This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to any historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "potential," "project," "projection," "plan," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended
October 2, 2021and the consolidated condensed financial statements and notes thereto included in Part I, Item 1 of this Form 10- Q. Allinformation presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. COVID-19 Pandemic We are subject to continued risks and uncertainties as a result of the outbreak of, and local, state and federal governmental responses to, the COVID-19 pandemic which was declared a National Public Health Emergency in March 2020. We experienced significant disruptions to our business as suggested and mandated social distancing and shelter-in-place orders led to the temporary closure of all of our restaurants. In the third quarter of fiscal 2020, certain jurisdictions began allowing the reopening of restaurant dining rooms, and we began to reopen dining rooms. While restrictions on the type of permitted operating model and occupancy capacity may continue to change, all of our restaurants are operating with no indoor dining restrictions other than in New York Citywhere customers are required to show proof of vaccination. We cannot predict how long the COVID-19 pandemic will last, whether vaccines will be effective at eliminating or slowing the spread of the virus or variants, whether it will reoccur or whether variants will spike, what additional restrictions may be enacted, to what extent we can maintain sales volumes during or following any resumption of mandated social distancing protocols or vaccination or mask mandates and what long-lasting effects the COVID-19 pandemic may have on the restaurant industry as a whole. The ongoing effects of the COVID-19 pandemic, including, but not limited to, labor-related impacts, supply chain disruption and consumer behavior, will determine the continued significance of the impact of the COVID-19 pandemic to our operating results and financial position. Overview As of January 1, 2022, the Company owned and operated 17 restaurants and bars, 17 fast food concepts and catering operations, exclusively in the United States, that have similar economic characteristics, nature of products and service, class of customer and distribution methods. The Company believes it meets the criteria for aggregating its operating segments into a single reporting segment in accordance with applicable accounting guidance. The consolidated condensed statements of operations for the 13 weeks ended January 1, 2022include revenues and income of approximately $1,982,000and $356,000, respectively, related to Blue Moon Fish Company, which was acquired on December 1, 2020. Accounting Period Our fiscal year ends on the Saturday nearest September 30. We report fiscal years under a 52/53-week format. This reporting method is used by many companies in the hospitality industry and is meant to improve year-to-year comparisons of operating results. Under this method certain years will contain 53 weeks. The periods ended January 1, 2022and January 2, 2021each included 13. Seasonality The Company has substantial fixed costs that do not decline proportionally with sales. Although our business is highly seasonal, our broader geographical reach as a result of recent acquisitions mitigates some of the risk. For instance, the second quarter of - 21 - -------------------------------------------------------------------------------- our fiscal year, consisting of the non-holiday portion of the cold weather season in New Yorkand Washington, D.C.(January, February and March), is the poorest performing quarter; however, in recent years this has been partially offset by our locations in Floridaas they experience increased results in the winter months. We generally achieve our best results during the warm weather, attributable to our extensive outdoor dining availability, particularly at Bryant Parkin New Yorkand Sequoia in Washington, D.C.(our largest restaurants) and our outdoor cafes. However, even during summer months these facilities can be adversely affected by unusually cool or rainy weather conditions. Our facilities in Las Vegasare indoor and generally operate on a more consistent basis throughout the year. Results of Operations The Company's operating income for the 13 weeks ended January 1, 2022was $2,791,000, as compared to an operating loss of $(3,307,000)for the 13 weeks ended January 2, 2021. This increase resulted primarily from all of our restaurants operating with no indoor dining restrictions, other than in New York Citywhere customers are required to show proof of vaccination, in the current period in comparison to the prior period as a result of government mandates in connection with the COVID-19 pandemic combined with a modest recovery in our event business in Washington, D.C.and New York Cityin the current period. The following table summarizes the significant components of the Company's operating results for the 13-week periods ended January 1, 2022and January 2, 2021: 13 Weeks Ended Variance January 1, January 2, 2022 2021 $ % (in thousands) REVENUES: Food and beverage sales $ 43,237 $ 19,889 $ 23,348117.4 % Other revenue 749 410 339 82.7 % Total revenues 43,986 20,299 23,687 116.7 % COSTS AND EXPENSES: Food and beverage cost of sales 12,542 5,943 6,599 111.0 % Payroll expenses 14,241 8,651 5,590 64.6 % Occupancy expenses 5,232 3,473 1,759 50.6 % Other operating costs and expenses 5,138 2,811 2,327 82.8 % General and administrative expenses 2,963 1,787 1,176 65.8 % Depreciation and amortization 1,079 941 138 14.7 % Total costs and expenses 41,195 23,606 17,589 74.5 % OPERATING INCOME (LOSS) $ 2,791 $ (3,307) $ 6,098184.4 % Revenues During the 13-week period ended January 1, 2022, revenues increased 116.7% as compared to revenues in the 13-week period ended January 2, 2021. This increase resulted primarily from all of our restaurants operating with no indoor dining restrictions, other than in New York Citywhere customers are required to show proof of vaccination, in the current period in comparison to the prior period as a result of government mandates in connection with the COVID-19 pandemic. - 22 -
Food and Beverage Same-Store Sales Company-wide, same-store sales increased 112.8% in the first quarter of Fiscal 2022 compared to the same period last year last, as follows:
13 Weeks Ended Variance January 1, January 2, 2022 2021 $ % (in thousands) Las Vegas
$ 14,002 $ 5,819 $ 8,183140.6 % New York 8,525 2,090 6,435 307.9 % Washington, D.C. 2,328 903 1,425 157.8 % Atlantic City, NJ 661 171 490 286.5 % Connecticut 67 88 (21) -23.9 % Alabama 3,079 2,016 1,063 52.7 % Florida 12,835 8,409 4,426 52.6 % Same-store sales 41,497 19,496 $ 22,001112.8 % Other 1,740 393 Food and beverage sales $ 43,237 $ 19,889The increase in company-wide same-store sales was driven primarily by increased customer traffic as a result of the impact of the COVID-19 pandemic on the prior period combined with targeted increases in menu pricing and a modest recovery in our event business in Washington, D.C.and New York Cityin the current period. Same-store sales in Connecticutdecreased 23.9% due to disruption to our business as a result of its relocation within the Foxwoods Resort and Casinowhere our property is located. Other food and beverage sales consist of sales related to new restaurants opened or acquired during the applicable period, sales related to properties that were closed ( Clyde Frazier'sWine and Dine, Gallagher's Steakhouseand Gallagher'sBurger Bar) and other adjustments and fees. Costs and Expenses Costs and expenses for the 13 weeks ended January 1, 2022and January 2, 2021were as follows (in thousands): 13 Weeks 13 Weeks Ended % Ended % Increase January 1, to Total January 2, to Total (Decrease) 2022 Revenues 2021 Revenues $ % Food and beverage cost of sales $ 12,54228.5 % $ 5,94329.3 % 6,599 111.0 % Payroll expenses 14,241 32.4 % 8,651 42.6 % 5,590 64.6 % Occupancy expenses 5,232 11.9 % 3,473 17.1 % 1,759 50.6 % Other operating costs and expenses 5,138 11.7 % 2,811 13.8 % 2,327 82.8 % General and administrative expenses 2,963 6.7 % 1,787 8.8 % 1,176 65.8 % Depreciation and amortization 1,079 2.5 % 941 4.6 % 138 14.7 % Total costs and expenses $ 41,195 $ 23,606 $ 17,589
Food and beverage costs as a percentage of total revenue for the 13 weeks ended
- 23 - -------------------------------------------------------------------------------- Payroll expenses as a percentage of total revenues for the 13 weeks ended
January 1, 2022decreased as compared with the same period of last year primarily as a result of retaining key restaurant management personnel with lower corresponding revenues in the prior period as a result of the government mandated closures and/or capacity restrictions at several of our restaurants in connection with the COVID-19 pandemic.
Occupancy expenses as a percentage of total revenue for the 13 weeks ended
Other operating costs and expenses as a percentage of total revenues for the 13 weeks ended
January 1, 2022as compared to the same period of last year decreased primarily as a result of the fixed nature of some of these expenses and lower sales in the prior period as a result of the COVID-19 pandemic, decreased maintenance at properties where we are experiencing lower traffic and increased professional fees at the restaurant-level in the prior periods. General and administrative expenses (which relate solely to the corporate office in New York City) for the 13 weeks ended January 1, 2022increased as compared with the same period of last year primarily as a result of headcount and salary reductions of corporate personnel in the prior period as a result of the impacts on our business from the COVID-19 pandemic. Depreciation and amortization expense for the 13 weeks ended January 1, 2022increased as compared to the same period of last year primarily as a result of assets placed in service since January 1, 2021. Income Taxes We calculate our interim income tax provision in accordance with ASC Topic 270, Interim Reporting and ASC Topic 740, Accounting for Income Taxes. At the end of each interim period, we estimate the annual effective tax rate and apply that rate to our ordinary year to date earnings. In addition, the tax effects of unusual or infrequently occurring items including changes in judgment about valuation allowances and effects of changes in enacted tax laws are recognized discretely in the interim period in which the change occurs. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including the expected operating (loss) income for the year, permanent and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets generated in the current fiscal year. The accounting estimates used to compute income tax expense may change as new events occur, additional information is obtained, or the tax environment changes. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted to provide economic relief to those impacted by the COVID-19 pandemic. In addition to the PPP loans, the CARES Act made various tax law changes including among other things (i) modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 tax years to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes, (ii) enhanced recoverability of AMT tax credit carryforwards, (iii) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest, and (iv) enacted a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k). On December 27, 2020, the Consolidated Appropriations Act of 2021 ("CAA") was enacted and provided clarification on the tax deductibility of expenses funded with PPP loans as fully deductible for tax purposes and therefore, the forgiveness of any PPP loans is not taxable. Any income recorded for financial reporting purposes is considered an unusual or infrequent event and the tax effect is recorded discretely in the quarter in which the loans were forgiven. No PPP Loans were forgiven during the 13 weeks ended January 1, 2022and January 2, 2021. As a result of the CARES Act and the CAA, the Company carried back taxable losses from fiscal year 2020 and is expected to carryback taxable losses from fiscal 2021 to generate a refund of previously paid income taxes. For the 13-week period ended January 2, 2021, the Company recorded income tax benefits as the taxable losses from fiscal 2020 and the projected taxable losses from fiscal 2021 are being carried back to tax years in which the Company was subject to a higher federal corporate income tax rate. The adjustment related to the fiscal 2020 carryback was recorded as a discrete item during the 13-week period ended January 2, 2021and the carryback of the projected taxable losses from fiscal 2021 was recorded as a component of the estimated annual effective tax rate for the 13-week period ended January 2, 2021. The provision for income taxes for the 13-week period ended January 1, 2022was $309,000. The effective tax rate for the 13-week period ended January 1, 2022of 11.3% differed from the statutory rate of 21% primarily as a result of the tax benefits - 24 - --------------------------------------------------------------------------------
related to the generation of FICA tax credits and operating profit attributable to non-controlling interests which is not taxable to the Company.
The income tax benefit for the 13-week period ended
January 2, 2021was $(2,919,000). The effective tax rate for the 13-week period ended January 2, 2021of -80.7% differed from the statutory rate of 21% primarily as a result of the tax benefits related to the generation of FICA tax credits, the carryback of the projected fiscal 2021 taxable losses to prior years when the Federal corporate tax rate was 34% and operating income attributable to non-controlling interests that is not taxable to the Company. The effective tax rate also includes a discrete benefit of $(352,000)primarily related to an adjustment of the estimated fiscal year 2020 carryback claim. The Company's overall effective tax rate in the future will be affected by factors such as changes in tax law, the utilization of state and local net operating loss carryforwards, the generation of FICA tax credits. additional forgiveness of PPP Loans and the mix of earnings by state taxing jurisdictions as Nevadadoes not impose a state income tax, as compared to the other major state and local jurisdictions in which the Company has operations. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual tax rate could differ from current estimates. Liquidity and Capital Resources Our primary source of capital has been cash provided by operations and, in recent years, bank and other borrowings to finance specific transactions, acquisitions and large remodeling projects. We utilize cash generated from operations to fund the cost of developing and opening new restaurants and smaller remodeling projects of existing restaurants we own. Consistent with many other restaurant operators, we typically use operating lease arrangements for our restaurants. In recent years we have been able to acquire the underlying real estate at several locations along with the restaurant operation. We believe that our operating lease arrangements provide appropriate leverage of our capital structure in a financially efficient manner. As of January 1, 2022, we had a cash and cash equivalents balance of $20,167,000. Due to the fluidity of the COVID-19 pandemic, management cannot determine the ultimate impact that it will have on the Company's consolidated financial condition, liquidity, future results of operations, suppliers, industry, and workforce and therefore any prediction as to the ultimate material adverse impact on the Company's consolidated financial condition, liquidity, and future results of operations is uncertain. The disruption in operations has led the Company to consider the impact of the COVID-19 pandemic on its liquidity, debt covenant compliance, and recoverability of long-lived and ROU assets, goodwill and intangible assets, among others. If these disruptions were to re-occur, they could have a material negative impact on our consolidated financial condition, future results of operations and liquidity. The extent of such negative impact will be determined, in part, by the longevity and severity of the pandemic. Cash Flows for 13 Weeks Ended January 1, 2022and January 2, 2021Net cash provided by operating activities for the 13 weeks ended January 1, 2022increased to $3,852,000as compared to $(2,985,000)used in operations in the same period of last year. This increase was attributable to an increase in operating income as a result of the continued recovery from the COVID-19 pandemic and changes in net working capital primarily related to accounts receivable, inventory and accounts payable and accrued expenses. Net cash used in investing activities for the 13 weeks ended January 1, 2022and January 2, 2021was $(408,000)and $(2,413,000), respectively, and resulted primarily from purchases of fixed assets at existing restaurants and, in the prior period, the cash portion of the purchase price of the Blue Moon Fish Companyacquisition. Net cash used in financing activities for the 13 weeks ended January 1, 2022of $(2,448,000)resulted primarily from principal payments on notes payable and the payment of distributions to non-controlling interests. Net cash used in financing activities for the 13 weeks ended January 2, 2021of $(675,000)resulted primarily from principal payments on notes payable. Recent Restaurant Expansions and Other Developments On December 1, 2020, the Company, through a newly formed, wholly-owned subsidiary, acquired the assets of Bear Ice, Inc.and File Gumbo Inc., which collectively operated a restaurant and bar named Blue Moon Fish Companylocated in Lauderdale-by-the-Sea, FL.The total purchase price of $2,820,000was paid with cash in the amount of $1,820,000and a four-year note held by the sellers in the amount of $1,000,000payable monthly with 5% interest. Concurrent with the acquisition, the Company assumed the related lease which expires in 2026 and has four five-year extension options. Rent payments under the lease are approximately $360,000per year and increase by approximately 15% as each option is exercised. On January 26, 2021, the Company exercised its right-of-first-refusal to acquire the land, building and parking lot associated with JB's on the Beach and immediately contributed such rights and interest to an unrelated entity ("Sandcastle 1, LLC") that - 25 - -------------------------------------------------------------------------------- purchased the properties on March 22, 2021. In exchange, the Company received a 5% interest in Sandcastle 1, LLC, which plans future development of the sites. In addition, all rights and privileges under the current lease were assigned to Sandcastle 1, LLC, as landlord and the lease terms remain unchanged. Our restaurants generally do not achieve substantial increases in revenue from year to year, which we consider to be typical of the restaurant industry. To achieve significant increases in revenue or to replace revenue of restaurants that lose customer favor or which close because of lease expirations or other reasons, we would have to open additional restaurant facilities or expand existing restaurants. There can be no assurance that a restaurant will be successful after it is opened, particularly since in many instances we do not operate our new restaurants under a trade name currently used by us, thereby requiring new restaurants to establish their own identity. We may take advantage of other opportunities we consider to be favorable, when they occur, depending upon the availability of financing and other factors. Recent Restaurant Dispositions On November 13, 2020, the Company was advised by the landlord that it would have to vacate Gallagher's Steakhouseand Gallagher'sBurger Bar at the Resorts Casino Hotellocated in Atlantic City, NJwhich were on a month-to-month, no rent lease. The closure of these properties occurred on January 2, 2021and did not result in a material charge to the Company's operations. As of January 2, 2021, the Company determined that, given the current situation, it will not reopen Thunder Grillin Washington, D.C.which has been closed since March 20, 2020. This closure did not result in a material charge to the Company's operations. On September 1, 2021, the Company advised the landlord of Clyde Frazier'sWine and Dine that we would be closing the property permanently and terminated the lease. In connection with termination, the Company recorded a gain of $810,000during the year ended October 2, 2021consisting of: (i) rent and other costs incurred in accordance with the termination provisions of the lease in the amount of $318,000, (ii) impairment of long-lived assets in the amount of $69,000and (iii) the write-off of our security deposit in the amount of $121,000offset by the write-off of ROU assets and related lease liabilities in the net amount of $1,318,000. Included in the consolidated condensed statement of operations for the 13 weeks ended January 2, 2021are revenues and net operating losses of approximately $582,000and $(131,000)related to the above properties. Investment in and Receivable from New Meadowlands Racetrack On March 12, 2013, the Company made a $4,200,000investment in the New Meadowlands Racetrack LLC("NMR") through its purchase of a membership interest in Meadowlands Newmark, LLC, an existing member of NMR with a then 63.7% ownership interest. On November 19, 2013, the Company invested an additional $464,000in NMR through the purchase of an additional membership interest in Meadowlands Newmark, LLCresulting in a total ownership of 11.6% of Meadowlands Newmark, LLC, and an effective ownership interest in NMR of 7.4%, subject to dilution. In 2015, the Company invested an additional $222,000in NMR and in February 2017, the Company invested an additional $222,000in NMR, both as a result of capital calls with no change in ownership, bringing its total investment to $5,108,000. During the 13 weeks ended January 1, 2022, the Company received a distribution of $222,000from NMR which has been recorded as other income in the consolidated condensed statement of operations. In addition to the Company's ownership interest in NMR, if casino gaming is approved at the Meadowlandsand NMR is granted the right to conduct said gaming, the Company shall be granted the exclusive right to operate the food and beverage concessions in the gaming facility with the exception of one restaurant. In conjunction with this investment, the Company, through a 97% owned subsidiary, Ark Meadowlands LLC("AM VIE"), also entered into a long-term agreement with NMR for the exclusive right to operate food and beverage concessions serving the new raceway facilities (the "Racing F&B Concessions") located in the new raceway grandstand constructed at the Meadowlands Racetrack in northern New Jersey. Under the agreement, NMR is responsible to pay for the costs and expenses incurred in the operation of the Racing F&B Concessions, and all revenues and profits thereof inure to the benefit of NMR. AM VIE receives an annual fee equal to 5% of the net profits received by NMR from the Racing F&B Concessions during each calendar year. On April 25, 2014, the Company loaned $1,500,000to Meadowlands Newmark, LLC. The note bears interest at 3%, compounded monthly and added to the principal, and is due in its entirety on January 31, 2024. The note may be prepaid, in whole or in part, at any time without penalty or premium. On July 13, 2016, the Company made an additional loan to Meadowlands Newmark, LLCin the amount of $200,000. Such amount is subject to the same terms and conditions as the original loan as discussed above. The principal and accrued interest related to this note in the amounts of $1,327,000and $1,317,000are included in Investment In and - 26 - -------------------------------------------------------------------------------- Receivable from New Meadowlands Racetrack in the consolidated condensed balance sheets at January 1, 2022and October 2, 2021, respectively. Notes Payable - Bank On June 1, 2018, the Company refinanced (the "Refinancing") its then existing indebtedness with its current lender, Bank Hapoalim B.M. ("BHBM"), by entering into an amended and restated credit agreement (the "Revolving Facility"), which was to mature on May 19, 2022(as extended). The Revolving Facility provides for total availability of the lesser of (i) $10,000,000and (ii) $35,000,000less the then aggregate amount of all indebtedness and obligations to BHBM. On July 26, 2021, all outstanding borrowings under the Revolving Facility, in the amount of $9,666,000, were converted to a promissory note with quarterly principal payments of $500,000commencing on September 1, 2021, with a balloon payment of $2,166,000on June 1, 2025. Such note bears interest at LIBOR plus 3.5% per annum. We expect that the LIBOR rate will be discontinued at some point during 2022 and to work with BHBM to identify a suitable replacement rate and amend our debt agreements to reflect this new reference rate accordingly. We do not expect the discontinuation of LIBOR as a reference rate in our debt agreements to have a material adverse effect on our financial position or materially affect our interest expense. Borrowings under the Revolving Facility, which include the promissory notes as discussed in Note 8 of the consolidated condensed financial statements, are secured by all tangible and intangible personal property (including accounts receivable, inventory, equipment, general intangibles, documents, chattel paper, instruments, letter-of-credit rights, investment property, intellectual property and deposit accounts) and fixtures of the Company. The Revolving Facility also requires, among other things, that the Company meet minimum quarterly tangible net worth amounts, maintain a minimum fixed charge coverage ratio and meet minimum annual net income amounts. The Revolving Facility contains customary representations, warranties and affirmative covenants as well as customary negative covenants, subject to negotiated exceptions on liens, relating to other indebtedness, capital expenditures, liens, affiliate transactions, disposal of assets and certain changes in ownership. On June 12, 2020and again on February 15, 2021, as a result of the impact of the COVID-19 pandemic on our business, BHBM agreed to modified financial covenants through fiscal Q2 2022. The Company was in compliance with all of its financial covenants under the Revolving Facility as of January 1, 2022. Paycheck Protection Program Loans During the year ended October 3, 2020, subsidiaries and consolidated VIEs (the "Borrowers") of the Company received loan proceeds from several banks (the "Lenders") in the aggregate amount of $14,995,000(the "PPP Loans") under the Paycheck Protection Program (the "PPP") of the CARES Act, which was enacted March 27, 2020. In addition, during the 13 weeks ended April 3, 2021, one of our consolidated VIEs received a second draw PPP Loan in the amount of $111,000. The PPP Loans are evidenced by individual promissory notes of each of the Borrowers (together, the "Notes") in favor of the Lender, which Notes bear interest at the rate of 1.00% per annum. Funds from the PPP Loans may be used only for payroll and related costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations that were incurred by a Borrower prior to February 15, 2020(the "Qualifying Expenses"). Under the terms of the PPP Loans, some or all of the amounts thereunder, including accrued interest, may be forgiven if they are used for Qualifying Expenses as described in and in compliance with the CARES Act. Each Note may be prepaid by the respective Borrower at any time prior to maturity with no prepayment penalties. No payments of principal or interest are due under the Notes until the date on which the amount of loan forgiveness (if any) under the CARES Act for each respective Note is remitted to the Lender and a forgiveness decision is received by the Borrower. Forgiveness applications can be submitted up to 10 months after the end of the related notes covered period (which is defined as 24 weeks after the date of the loan) (the "Deferral Period") and the ultimate forgiveness decisions can be made by the Lenders up to 60 days after submitting the applications and possibly longer if forgiveness is fully or partially denied and the Borrower appeals the decision. While the Company and each Borrower believe that all PPP Loan proceeds were used exclusively for Qualifying Expenses, it is unclear and uncertain whether the conditions for forgiveness of the remaining PPP Loans outstanding at January 1, 2022will be met under the current guidelines of the CARES Act. Therefore, we cannot make any assurances that the Company, or any of the Borrowers, will be eligible for forgiveness of the remaining PPP Loans, in whole or in part. To the extent that any of the remaining PPP Loans are not forgiven, beginning one month following expiration of the Deferral Period, and continuing monthly until 24 months from the date of each applicable Note (the "Maturity Date"), each respective Borrower is obligated to make monthly payments of principal and interest to the Lender with respect to any unforgiven portion of the Notes, in such equal amounts required to fully amortize the principal amount outstanding on such Notes as of the last day of the applicable Deferral Period by the applicable Maturity Date. During the 13 weeks ended January 1, 2022, the Company made payments related to the unforgiven portion of PPP Loans in the aggregate amount of $666,000. - 27 - -------------------------------------------------------------------------------- Recent Events On January 28, 2022, the Board of Directors terminated the Company's 2016 Option Plan and approved the 2022 Stock Option Plan for authorizing the future issuance of options to acquire 500,000 shares of common stock, subject to shareholder approval at our annual meeting to be held on March 15, 2022. Critical Accounting Policies The preparation of financial statements requires the application of certain accounting policies, which may require the Company to make estimates and assumptions of future events. In the process of preparing its consolidated condensed financial statements, the Company estimates the appropriate carrying value of certain assets and liabilities, which are not readily apparent from other sources. The primary estimates underlying the Company's consolidated condensed financial statements include projected cash flows, allowances for potential bad debts on accounts and notes receivable, assumptions regarding discount rates related to lease accounting, the useful lives and recoverability of its assets, such as property and intangibles, fair values of financial instruments, the realizable value of its tax assets and other matters. Management bases its estimates on certain assumptions, which it believes are reasonable in the circumstances, and actual results could differ from those estimates. Although management does not believe that any change in those assumptions in the near term would have a material effect on the Company's consolidated condensed financial position or the results of operations, differences in actual results could be material to the consolidated condensed financial statements. The Company's critical accounting policies are described in the Company's Form 10-K for the year ended October 2, 2021. There have been no significant changes to such policies during fiscal 2022 other than those disclosed in Note 1 to the consolidated condensed financial statements. Recently Adopted and Issued Accounting Standards See Note 1 to the consolidated condensed financial statements for a description of recent accounting pronouncements, including those adopted in fiscal 2022 and the expected dates of adoption of new accounting standards and the anticipated impact on the consolidated condensed financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not Applicable Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of January 1, 2022to ensure that all material information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to them as appropriate to allow timely decisions regarding required disclosure and that all such information is recorded, processed, summarized and reported within the time periods specified in the SEC'srules and forms. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the first quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Limitations of the Effectiveness of Internal Control A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. - 28 -
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