RAVE RESTAURANT GROUP, INC. - Quarter Report: 2017 December (Form 10-Q)

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)

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

PART II. OTHER INFORMATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements 

RAVE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited) 

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.

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.

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:

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:

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).

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.

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.

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.

 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:

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):

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.

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:

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.

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.

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:

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:

Financial Results

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.

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):

 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