate Total Fiscal Quarter Ended Fiscal Quarter Ended Fiscal Quarter Ended Fiscal Quarter Ended December 29, 2024 December 24, 2023 December 29, 2024 December 24, 2023 December 29, 2024 December 24, 2023 December 29, 2024 December 24, 2023 REVENUES: Franchise and license revenues $ 2,541 $ 2,271 $ 300 $ 430 $ — $ — $ 2,841 $ 2,701 Rental income — — — — 23 38 23 38 Other income — — 5 7 — — 5 7 Total revenues 2,541 2,271 305 437 23 38 2,869 2,746 COSTS AND EXPENSES: General and administrative expenses — — — — 1,314 1,341 1,314 1,341 Franchise expenses 724 669 105 175 — — 829 844 Provision for credit losses — — — — 9 10 9 10 Interest (income) expense — — — 2 (87 ) (48 ) (87 ) (46 ) Depreciation and amortization expense — — — — 53 57 53 57 Total costs and expenses 724 669 105 177 1,289 1,360 2,118 2,206 INCOME/(LOSS) BEFORE TAXES $ 1,817 $ 1,602 $ 200 $ 260 $ (1,266 ) $ (1,322 ) $ 751 $ 540 19 Table of Contents Six Months Ended December 29, 2024 and December 24, 2023 Pizza Inn Franchising Pie Five Franchising Corporate Total Fiscal Year-to-Date Fiscal Year-to-Date Fiscal Year-to-Date Fiscal Year-to-Date December 29, 2024 December 24, 2023 December 29, 2024 December 24, 2023 December 29, 2024 December 24, 2023 December 29, 2024 December 24, 2023 REVENUES: Franchise and license revenues $ 5,261 $ 4,875 $ 606 $ 865 $ — $ — $ 5,867 $ 5,740 Rental income — — — — 46 85 46 85 Other income — — 6 8 — — 6 8 Total revenues 5,261 4,875 612 873 46 85 5,919 5,833 COSTS AND EXPENSES: General and administrative expenses — — — — 2,730 2,660 2,730 2,660 Franchise expenses 1,613 1,612 211 404 — — 1,824 2,016 Provision (recovery) for credit losses — — — — (8 ) 35 (8 ) 35 Interest income — — — — (169 ) (48 ) (169 ) (48 ) Depreciation and amortization expense — — — — 96 112 96 112 Total costs and expenses 1,613 1,612 211 404 2,649 2,759 4,473 4,775 INCOME/(LOSS) BEFORE TAXES $ 3,648 $ 3,263 $ 401 $ 469 $ (2,603 ) $ (2,674 ) $ 1,446 $ 1,058 20 Table of Contents Revenues: Revenues are derived from franchise royalties, supplier and distributor incentive revenues, franchise license fees, area development exclusivity fees and foreign master license fees, advertising fund contributions, supplier convention funds, rental income, and other income. The volume of supplier and distributor incentive revenues is dependent on the level of total 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 29, 2024 and for the same period in the prior fiscal year were $2.9 million and $2.7 million, respectively. Total revenues for the six month period ended December 29, 2024 and for the same period in the prior fiscal year were $5.9 million and $5.8 million, respectively. Pizza Inn Franchise and License Pizza Inn franchise revenues increased by $0.3 million to $2.5 million for the three month period ended December 29, 2024 as compared to the same period in the prior fiscal year. The 11.9% increase was driven by increases in supplier and distributor incentives. Pizza Inn franchise revenues increased by $0.4 million to $5.3 million for the six month period ended December 29, 2024 as compared to the same period in the prior fiscal year. The 7.9% increase was driven by increases in supplier and distributor incentives. Pie Five Franchise and License Pie Five franchise revenues decreased by $0.1 million to $0.3 million for the three month period ended December 29, 2024 as compared to the same period in the prior fiscal year. The 30.2% decrease was driven by decreases in domestic royalties. Pie Five franchise revenues decreased by $0.3 million to $0.6 million for the six month period ended December 29, 2024 as compared to the same period in the prior fiscal year. The 29.9% decrease was driven by decreases in domestic royalties. Costs and Expenses: General and Administrative Expenses Total general and administrative expenses remained relatively stable at $1.3 million for the three month period ended December 29, 2024 as compared to the same period of the prior fiscal year. The 2.0% decrease was driven by decreases in legal fees, offset by increases in salaries. Total general and administrative expenses increased by $0.1 million to $2.7 million for the six month period ended December 29, 2024 as compared to the same period of the prior fiscal year. The 2.6% increase was driven by increases in salaries. 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 remained relatively stable at $0.8 million for the three month period ended December 29, 2024 as compared to the same period of the prior fiscal year. The 1.8% decrease was driven by decreases in salaries, offset by increases in advertising fees. Total franchise expenses decreased by $0.2 million to $1.8 million for the six month period ended December 29, 2024 as compared to the same period of the prior fiscal year. The 9.5% decrease was driven by decreases in salaries and advertising fees. Provision (Recovery) for Credit Losses 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 29, 2024, provision for credit losses was $9 thousand compared to $10 thousand for the same period in the prior fiscal year. During the three month period ended December 29, 2024, the Company recorded a loss in provision for credit losses due to the write off of receivables. For the six month period ended December 29, 2024, recoveries for credit losses were $8 thousand compared to provision for credit losses of $35 thousand for the same period in the prior fiscal year. During the six month period ended December 29, 2024, the Company recorded a loss in provision for credit losses due to the write off of receivables, offset by a gain in provision for credit losses due to the recoveries of receivables that had been previously reserved. 21 Table of Contents Interest Expense and Income Interest income increased by $41 thousand to $87 thousand for the three month period ended December 29, 2024 as compared to the same period in the prior fiscal year. The increase was primarily driven by interest received on U.S. Treasury bills. Interest income increased by $121 thousand to $169 thousand for the six month period ended December 29, 2024 as compared to the same period in the prior fiscal year. The increase was primarily driven by interest received on U.S. Treasury bills. Amortization and Depreciation Expense Amortization and depreciation expense decreased by $4 thousand to $53 thousand for the three month period ended December 29, 2024 as compared to the same period in the prior year. The decrease was primarily the result of lower depreciation of equipment. Amortization and depreciation expense decreased by $16 thousand to $96 thousand for the six month period ended December 29, 2024 as compared to the same period in the prior year. The decrease was primarily the result of lower depreciation of equipment. Provision for Income Taxes Total income tax expense consists of the following (in thousands): Three Months Ended Six Months Ended December 29, 2024 December 24, 2023 December 29, 2024 December 24, 2023 Federal tax expense (benefit) $ 121 $ (23 ) $ 264 $ 85 State tax expense 23 10 49 34 Total income tax expense (benefit) $ 144 $ (13 ) $ 313 $ 119 For the three and six months ended December 29, 2024, the Company recorded an income tax expense of $144 thousand and $313 thousand, respectively. For the three and six months ended December 24, 2023, the Company recorded an income tax benefit of $13 thousand and a tax expense of $119 thousand, respectively. The increase for the three months ended as of December 29, 2024 was driven by a decrease in the number of RSUs vested compared to the comparable period of the prior fiscal year, which resulted in a lower tax benefit from stock-based compensation. The increase for the six months ended as of December 29, 2024 was primarily driven by a decrease in the number of RSUs vested compared to the comparable period of the prior fiscal year, which resulted in a lower tax benefit from stock-based compensation. The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Basic net income per share remained relatively stable at $0.04 per share for the three months ended December 29, 2024, compared to the comparable period in the prior fiscal year. The Company had net income of $0.6 million for the three months ended December 29, 2024 compared to net income of $0.6 million in the comparable period in the prior fiscal year, on revenues of $2.9 million for the three months ended December 29, 2024 compared to $2.8 million in the comparable period in the prior fiscal year. Basic net income per share increased $0.01 per share to $0.08 per share for the six months ended December 29, 2024, compared to the comparable period in the prior fiscal year. The Company had net income of $1.1 million for the six months ended December 29, 2024 compared to net income of $0.9 million in the comparable period in the prior fiscal year, on revenues of $5.9 million for the six months ended December 29, 2024 compared to $5.8 million in the comparable period in the prior fiscal year. Liquidity and Capital Resources During the six month period ended December 29, 2024, 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, stock-based compensation, and changes in working capital. Cash provided by operating activities was $1.2 million for the six month period ended December 29, 2024 compared to cash provided by operating activities of $0.3 million for the six month period ended December 24, 2023. The primary driver of increased operating cash flow during the six month period ended December 29, 2024 was increased collections of accounts receivable related to the payment of franchise receivables. 22 Table of Contents Cash flows from investing activities reflect purchases and maturities of short-term investments as well as 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 29, 2024 was $1.0 million compared to cash used in investing activities of $16 thousand for the six months ended December 24, 2023. Net cash used by investing activities during the six month period ended December 29, 2024 was primarily attributable to increased purchases of U.S. Treasury bills. Cash flows used in financing activities generally reflect changes in the Company's stock and debt activity during the period. Net cash used in financing activities was $0.2 million for the six month period ended December 29, 2024 compared to net cash used in financing activities of $0.3 million for the six month period ended December 24, 2023. Net cash used by financing activities for the six months ended December 29, 2024 was primarily attributable to taxes paid on vested RSUs. Net cash used by financing activities for the six months ended December 24, 2023 was primarily attributable to taxes paid on vested RSUs. 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. 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. As of December 29, 2024, $0.6 million has been received and $0.1 million is still outstanding and included within accounts receivable on the accompanying Condensed Consolidated Balance Sheets. 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 credit losses 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. 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. In event of a closed franchise or defaulted development agreement, the remaining balance of unamortized license fees will be recognized in entirety as of the date of the closure or default. 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 the 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. 23 Table of Contents 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 29, 2024 and December 24, 2023, 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.