RAVE RESTAURANT GROUP, INC. - FORM 10-Q

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EX-32 - RAVE RESTAURANT GROUP, INC.	ex322.htm
EX-32 - RAVE RESTAURANT GROUP, INC.	ex321.htm
EX-31 - RAVE RESTAURANT GROUP, INC.	ex312.htm
EX-31 - RAVE RESTAURANT GROUP, INC.	ex311.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 24, 2017

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-12919

RAVE RESTAURANT GROUP, INC.

(Exact name of registrant as specified in its charter)

Missouri	45-3189287
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	Identification No.)

3551 Plano Parkway

The Colony, Texas 75056

(Address of principal executive offices)

(469) 384-5000

(Registrant's telephone number,
including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of February 6, 2018, 14,896,208 shares of the issuer’s common stock were outstanding.

RAVE RESTAURANT GROUP, INC.

Index

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements	Page

	Condensed Consolidated Statements of Operations for the three and six month periods ended December 24, 2017 and December 25, 2016 (unaudited)	4

	Condensed Consolidated Balance Sheets at December 24, 2017 (unaudited) and June 25, 2017	5

	Condensed Consolidated Statements of Cash Flows for the six month periods ended December 24, 2017 and December 25, 2016 (unaudited)	6

	Supplemental Disclosure of Cash Flow Information for the six month periods ended December 24, 2017 and December 25, 2016 (unaudited)	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3.	Defaults Upon Senior Securities	24

Item 4.	Mine Safety Disclosures	24

Item 5.	Other Information	24

Item 6.	Exhibits	25

Signatures		26

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

			Three Months Ended		Six Months Ended
			December 24,	December 25,	December 24,	December 25,
			2017	2016	2017	2016

REVENUES:			$ 4,197	$ 6,780	$ 9,629	$ 14,246

COSTS AND EXPENSES:
	Cost of sales		1,055	3,858	3,142	8,305
	General and administrative expenses		2,017	2,967	4,111	5,525
	Franchise expenses		743	685	1,344	1,263
	Pre-opening expenses		(1)	47	114	54
	(Gain)/Loss on sale of assets		(166)	656	(165)	699
	Impairment of long-lived assets and other lease charges		533	5,057	681	5,226
	Bad debt		89	298	213	351
	Interest expense		63	2	131	2
	Depreciation and amortization expense		288	740	600	1,517
		Total costs and expenses	4,621	14,310	10,171	22,942

LOSS FROM CONTINUING OPERATIONS BEFORE TAXES			(424)	(7,530)	(542)	(8,696)
	Income tax expense / (benefit)		(27)	5	(14)	10
LOSS FROM CONTINUING OPERATIONS			(397)	(7,535)	(528)	(8,706)

	Loss from discontinued operations		(180)	(390)	(405)	(715)
NET LOSS			$ (577)	$ (7,925)	$ (933)	$ (9,421)

LOSS PER SHARE OF COMMON STOCK - BASIC:
	Loss from continuing operations		$ (0.03)	$ (0.71)	$ (0.04)	$ (0.82)
	Loss from discontinued operations		(0.01)	(0.03)	(0.03)	(0.07)
	Net loss		$ (0.04)	$ (0.74)	$ (0.07)	$ (0.89)

LOSS PER SHARE OF COMMON STOCK - DILUTED:

	Loss from continuing operations		$ (0.03)	$ (0.71)	$ (0.04)	$ (0.82)
	Loss from discontinued operations		$ (0.01)	$ (0.03)	$ (0.03)	$ (0.07)
	Net loss		$ (0.04)	$ (0.74)	$ (0.07)	$ (0.89)

Weighted average common shares outstanding - basic			14,344	10,657	12,742	10,575

Weighted average common and
	potential dilutive common shares outstanding		14,344	10,657	12,742	10,575

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

	December 24,	June 25,
	2017 (unaudited)	2017

ASSETS

CURRENT ASSETS
Cash and Cash Equivalents	$ 1,428	$ 451
Accounts receivable, less allowance for bad debts
accounts of $332 and $249, respectively	1,494	2,761
Notes receivable	2,060	675
Inventories	19	79
Income tax receivable	-	194
Property held for sale	608	671
Prepaid expenses and other	448	295
Total current assets	6,057	5,126

LONG-TERM ASSETS
Property, plant and equipment, net	1,667	3,808
Intangible assets definite-lived, net	228	239
Long-term notes receivable	-	127
Deposits and other	243	246
Total assets	$ 8,195	$ 9,546

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade	$ 1,428	$ 4,165
Short-term debt	-	1,000
Accrued expenses	854	1,265
Deferred rent	41	101
Deferred revenues	97	212
Total current liabilities	2,420	6,743

Convertible notes	1,459	2,749
Deferred rent, net of current portion	294	655
Deferred revenues, net of current portion	715	1,425
Other long-term liabilities	45	53
Total liabilities	4,933	11,625

SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 26,000,000
shares; issued 22,015,608 and 17,786,049 shares, respectively;
outstanding 14,896,208 and 10,666,649 shares, respectively	220	178
Additional paid-in capital	33,016	26,784
Accumulated deficit	(5,338)	(4,405)
Treasury stock at cost
Shares in treasury: 7,119,400	(24,636)	(24,636)
Total shareholders' equity (deficit)	3,262	(2,079)

	$ 8,195	$ 9,546

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

RAVE RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

				Six Months Ended
				December 24,	December 25,
				2017	2016

CASH FLOWS FROM OPERATING ACTIVITIES:

	Net loss			$ (933)	$ (9,421)
	Adjustments to reconcile net loss to
		cash used in operating activties:
		Depreciation and amortization		581	1,513
		Amortization of intangible assets definite-lived		19	26
		Amortization of debt issue costs		23	-
		Impairment of long-lived assets		681	4,773
		Stock compensation expense		19	90
		(Gain)/loss on sale/disposal of assets		(166)	699
		Provision for bad debt		213	351
	Changes in operating assets and liabilities:
		Notes and accounts receivable		1,376	100
		Inventories		60	(2)
		Accounts payable - trade		(3,667)	680
		Accrued expenses		(419)	(132)
		Deferred rent		(421)	(253)
		Deferred revenue		(690)	(246)
		Prepaid expenses and other		(150)	182
		Cash used in operating activities		(3,474)	(1,640)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Proceeds from sale of assets			939	45
	Purchase of intangible assets definite-lived			(9)	-
	Capital expenditures			(421)	(217)
		Cash provided by (used in) investing activities		509	(172)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from sale of stock			4,942	-
	Proceeds from stock options			-	806
	Net change in other debt			(1,000)	1,000
		Cash provided by financing activities		3,942	1,806

Net increase (decrease) in cash and cash equivalents				977	(6)
Cash and cash equivalents, beginning of period				451	873
Cash and cash equivalents, end of period				$ 1,428	$ 867

<TABLE><CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

	Cash paid during the period:
			Interest paid	$ 115	$ -
			Taxes paid	$ 48	$ 25
	Non-cash activities:
		Capital expenditures included in accounts payable		$ 125	$ -

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

RAVE RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements of Rave Restaurant Group, Inc. (the "Company") have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 25, 2017.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial position and results of operations for the interim periods reflected. Except as noted, all adjustments are of a normal recurring nature. Results of operations for the fiscal periods presented are not necessarily indicative of fiscal year-end results.

(1)

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All appropriate intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Fiscal Quarters

The three and six month periods ended December 24, 2017 and December 25, 2016, each contained 13 weeks and 26 weeks, respectively.

Revenue Recognition

The Company recognizes revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Revenue from restaurant sales is recognized when food and beverage products are sold. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities.

Franchise revenues consist of income from license fees, royalties, and area development and foreign master license fees and supplier and distributor incentive revenues. License fees are recognized as income when there has been substantial performance under the agreement by the Company. Domestic license fees are generally recognized at the time the restaurant is opened. Foreign master license fees are generally recognized upon execution of the agreement as all material services relating to the sale have been substantially performed by the Company and the fee has been collected. Royalties are recognized as income when earned. Supplier and distributor incentive revenues are recognized when title to the underlying commodities transfers.

Stock-Based Compensation

The Company accounts for stock options using the fair value recognition provisions of the authoritative guidance on share-based payments. The Company uses the Black-Scholes formula to estimate the value of stock-based compensation for options granted to employees and directors and expects to continue to use this acceptable option valuation model in the future. The authoritative guidance also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow.

Restricted Stock Units

Compensation cost for restricted stock units (“RSU’s”) is measured as an amount equal to the fair value of the RSU’s on the date of grant and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on the best estimate of the ultimate achievement level.

Use of Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the Company’s management to make estimates and assumptions that affect its reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and other various assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically and actual results could differ materially from estimates.

Reclassification

Certain items have been reclassified in the prior financial statements to conform to current financial statement presentation.

Discontinuation of Norco Distribution Division

During the fiscal quarter ended December 24, 2017, the Company discontinued its Norco distribution division and revised its arrangements with third party suppliers and distributors of food, equipment and supplies. As a result, sale of food, equipment and supplies is no longer recognized as revenue and the cost of such items is no longer included in cost of sales. The Company now recognizes incentive revenues received from third party suppliers and distributors as revenue.

(2)

Commitments and Contingencies

On April 22, 2009 the Company’s board of directors amended the 2007 Stock Purchase Plan first adopted on May 23, 2007 and previously amended on June 2, 2008, to increase the number of shares of common stock the Company may repurchase shares to a total of 3,016,000 shares. The 2007 Stock Purchase Plan does not have an expiration date. There were no stock repurchases in the second quarter of fiscal 2018. As of December 24, 2017, up to an additional 848,425 shares could be repurchased under the 2007 Stock Purchase Plan.

The Company is subject to various claims and contingencies related to employment agreements, franchise disputes, lawsuits, taxes, food product purchase contracts and other matters arising out of the normal course of business. Management believes that any such claims and actions currently pending are either covered by insurance or would not have a material adverse effect on the Company's annual results of operations or financial condition if decided in a manner that is unfavorable to the Company.

(3) Stock-Based Compensation

Stock Options:

For the three month period ended December 24, 2017, and December 25, 2016, the Company recognized stock-based compensation expense related to stock options of $10 thousand and $25 thousand, respectively. For the six month period ended December 24, 2017 and December 25, 2016, the Company recognized stock-based compensation expense related to stock options of $19 thousand and $50 thousand, respectively. As of December 24, 2017, unamortized stock-based compensation expense related to stock options was $16 thousand.

The following table summarizes the number of shares of the Company’s common stock subject to outstanding stock options:

<BTB>	Six Months Ended
<BTB>	December 24, 2017	December 25, 2016

Outstanding at beginning of year	478,056	847,556

Granted	-	50,000
Exercised	-	(315,000)
Forfeited/Canceled/Expired	-	(80,000)

Outstanding at end of period	478,056	502,556

Exercisable at end of period	438,056	365,406

Restricted Stock Units:

For the three month periods ended December 24, 2017, and December 25, 2016, the Company recognized $0 and $20 thousand in stock-based compensation expense related to RSU’s. For the six month period ended December 24, 2017, and December 25, 2016, the Company recognized $0 and $40 thousand in stock-based compensation expense related to RSU’s. As of December 24, 2017, unamortized stock-based compensation expense related to RSU’s was $0 because the Company determined that the probability of achieving the minimum performance criteria was remote.

A summary of the status of restricted stock units as of December 24, 2017, and changes during the fiscal six month period then ended is presented below:

Number of Restricted Stock Units

Unvested at June 25, 2017	487,950
Granted	-
Vested	-
Forfeited	(34,730)
Unvested at December 24, 2017	453,220

(4)

Earnings per Share (EPS)

The following table shows the reconciliation of the numerator and denominator of the basic EPS calculation to the numerator and denominator of the diluted EPS calculation (in thousands, except per share amounts).

	Three Months Ended		Six Months Ended
	December 24,	December 25,	December 24,	December 25,
	2017	2016	2017	2016
Loss from continuing operations	$ (397)	$ (7,535)	$ (528)	$ (8,706)
Loss from discontinued operations	(180)	(390)	(405)	(715)
Net loss available to common stockholders	$ (577)	$ (7,925)	$ (933)	$ (9,421)

BASIC:
Weighted average common shares	14,344	10,657	12,742	10,575

Loss from continuing operations per common share	$ (0.03)	$ (0.71)	$ (0.04)	$ (0.82)
Loss from discontinued operations per common share	(0.01)	(0.03)	(0.03)	(0.07)
Net loss per common share	$ (0.04)	$ (0.74)	$ (0.07)	$ (0.89)

DILUTED:
Weighted average common shares	14,344	10,657	12,742	10,575
Stock options	-	-	-	-
Weighted average common shares outstanding	14,344	10,657	12,742	10,575


Loss from continuing operations per common share	$ (0.03)	$ (0.71)	$ (0.04)	$ (0.82)
Loss from discontinued operations per common share	(0.01)	(0.03)	(0.03)	(0.07)
Net loss per common share	$ (0.04)	$ (0.74)	$ (0.07)	$ (0.89)

For the three and six months period ended December 24, 2017, options to purchase 478,056 shares of common stock at exercise prices ranging from $1.87 to $13.11 were excluded from the computation of diluted EPS because their inclusion would have been anti-dilutive.

(5) Closed restaurants and discontinued operations

In April, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which modifies the definition of discontinued operations to include only disposals of an entity that represent strategic shifts that have or will have a major effect on an entity’s operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. The standard was effective prospectively for annual and interim periods beginning after December 15, 2014, with early adoption permitted.

The authoritative guidance on “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that discontinued operations that meet certain criteria be reflected in the statement of operations after results of continuing operations as a net amount. This guidance also requires that the operations of closed restaurants, including any impairment charges, be reclassified to discontinued operations for all periods presented.

The authoritative guidance on “Accounting for Costs Associated with Exit or Disposal Activities,” requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This authoritative guidance also establishes that fair value is the objective for initial measurement of the liability.

Discontinued operations include losses attributable to the discontinued Norco distribution and supply division, leased buildings associated with Company-owned units closed in prior years, and closed Pizza Inn corporate-owned units.

(6) Income Taxes

For the six months ended December 24, 2017, the Company had an income tax benefit of $260 thousand calculated at a 27.5% weighted-average rate consistent with a statutory U.S. federal blended rate offset by an income tax expense of $246 thousand related to recording a valuation allowance for deferred tax assets of $260 thousand foreign taxes of $6 thousand, state taxes of $13 thousand and an additional IRS refund of $33 thousand.

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 continues to record a full valuation allowance against its net deferred tax assets. The Company assessed 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 considered both positive and negative evidence related to the likelihood of realization of deferred tax assets. In making such assessment, more weight was given to evidence that could be objectively verified, including recent cumulative losses. Future sources of taxable income were also considered in determining the amount of the recorded valuation allowance. Based on the Company’s review of this evidence at December 24, 2017, management determined that a full valuation allowance against all of the Company’s deferred tax assets at December 24, 2017 was appropriate.

In December 2017, President Donald Trump signed the Tax Cuts and Jobs Act. The new law drops the income tax rate for corporations to 21% effective January 1, 2018. Due to the tax rate change, the deferred tax assets as of December 24, 2017 were adjusted by $3.3 million and the valuation allowance was adjusted by the same amount. There were approximately 6.0 million of deferred tax assets at December 24, 2017.

(7) Related Party Transactions

On February 20, 2014, the Company entered into an Advisory Services Agreement (the “Agreement”) with NCM Services, Inc. (“NCMS”) pursuant to which NCMS would provide certain advisory and consulting services to the Company. NCMS is indirectly owned and controlled by Mark E. Schwarz, the Chairman of the Company. The term of the Agreement commenced December 30, 2013, and continued quarterly thereafter until terminated by either party. Pursuant to the Agreement, NCMS was paid an initial fee of $150,000 and earned quarterly fees of $50,000 and an additional fee of up to $50,000 per quarter (not to exceed an aggregate of $100,000 in additional fees). The quarterly and additional fees were waived if the Company was not in compliance with all financial covenants under its primary credit facility or to the extent that payment of those fees would result in non-compliance with such financial covenants. The Agreement was terminated at the end of fiscal 2017.

(8)

Segment Reporting

In order to show the impact of this change and better reflect the current operational structure, the Company has redefined its operating segments as Pizza Inn Franchising, Pie Five Franchising and Company-Owned Restaurants. Summarized in the following tables are net sales and operating revenues, operating income and geographic information (revenues) for these reportable segments for the three and six month periods ended December 24, 2017 and December 25, 2016 (in thousands). Operating income reported below excludes income tax provision and discontinued operations.

		Three Months Ended		Six Months Ended
<BTB>		December 24,	December 25,	December 24,	December 25,
		2017	2016	2017	2016
Net sales and operating revenues:
Pizza Inn Franchising		$ 1,718	$ 1,782	$ 3,492	$ 3,656
Pie Five Franchising		912	938	2,395	1,823
Company-owned restaurants (Note 1)		1,567	4,060	3,742	8,767
	Consolidated revenues	$ 4,197	$ 6,780	$ 9,629	$ 14,246

Depreciation and amortization:
Pizza Inn Franchising		$ -	$ -	$ -	$ -
Pie Five Franchising		-	-	-	-
Company-owned restaurants (Note 1)		173	628	373	1,304
	Combined	173	628	373	1,304
Corporate administration and other		115	112	227	213
	Depreciation and amortization	$ 288	$ 740	$ 600	$ 1,517

Gain/(Loss) from continuing operations before taxes:
Pizza Inn Franchising		$ 1,398	$ 1,459	$ 2,877	$ 3,030
Pie Five Franchising		489	576	1,666	1,186
Company-owned restaurants (Note 1)		(464)	(6,271)	(1,342)	(7,774)
	Combined	1,423	(4,236)	3,201	(3,558)
Corporate administration and other		(1,847)	(3,294)	(3,743)	(5,138)
	Loss from continuing operations before taxes	$ (424)	$ (7,530)	$ (542)	$ (8,696)

Geographic information (revenues):
United States		$ 3,983	$ 6,733	$ 9,336	$ 14,103
Foreign countries		214	47	293	143
	Consolidated total	$ 4,197	$ 6,780	$ 9,629	$ 14,246
<FN>
	Note 1:
	Company stores that were closed are included in discontinued operations in the accompanying
	Condensed Consolidated Statement of Operations.

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 25, 2017, 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 25, 2017. 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”) operates and franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants domestically and internationally under the trademark “Pizza Inn” and operates domestic fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five Pizza Company” or “Pie Five”. We facilitate food, equipment and supply distribution to our domestic and international system of restaurants through agreements with third party suppliers and distributors. The following chart presents information concerning Company-owned and franchised restaurants as of and for the three and six month periods ended December 24, 2017:

Three Months Ended December 24, 2017
(in thousands, except unit data)
	Pizza Inn		Pie Five		All Concepts
	Ending	Retail	Ending	Retail	Ending	Retail
	Units	Sales	Units	Sales	Units	Sales

Company-Owned	-	$ -	3	$ 1,567	3	$ 1,567
Domestic Franchised	156	20,906	77	9,986	233	30,892
Total Domestic Units	156	$ 20,906	80	$ 11,553	236	$ 32,459

International Franchised	62		-		62




Six Months Ended December 24, 2017
(in thousands, except unit data)
	Pizza Inn		Pie Five		All Concepts
	Ending	Retail	Ending	Retail	Ending	Retail
	Units	Sales	Units	Sales	Units	Sales

Company-Owned	-	$ -	3	$ 3,742	3	$ 3,742
Domestic Franchised	156	42,800	77	20,252	233	63,052
Total Domestic Units	156	$ 42,800	80	$ 23,994	236	$ 66,794

International Franchised	62		-		62

Domestic units are located in 23 states predominantly situated in the southern half of the United States. International units are located in six foreign countries.

Basic and diluted loss per common share improved $0.70 per share to a loss of $0.04 per share for the three month period ended December 24, 2017, compared to a loss of $0.74 per share in the comparable period in the prior fiscal year. The Company had a net loss of $0.6 million for the three month period ended December 24, 2017, and net loss of $7.9 million in the comparable period in the prior fiscal year, on revenues of $4.2 million for the three month period ended December 24, 2017 compared to $6.8 million in the comparable period in the prior fiscal year. The decrease in net loss from prior year was primarily due to the closing of poorly preforming stores, lower closed store expenses, increased gains from sale of assets, lower impairment expenses , lower lease termination costs and reduced general and administrative expenses.

Basic and diluted loss per common share improved $0.82 per share to a loss of $0.07 per share for the six month period ended December 24, 2017, compared to a loss of $0.89 per share in the comparable period in the prior fiscal year. Net loss decreased by $8.5 million from $9.4 million to $0.9 million in the six month period ended December 24, 2017 as compared to the same period in the prior year. The decrease in net loss from prior year was primarily due to the closing of poorly preforming stores, lower closed store expenses, increased gains from sale of assets, lower impairment expenses ,lower lease termination costs and reduced general and administrative expenses.

Adjusted EBITDA for the fiscal quarter ended December 24, 2017, improved by $0.9 million compared to the prior fiscal year. Year-to-date adjusted EBITDA increased to $0.5 million compared to a loss of $0.9 million the prior fiscal year. The following table sets forth a reconciliation of net income to Adjusted EBITDA for the periods shown (in thousands):

	Three Months Ended		Six Months Ended
	December 24,	December 25,	December 24,	December 25,
	2017	2016	2017	2016
Net loss	$ (577)	$ (7,925)	$ (933)	$ (9,421)
Interest expense	63	2	131	2
Income taxes	(27)	5	(14)	10
Depreciation and amortization	288	740	600	1,517
EBITDA	$ (253)	$ (7,178)	$ (216)	$ (7,892)
Stock compensation expense	10	45	19	90
Pre-opening costs	(1)	47	114	54
(Gain)/Loss on sale/disposal of assets	(166)	656	(165)	699
Impairment of long-lived assets and other lease charges	533	5,057	681	5,226
Discontinued operations and closed and non-operating store costs	(291)	347	72	884
Adjusted EBITDA	$ (168)	$ (1,026)	$ 505	$ (939)

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 24,	December 25,	December 24,	December 25,
	2017	2016	2017	2016
	(in thousands, except unit data)		(in thousands, except unit data)
Pie Five Retail Sales - Total Units
Domestic - Franchised	$ 9,986	$ 10,161	$ 20,252	$ 20,501
Domestic - Company-owned	1,567	4,060	3,742	8,767
Total domestic retail sales	$ 11,553	$ 14,221	$ 23,994	$ 29,268

Pie Five Comparable Store Retail Sales - Total	$ 7,840	$ 9,087	$ 15,184	$ 17,961

Pie Five Average Units Open in Period
Domestic - Franchised	72	67	71	63
Domestic - Company-owned	10	30	12	30
Total domestic Units	82	97	83	93

Pie Five system-wide retail sales decreased $2.7 million, or 18.8%, for the three month period ended December 24, 2017 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 97 to 82. Comparable store retail sales decreased by $1.2 million, or 13.7%, during the second quarter of fiscal 2018 compared to the same period of the prior year.

Pie Five system-wide retail sales decreased $5.3 million, or 18.0%, for the six month period ended December 24, 2017 when compared to the same period of the prior year. Year-to-date fiscal 2018 compared to the year-to-date of the prior year, average units open in the period decreased from 93 to 83. Comparable store retail sales decreased by $2.8 million, or 15.5%, during the first six month period ended December 24, 2018 compared to the same period of the prior fiscal year.

The following chart summarizes Pie Five Unit activity for the three and six month periods ended December 24, 2017:

	Three Months Ended December 24, 2017
	Beginning				Ending
	Units	Opened	Transfer	Closed	Units

Domestic - Franchised	69	2	11	5	77
Domestic - Company-owned	14	-	(11)	-	3
Total domestic Units	83	2	-	5	80


	Six Months Ended December 24, 2017
	Beginning				Ending
	Units	Opened	Transfer	Closed	Units

Domestic - Franchised	71	5	11	10	77
Domestic - Company-owned	13	1	(11)	-	3
Total domestic Units	84	6	-	10	80

The net decrease of three Pie Five Units during the three month period ended December 24, 2017 was primarily the result of the closure of poor-performing stores, which we believe will provide a stronger foundation for future brand growth. We believe that the net increase of eight franchised Pie Five Units in the three month period ended December 24, 2017 is a demonstration of brand strength and strategic commitment to franchise operations.

The net decrease of four Pie Five Units during the first six month period ended December 24, 2018 was primarily the result of the closure of poor-performing stores, which we believe will provide a stronger foundation for future brand growth. We believe that the net increase of six franchised Pie Five Units in the first six month period ended December 24, 2017 is a demonstration of brand strength and strategic commitment to franchise operations. We do not anticipate the opening of additional Company-owned Pie Five Units in the near future.

Pie Five - Company-Owned Restaurants	Three Months Ended		Six Months Ended
(in thousands, except store weeks and average data)	December 24,	December 25,	December 24,	December 25,
	2017	2016	2017	2016
Store weeks	130	386	307	786
Average weekly sales	11,594	10,517	11,979	11,151
Average number of units	10	30	12	30

Restaurant sales (excluding partial weeks)	1,507	4,060	3,677	8,765
Restaurant sales	1,567	4,060	3,742	8,767

Loss from continuing operations before taxes	(464)	(6,269)	(1,342)	(7,774)
Allocated marketing and advertising expenses	78	204	187	438
Depreciation/amortization expense	173	628	373	1,304
Pre-opening costs	(1)	47	114	54
Operations management and extraordinary expenses	28	213	83	440
Impairment, other lease charges and non-operating store costs	61	5,121	345	5,506
Loss from continuing operations before taxes	(135)	(56)	(240)	(32)

Average weekly sales for Company-owned Pie Five Units increased $1,077, or 10.2%, to $11,594 for the three month period ended December 24, 2017 compared to $10,517 for the same period of the prior fiscal year. Company-owned Pie Five restaurant operating cash flow decreased $0.1 million during the second quarter of fiscal 2018 compared to the same period of prior year. Loss from continuing operations before taxes for Company-owned Pie Five stores improved $5.8 million for the three month period ended December 24, 2017 compared to the same period of the prior year. For the Pie Five Company-owned restaurants, the decrease in sales was due to decreased store count, and the increase in average weekly sales was due to closing underperforming stores.

Average weekly sales for Company-owned Pie Five Units increased $828, or 7.4%, to $11,979 for the six month period ended December 24, 2017 compared to $11,151 for the same period of prior year. Company-owned Pie Five restaurant operating cash flow decreased $0.2 million during the six month period ended December 24, 2017 compared to the same period of prior year. Loss from continuing operations before taxes for Company-owned Pie Five stores improved $6.4 million for the six month period ended December 24, 2017 compared to the same period of the prior year. For the Pie Five Company-owned restaurants, the decrease in sales was due to decreased store count, and the increase in average weekly sales was due to closing underperforming stores.

Pizza Inn Brand Summary

The following tables summarize certain key indicators for the Pizza Inn franchised and Company-owned domestic units that management believes are useful in evaluating performance.

	Three Months Ended		Six Months Ended
	December 24,	December 25,	December 24,	December 25,
	2017	2016	2017	2016
Pizza Inn Retail Sales - Total Domestic Units	(in thousands, except unit data)		(in thousands, except unit data)
Domestic Units
Buffet - Franchised	$ 19,267	$ 19,802	$ 39,406	$ 40,009
Delco/Express - Franchised	1,639	1,658	3,394	3,362
Buffet - Company-owned	-	167	-	359
Total domestic retail sales	$ 20,906	$ 21,627	$ 42,800	$ 43,730

Pizza Inn Comparable Store Retail Sales - Total Domestic	$ 19,784	$ 19,257	$ 40,244	$ 39,375

Pizza Inn Average Units Open in Period
Domestic Units
Buffet - Franchised	91	95	91	95
Delco/Express - Franchised	67	64	67	63
Buffet - Company-owned	-	1	-	1
Total domestic Units	158	160	158	159

Total Pizza Inn domestic retail sales decreased $0.7 million, or 3.3%, for the three month period ended December 24, 2017 when compared to the same period of the prior year. Pizza Inn domestic comparable store retail sales increased 2.7%, for the three month period ended December 24, 2017 when compared to the same period of the prior year.

Total Pizza Inn domestic retail sales decreased $0.9 million, or 2.1%, for the six month period ended December 24, 2017 when compared to the same period of the prior year. Pizza Inn domestic comparable store retail sales increased 2.2%, for the six month period ended December 24, 2017 when compared to the same period of the prior year.

The following chart summarizes Pizza Inn unit activity for the three month and six month periods ended December 24, 2017:

	Three Months Ended December 24, 2017
	Beginning		Concept		Ending
	Units	Opened	Change	Closed	Units
Domestic Units
Buffet - Franchised	91	-	-	1	90
Delco/Express - Franchised	68	1	-	3	66
Total domestic Units	159	1		4	156

International Units (all types)	60	2	-	-	62

Total Units	219	3	-	4	218


	Six Months Ended December 24, 2017
	Beginning		Concept		Ending
	Units	Opened	Change	Closed	Units
Domestic Units
Buffet - Franchised	93	-	-	3	90
Delco/Express - Franchised	68	2	-	4	66
Total domestic Units	161	2		7	156

International Units (all types)	60	2	-	-	62

Total Units	221	4	-	7	218

There was a net decrease of three units in the total domestic Pizza Inn store count during the three month period ended December 24, 2017. There was a net decrease of five units in the total domestic Pizza Inn store count during the six month period ended December 24, 2017. We believe this represents a stabilizing of domestic store count. The number of international Pizza Inn units increased by two units in the three month period ended December 24, 2017

Non-GAAP Financial Measures and Other Terms

The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”). However, the Company also presents and discusses certain non-GAAP financial measures that it believes are useful to investors as measures of operating performance. Management may also use such non-GAAP financial measures in evaluating the effectiveness of business strategies and for planning and budgeting purposes. However, these non-GAAP financial measures should not be viewed as an alternative or substitute for the results reflected in the Company’s GAAP financial statements.

We consider EBITDA and Adjusted EBITDA to be important supplemental measures of operating performance that are commonly used by securities analysts, investors and other parties interested in our industry. We believe that EBITDA is helpful to investors in evaluating our results of operations without the impact of expenses affected by financing methods, accounting methods and the tax environment. We believe that Adjusted EBITDA provides additional useful information to investors by excluding non-operational or non-recurring expenses to provide a measure of operating performance that is more comparable from period to period. We believe that restaurant operating cash flow is a useful metric to investors in evaluating the ongoing operating performance of Company-owned restaurants and comparing such store operating performance from period to period. Management also uses these non-GAAP financial measures for evaluating operating performance, assessing the effectiveness of business strategies, projecting future capital needs, budgeting and other planning purposes.

The following key performance indicators presented herein, some of which represent non-GAAP financial measures, have the meaning and are calculated as follows:

“EBITDA” represents earnings before interest, taxes, depreciation and amortization.

“Adjusted EBITDA” represents earnings before interest, taxes, depreciation and amortization, stock compensation expense, pre-opening expense, gain/loss on sale of assets, costs related to impairment, other lease charges, non-operating store costs and discontinued operations.

“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.

“Restaurant operating cash flow” represents the pre-tax income earned by Company-owned restaurants before (1) allocated marketing and advertising expenses, (2) depreciation and amortization, (3) pre-opening expenses, (4) operations management and extraordinary expenses, (5) impairment and other lease charges, and (6) non-operating store costs.

“Non-operating store costs” represent gain or loss on asset disposal, store closure expenses, lease termination expenses and expenses related to abandoned store sites.

“Pre-opening expenses” consist primarily of certain costs incurred prior to the opening of a restaurant, including: (1) marketing and promotional expenses, (2) accrued rent, and (3) manager salaries, employee payroll and related training costs.

Financial Results

In order to show the impact of this change and better reflect the current operational structure, the Company has redefined 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 month periods ended December 24, 2017 and December 25, 2016 (in thousands):

		Pizza Inn		Pie Five		Company-Owned
		Franchising		Franchising		Stores		Corporate		Total
		Fiscal Quarter Ended		Fiscal Quarter Ended		Fiscal Quarter Ended		Fiscal Quarter Ended		Fiscal Quarter Ended
		Dec 24,	Dec 25,	Dec 24,	Dec 25,	Dec 24,	Dec 25,	Dec 24,	Dec 25,	Dec 24,	Dec 25,
		2017	2016	2017	2016	2017	2016	2017	2016	2017	2016
REVENUES:
	Franchise revenues	1,718	1,782	912	938	-	-	-	-	2,630	2,720
	Restaurant sales	-	-	-	-	1,567	4,060	-	-	1,567	4,060
	Total revenues	1,718	1,782	912	938	1,567	4,060	-	-	4,197	6,780

COSTS AND EXPENSES:
	Cost of sales	-	-	-	-	1,055	3,858	-	-	1,055	3,858
	General and administrative expenses	-	-	-	-	271	739	1,746	2,228	2,017	2,967
	Franchise expenses	320	323	423	362	-	-	-	-	743	685
	Pre-opening expenses	-	-	-	-	(1)	47	-	-	(1)	47
	(Gain)/Loss on sale of assets	-	-	-	-	-	-	(166)	656	(166)	656
	Impairment of long-lived assets
	and other lease charges	-	-	-	-	533	5,057	-	-	533	5,057
	Bad debt	-	-	-	-	-	-	89	298	89	298
	Interest expense	-	-	-	-	-	-	63	2	63	2
	Amortization and depreciation expense	-	-	-	-	173	628	115	112	288	740
	Total costs and expenses	320	323	423	362	2,031	10,329	1,847	3,296	4,621	14,310

INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE TAXES		1,398	1,459	489	576	(464)	(6,269)	(1,847)	(3,296)	(424)	(7,530)

		Pizza Inn		Pie Five		Company-Owned
		Franchising		Franchising		Stores		Corporate		Total
		Fiscal Year-to-Date		Fiscal Year-to-Date		Fiscal Year-to-Date		Fiscal Year-to-Date		Fiscal Year-to-Date
		Dec 24,	Dec 25,	Dec 24,	Dec 25,	Dec 24,	Dec 25,	Dec 24,	Dec 25,	Dec 24,	Dec 25,
		2017	2016	2017	2016	2017	2016	2017	2016	2017	2016
REVENUES:
	Franchise revenues	3,492	3,656	2,395	1,823	-	-	-	-	5,887	5,479
	Restaurant sales	-	-	-	-	3,742	8,767	-	-	3,742	8,767
	Total revenues	3,492	3,656	2,395	1,823	3,742	8,767	-	-	9,629	14,246

COSTS AND EXPENSES:
	Cost of sales	-	-	-	-	3,142	8,305	-	-	3,142	8,305
	General and administrative expenses	-	-	-	-	650	1,652	3,461	3,873	4,111	5,525
	Franchise expenses	615	626	729	637	-	-	-	-	1,344	1,263
	Pre-opening expenses	-	-	-	-	114	54	-	-	114	54
	(Gain)/Loss on sale of assets	-	-	-	-	-	-	(165)	699	(165)	699
	Impairment of long-lived assets
	and other lease charges	-	-	-	-	681	5,226	-	-	681	5,226
	Bad debt	-	-	-	-	124	-	89	351	213	351
	Interest expense	-	-	-	-	-	-	131	2	131	2
	Amortization and depreciation expense	-	-	-	-	373	1,304	227	213	600	1,517
	Total costs and expenses	615	626	729	637	5,084	16,541	3,743	5,138	10,171	22,942

INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE TAXES		2,877	3,030	1,666	1,186	(1,342)	(7,774)	(3,743)	(5,138)	(542)	(8,696)

Revenues:

Revenues are derived from (1) franchise royalties, franchise fees and supplier incentives, and (2) Company-owned restaurant operations. 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, and the products sold to franchisees through third-party food distributors.

Total revenues for the three month period ended December 24, 2017 and for the same period in the prior fiscal year were $4.2 million and $6.8 million, respectively. Total revenues for the six month period ended December 24, 2017 was $9.6 million compared to $14.2 million in the same period in the prior fiscal year. The decrease in total revenues in both the three and six month periods was primarily driven by the reduction in the number of Company-owned stores.

Pizza Inn Franchise Revenues

Pizza Inn franchise revenues decreased by $0.1 million to $1.7 million from $1.8 million for the three month period ended December 24, 2017 compared to the same period in the prior fiscal year. Pizza Inn franchise revenues decreased to $3.5 million for the six month period ended December 24, 2017 from $3.7 million for the same period of the prior fiscal year. The decrease in both the three and six month periods was primarily the result of reduced retail sales, largely attributable to closure of under-performing stores.

Pie Five Franchise Revenues

Pie Five franchise revenues were flat year over year at $0.9 for the three month period ended December 24, 2017 compared to the same period in the prior fiscal year. Pie Five franchise revenues increased to $2.4 million for the six month period ended December 24, 2017 from $1.8 million for the same period of the prior fiscal period, primarily driven by the recognition of a set up fee for the first international franchisee.

Restaurant Sales

Restaurant sales, which consist of revenue generated by Company-owned restaurants, decreased 61.4%, or $2.5 million, to $1.6 million for the three month period ended December 24, 2017, compared to $4.1 million for the comparable period in the prior year. In the six month period ended December 24, 2017, restaurant sales decreased 57.3%, or $5.0 million, to $3.8 million compared to $8.8 million for the comparable period in the prior year. In both cases, the decrease in restaurant sales was primarily a result of decreased store count.

Costs and Expenses:

Cost of Sales - Total

Total cost of sales, which primarily includes food and supply costs, labor and general and administrative expenses directly related to Company-owned restaurant sales, decreased to $1.1 million for the three month period ended December 24, 2017 compared to $3.9 million in the three month period ended December 25, 2016. For the six month period ended December 24, 2017, total cost of sales decreased to $3.1 million from $8.3 million. The decreases in costs in both three and six month periods were primarily the result decreased Company-owned store count.

General and Administrative Expenses - Total

Total general and administrative expenses decreased to $2.0 million for the three month period ended December 24, 2017 compared to $3.0 million for the three month period ended December 25, 2016 primarily due to decreased expenses resulting from the lower number of Company-owned restaurants and decreased costs in corporate overhead. For the six month period ended December 24, 2017, general and administrative expenses decreased to $4.1 million from $5.5 million in the same period in the prior fiscal year primarily due to decreased expenses resulting from the lower number of Company-owned restaurants and decreased costs in corporate overhead.

General and Administrative Expenses - Company-Owned Restaurants

General and administrative expenses for Company-owned restaurants decreased to $0.3 million for the three month period ended December 24, 2017 compared to $0.7 million in the three month period ended December 25, 2016 primarily as a result of lower store count. General and administrative expenses for Company-owned restaurants decreased to $0.7 million for the six month period ended December 24, 2017 compared to $1.6 million in the six month period ended December 25, 2016 primarily as a result of lower store count.

General and Administrative Expenses - Corporate

General and administrative expenses for corporate decreased to $1.7 million for the three month period ended December 24, 2017 compared to $2.2 million for the three month period ended December 25, 2016. General and administrative expenses for corporate decreased to $3.5 million for the six month period ended December 24, 2017 compared to $3.9 million for the six month period ended December 25, 2016.

Franchise Expenses - Total

Franchise expenses include selling, general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. Franchise expenses remained stable at $0.7 million for the three month periods and $1.3 million for the six month periods ended December 24, 2017 and December 25, 2016 respectively.

Franchise Expenses – Pizza Inn

Pizza Inn franchise expenses include general and administrative expenses directly related to the continuing service of the Pizza Inn domestic and international franchises. Franchise expenses remained stable at $0.3 million for the three month periods and $0.6 million for the six month periods ended December 24, 2017 and December 25, 2016 respectively.

Franchise Expenses – Pie Five

Pie Five franchise expenses include general and administrative expenses directly related to the continuing service of domestic and international franchises. Pie Five franchise expenses remained stable at $0.4 million for the three month period ended December 24, 2017 as compared to the same period in the prior fiscal year. Pie Five franchise expenses increased slightly to $0.7 million from $0.6 million for the six month period ended December 24, 2017 as compared to the same period in the prior fiscal year.

Pre-Opening Expenses

Pre-opening expenses decreased to a credit of $1 thousand for the second quarter of fiscal 2018 compared to $47 thousand expense for the same quarter of fiscal 2017. For the six month period ended December 24, 2017, pre-opening expenses were $114 thousand compared to $54 thousand in six month period ended December 25, 2016. Pre-opening expenses are directly related to the number of new store openings, which declined in fiscal 2018.

Impairment of Long-lived Assets and Other Lease Charges

Impairment of long-lived assets and other lease charges were $0.5 million for three month period ended December 24, 2017 compared to $5.1 million for the same period in the prior fiscal year. Impairment of long-lived assets and other lease charges were $0.7 million for the six month period ended December 24, 2017 compared to $5.2 million for the same period in the prior fiscal year. For the six month period ended December 24, 2017, these charges related to continuing lease termination expenses for nine Pie Five restaurant sites no longer deemed desirable for future restaurant development and lease termination expense for one additional Pie Five restaurant site.

Bad Debt Expense

The Company monitors franchisee receivable balances and adjusts credit terms when necessary to minimize the Company’s exposure to high risk accounts receivable. Bad debt expense decreased $0.2 million for the three month period ended December 24, 2017 as compared to the comparable period in the prior fiscal year. Bad debt expense decreased to $0.2 million for the six month period ended December 24, 2017 as compared to $0.4 million in the comparable period in the prior fiscal year. In the six month period ended December 24, 2017, the Company recognized $0.2 million bad debt expense related to the collectability of a promissory note taken in connection with the prior sale of two Company-owned Pie Five Units to a franchisee.

Interest Expense

Interest expense increased to $63 thousand in the three month period ended December 24, 2017 compared to $2 thousand during the same fiscal quarter of the prior year. Interest expense was $131 thousand for the six month period ended December 24, 2017 as compared to $2 thousand in the comparable period in the prior fiscal year. The increase in interest expense during both the three and six month periods compared to the prior fiscal year was primarily related to the interest expense on senior convertible notes issued in the third quarter of fiscal 2017.

Provision for Income Tax

Discontinued Operations

Net losses from the Norco food and supply distribution division are included within discontinued operations. The discontinuation of the Norco food and supply distribution entity was a strategic shift for the Company during the second quarter of fiscal 2018, releasing the Company from added credit risk, overhead expense, and direct supply and delivery responsibilities. Discontinued operations also includes losses from leased buildings and operating losses associated with Company-owned Pizza Inn restaurants closed in prior years.

Liquidity and Capital Resources

During the six month period ended December 24, 2017, our primary sources of liquidity were cash flows from investing activities and proceeds from the sale of common stock.

Cash flows from operating activities generally reflect net income or losses adjusted for certain non-cash items including depreciation and amortization, changes in deferred tax assets, share based compensation, and changes in working capital. Cash used by operating activities increased $1.8 million to cash used of $3.5 million for the six month period ended December 24, 2017 compared to cash used of $1.6 million for the six month period ended December 25, 2016. The primary drivers of additional cash consumption during the six month period ended December 24, 2017 were lease termination payments for restaurant sites no longer deemed desirable for future development, timing of net working capital related to the discontinued Norco food and supply distribution division, and an overall reduction in accounts payable.

Cash flows from investing activities reflect net proceeds from the sale of assets and capital expenditures for the purchase of Company assets. Cash provided by investing activities during the six month period ended December 24, 2017 of $0.5 million was primarily attributed to the sale of assets of closed Company-owned Pie Five Units partially offset by capital expenditures for a new Company-owned Pie Five Unit. This compares to cash used by investing activities of $0.2 million during the same period in the prior fiscal year attributable to Company-owned Pie Five Units that were under development during the period.

Cash flows from financing activities generally reflect changes in the Company's stock and debt activity during the period. Net cash provided by financing activities increased to $3.9 million for the six month period ended December 24, 2017 compared to $1.8 million for the six month period ended December 25, 2016 primarily as the result of the sale of stock in connection with a shareholder rights offering that closed in September 2017 partially offset by the repayment of a $1.0 million promissory note.

On October 27, 2017, the Company filed with the Securities and Exchange Commission (“SEC”) a shelf registration statement on Form S-3 for the offer and sale of up to $5.0 million of its common stock at such time and in such manner as may subsequently be determined appropriate. The registration statement was declared effective by the SEC on November 8, 2017. On December 5, 2017, the Company filed a prospectus supplement pertaining to at-the-market sales of its common stock under the effective registration statement.

Management believes the cash on hand combined with cash from operations and proceeds from at-the-market sales of common stock under its shelf registration will be sufficient to fund operations for the next 12 months.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and various other assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically. Actual results could differ materially from estimates.

The Company believes the following critical accounting policies require estimates about the effect of matters that are inherently uncertain, are susceptible to change, and therefore require subjective judgments. Changes in the estimates and judgments could significantly impact the Company’s results of operations and financial condition in future periods.

Accounts receivable consist primarily of receivables generated from franchise royalties and supplier concessions. The Company records a provision for doubtful receivables to allow for any amounts which may be unrecoverable based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic trends. Actual realization of accounts receivable could differ materially from the Company’s estimates.

Inventory consists primarily of food, paper products and supplies stored in and used by Company-owned restaurants and is stated at lower of first-in, first-out (“FIFO”) or market. The valuation of such restaurant inventory requires us to estimate the amount of obsolete and excess inventory based on estimates of future retail sales by Company-owned restaurants. Overestimating retail sales by Company-owned restaurants could result in the write-down of inventory which would have a negative impact on the gross margin of such Company-owned restaurants.

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 recognized, 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 and supplier incentive revenues. License fees are recognized as income when there has been substantial performance of the agreement by both the franchisee and the Company, generally at the time the restaurant is opened. Royalties are recognized as income when earned. Supplier incentive revenues are recognized as earned, typically as the underlying commodities are shipped.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information it is required to disclose in the reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company’s management, including the Company’s principal executive officer and principal financial officer, or persons performing similar functions, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s principal executive officer and principal financial officer, or persons performing similar functions, have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. During the most recent fiscal quarter, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject to claims and legal actions in the ordinary course of its business. The Company believes that all such claims and actions currently pending against it are either adequately covered by insurance or would not have a material adverse effect on the Company’s annual results of operations, cash flows or financial condition if decided in a manner that is unfavorable to the Company.

Item 1A. Risk Factors

Not required for a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds

On May 23, 2007, the Company’s board of directors approved a stock purchase plan (the “2007 Stock Purchase Plan”) authorizing the purchase on our behalf of up to 1,016,000 shares of our common stock in the open market or in privately negotiated transactions. On June 2, 2008, the Company’s board of directors amended the 2007 Stock Purchase Plan to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares. On April 22, 2009 the Company’s board of directors amended the 2007 Stock Purchase Plan again to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 3,016,000 shares. The 2007 Stock Purchase Plan does not have an expiration date. There were no stock repurchases in the fiscal quarter ended December 24, 2017.

The Company’s ability to repurchase shares of our common stock is subject to various laws, regulations and policies as well as the rules and regulations of the SEC. Subsequent to December 24, 2017, the Company has not repurchased any outstanding shares but may make further repurchases under the 2007 Stock Purchase Plan. The Company may also repurchase shares of our common stock other than pursuant to the 2007 Stock Purchase Plan or other publicly announced plans or programs.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

3.1

Amended and Restated Articles of Incorporation of Rave Restaurant Group, Inc. (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed January 8, 2015).

3.2

Amended and Restated By-laws of Rave Restaurant Group, Inc. (incorporated by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K filed January 8, 2015).

4.1

Indenture for 4% Convertible Senior Notes due 2022 (filed as Exhibit 4.1 to Form S-3/A filed January 6, 2017 and incorporated herein by reference).

4.2

Pledge Agreement (filed as Exhibit 4.2 to Form S-3/A filed January 6, 2017 and incorporated herein by reference).

4.3

Supplemental Indenture Number 1 dated as of October 31, 2017, between Rave Restaurant Group, Inc. and Securities Transfer Corporation (filed as Exhibit 4.1 to Form 8-K filed November 9, 2017 and incorporated herein by reference).

10.1

At Market Issuance Sales Agreement between Rave Restaurant Group, Inc. and B. Riley FBR, Inc. dated December 5, 2017 (filed as Exhibit 1.1 to Form 8-K filed December 5, 2017 and incorporated herein by reference).

31.1

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.

31.2

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.

32.1

Section 1350 Certification of Principal Executive Officer.

32.2

Section 1350 Certification of Principal Financial Officer.

101

Interactive data files pursuant to Rule 405 of Regulation S-T

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		RAVE RESTAURANT GROUP, INC.
		(Registrant)



	By:	/s/ Scott Crane
		Scott Crane
		President and Chief Executive Officer
		(Principal Executive Officer)






	By:	/s/ Timothy E. Mullany
		Timothy E. Mullany
		Chief Financial Officer
		(Principal Financial Officer)

Dated: February 6, 2018

Attached files

RAVE RESTAURANT GROUP, INC. Reports

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