Quarterlytics / Consumer Cyclical / Restaurants / Rave Restaurant Group, Inc.

Rave Restaurant Group, Inc.

rave · NASDAQ Consumer Cyclical
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Ticker rave
Exchange NASDAQ
Sector Consumer Cyclical
Industry Restaurants
Employees 11-50
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FY2019 Annual Report · Rave Restaurant Group, Inc.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549

FORM 10-K

(Mark One)
☒

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 2019.
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____ to _____.

☐

Commission File Number 0-12919

RAVE RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)

Missouri
(State or jurisdiction of incorporation or organization)

45-3189287
(I.R.S. Employer Identification No.)

3551 Plano Parkway
The Colony, Texas
(Address of principal executive offices)

75056
(Zip Code)

Registrant’s telephone number, including area code:   (469) 384-5000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, $0.01 par value

Trading Symbol(s)
RAVE

Name of each exchange on which registered
Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act:    None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted 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 such files). Yes ☑ No ☐

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.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☑
Emerging growth company ☐

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 ☐ No

☑

As  of  December  23,  2018,  the  last  business  day  of  the  registrant’s  most  recently  completed  second  fiscal  quarter,  the
aggregate  market  value  of  the  voting  and  non-voting  common  equity  held  by  non-affiliates  was  approximately  $7.1  million
computed by reference to the price at which the common equity was last sold on the NASDAQ Capital Market.

As of September 18, 2019, there were 15,122,877 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

 
 
 
 
 
 
 
 
 
 
 
Portions of the registrant’s definitive proxy statement, to be filed pursuant to Section 14(a) of the Securities Exchange Act
in connection with the registrant’s annual meeting of shareholders scheduled for December 10, 2019, have been incorporated by
reference in Part III of this report.

Forward-Looking Statements

This  Form  10-K  contains  certain  forward-looking  statements,  within  the  meaning  of  the  Private  Securities  Litigation
Reform Act of 1995, which are intended to be covered by the safe harbors created thereby.  Forward-looking statements include
statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such
as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” or similar expressions.  These statements include the plans and
objectives of management for future operations, including plans and objectives relating to future growth of our business activities
and availability of funds.  Statements that address business and growth strategies, performance goals, projected financial condition
and operating results, our understanding of our competition, industry and market trends, and any other statements or assumptions
that are not historical facts are forward-looking statements.

The forward-looking statements included in this Form 10-K are based on current expectations that involve numerous risks
and  uncertainties.    Assumptions  relating  to  these  forward-looking  statements  involve  judgments  with  respect  to,  among  other
things, future economic, competitive and market conditions, regulatory framework and future business decisions, all of which are
difficult or impossible to predict accurately and many of which are beyond our control.  Although we believe that the assumptions
underlying these forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be
no assurance that the forward-looking statements included in this Form 10-K will prove to be accurate.  In light of the significant
uncertainties  inherent  in  these  forward-looking  statements,  the  inclusion  of  such  information  should  not  be  regarded  as  a
representation that our objectives and plans will be achieved.

PART I

ITEM 1. BUSINESS.

General

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  under  the
trademark “Pizza Inn” and operates and franchises fast casual pizza restaurants (“Pie Five Units”) under the trademarks “Pie Five
Pizza Company” or “Pie Five”. The Company also licenses Pizza Inn Express, or PIE, kiosks (“PIE Units”) under the trademark
“Pizza Inn”. We facilitate food, equipment and supply distribution to our domestic and international system of restaurants through
agreements with third party distributors.

As of June 30, 2019, we owned and operated one Pie Five Unit.  As of that date, we also had 57 franchised Pie Five Units,
194  franchised  Pizza  Inn  restaurants  and  nine  licensed  PIE  Units.    The  146  domestic  franchised  Pizza  Inn  restaurants  were
comprised of 87 Buffet Units, nine Delco Units and 50 Express Units.  As of June 30, 2019, there were 48 international franchised
Pizza Inn restaurants.  Domestic Pizza Inn restaurants and kiosks were located  predominantly  in  the  southern  half  of  the  United
States, with Texas, Arkansas, North Carolina and Mississippi accounting for approximately 25%, 18%, 17% and 8%, respectively,
of the total number of domestic units.

Our History

The Company has offered consumers affordable, high quality pizza since 1958, when the first Pizza Inn restaurant opened
in Dallas, Texas.  We awarded our first franchise in 1963 and opened our first buffet restaurant in 1969.  We began franchising the
Pizza Inn brand internationally in the late 1970s.  In 1993, our stock began trading on the NASDAQ Stock Market, and presently
trades on the NASDAQ Capital Market under the ticker symbol “RAVE.”  In June 2011, we opened the first Pie Five restaurant in
Ft. Worth, Texas.  In November 2012, we signed our first franchise development agreement for Pie Five.  In 2018, we launched the
PIE  kiosk  and  convenience  store  solution  to  meet  the  consumer  demand  for  tasty  and  high-quality  pizzas  within  a  grab-and-go
delivery model.

2

Our Concepts

We operate and franchise restaurant concepts and license PIE kiosks under two distinct brands: Pizza Inn and Pie Five.

Pizza Inn

We franchise Buffet Units, Delco Units and Express Units under the Pizza Inn brand.  Additionally, we license PIE Units
under the Pizza Inn brand.  Buffet Units and Delco Units feature crusts that are hand-made from dough made fresh in the restaurant
each day.  Our pizzas are made with a proprietary all-in-one flour mixture, real mozzarella cheese and a proprietary mix of classic
pizza spices.  In international markets, the menu mix of toppings and side items is occasionally adapted to local tastes.

Buffet Units offer dine-in, carryout and catering service and, in many cases, also offer delivery service.  Buffet Units offer a
variety  of  pizza  crusts  with  standard  toppings  and  special  combinations  of  toppings  in  addition  to  pasta,  salad,  sandwiches,
appetizers, desserts  and  beverages,  including  beer  and  wine  in  some  locations,  in  an  informal,  family-oriented  atmosphere.    We
occasionally offer other items on a limited promotional basis.  Buffet Units are generally located in free standing buildings or strip
center locations in retail developments near offices, shopping centers and residential areas.  The current standard Buffet Units are
between 2,100 and 4,500 square feet in size and seat 120 to 185 customers.  The interior decor is designed to promote a  casual,
lively,  contemporary,  family-style  atmosphere.    Some  Buffet  Units  feature  game  rooms  that  offer  a  range  of  electronic  game
entertainment for the entire family.

Delco  Units  offer  delivery  and  carryout  service  only  and  are  typically  located  in  shopping  centers  or  other  in-line  retail
developments.    Delco  Units  typically  offer  a  variety  of  crusts  and  some  combination  of  side  items.    Delco  Units  occupy
approximately 1,200 square feet, are primarily production facilities and, in most instances, do not offer seating.    The decor of the
Delco Unit is designed to be bright and highly visible and feature neon lighted displays and awnings.  We have attempted to locate
Delco Units strategically to facilitate timely delivery service and to provide easy access for carryout service.

Express Units serve our customers through a variety of non-traditional points of sale.  Express Units are typically located in
a convenience store, food court, college campus, airport terminal, travel plaza, athletic facility or other commercial facility.  They
have limited or no seating and solely offer quick carryout service of a limited menu of pizza and other foods and beverages.  An
Express Unit typically occupies approximately 200 to 400 square feet and is commonly operated by the operator or food service
licensee of the commercial host facility.  We have developed a high-quality pre-prepared crust that is topped and cooked on-site,
allowing this concept to offer a lower initial investment and reduced labor and operating costs while maintaining product quality
and consistency.  Like Delco Units, Express Units are primarily production-oriented facilities and, therefore, do not require all of
the equipment, labor or square footage of the Buffet Unit.

PIE  Units  serve  customers  through  a  non-traditional,  licensed  pizza-only  model  called  Pizza  Inn  Express.    PIE  Units
provide a nimble and streamlined pizza preparation and sales model at a minimal investment.  PIE Units provide customers with a
fast,  seamless  experience  when  picking  up  their  favorite  hot  pizza.    Geared  towards  convenience  stores,  but  also  an  airport  or
entertainment  venue  option,  PIE  Units  allow  customers  to  order  and  pay  at  a  kiosk  for  grab-and-go  or  pick  up  their  food  at  a
designated spot.  A PIE Unit typically occupies approximately 52 square feet and is simple to configure and move to meet licensee
retail sales traffic needs.  For PIE Units, we have developed a high-quality pre-prepared crust that is topped and cooked on-site,
allowing this concept to offer a lower initial investment and reduced labor and operating costs while maintaining product quality
and consistency.  Like Delco Units and Express Units, PIE Units are primarily production-oriented facilities and, therefore, do not
require all of the equipment, labor or square footage of the Buffet Unit.

3

Pie Five

Pie Five is a fast-casual pizza concept that creates individualized pizzas which are baked in 140 seconds in our specially
designed oven.  Pizzas are created at the direction of our customers who choose from a variety of freshly prepared and displayed
proprietary  and  non-proprietary  toppings,  cheeses,  sauces  and  doughs  and  complete  their  purchase  process  in  less  than  five
minutes.  Customers can also get freshly prepared side salads, also made to order from our recipes or at the customer's direction. 
They  can  also  choose  from  several  baked  daily  desserts  like  brownies,  cookie  pies,  and  cakes.    A  variety  of  soft  beverages  are
available, as well as beer and wine in some locations.

Traditional Pie Five restaurants typically occupy leased, in-line or end-cap space of between 1,800 and 2,400 square feet in
retail strip or multi-unit retail space.  With seating for 65 to 85 customers in most units, and patio seating where available, Pie Five
restaurants primarily serve lunch and dinner to families, adults and kids of all ages.  During fiscal 2018, an alternative prototype Pie
Five  was  developed  to  minimize  retail  space  needs  with  only  1,400  square  feet  and  seating  for  20  to  25  customers.    Pie  Five
restaurants typically are in high traffic, high visibility urban or suburban sites in mid to large-size metropolitan areas.  Sales are
predominantly on-premise though carry out and delivery are offered as well. The majority of Pie Five restaurants also sell salads,
calzones, and desserts. Due to the relatively compact footprint of the restaurants, and other operating advantages, we believe Pie
Five is also well suited for non-traditional locations such as airports.

Site Selection

We consider the restaurant site selection process critical to a restaurant’s long-term success and devote significant resources
to the investigation and evaluation of potential sites. The site selection process includes a review of trade area demographics using
a  third  party  customer  and  site  selection  tool,  as  well  as  a  proprietary  evaluation  process.    We  may  also  rely  on  a  franchisee’s
knowledge  of  the  trade  area  and  market  characteristics  when  selecting  a  location  for  a  franchised  restaurant.  A  member  of  our
development team visits each potential domestic restaurant location.

Development and Operations

New Unit Development

We  intend  to  expand  the  Pizza  Inn  system  domestically  and  internationally  in  markets  with  significant  long-term  growth
potential and where we believe we can use our competitive strengths to establish brand recognition and gain local market share. 
We plan to expand our Pizza Inn branded domestic restaurant base primarily through opening new franchised restaurants with new
and  existing  franchisees.    We  also  plan  to  seek  new  domestic  licensees  for  PIE  kiosks.    We  expect  to  evaluate  the  continued
development of new Pizza Inn Buffet and Delco Units in international markets in fiscal 2020, particularly in the Middle East.

In  appropriate  circumstances,  we  may  grant  area  developer  rights  for  Pizza  Inn  restaurants  in  new  and  existing  domestic
markets.  A Pizza Inn area developer typically pays a negotiated fee to purchase the right to operate or develop restaurants within a
defined territory and, typically, agrees to a multi-restaurant development schedule. The area developer assists us in local franchise
service and quality control in exchange for half of the franchise fees and royalties from all restaurants within the territory during the
term of the agreement.

In fiscal 2020, we intend to continue developing franchised Pie Five Units domestically and internationally.  As of June 30,
2019,  we  had  57  franchised  units  open.    The  rate  at  which  we  will  be  able  to  continue  to  expand  the  Pie  Five  concept  through
franchise development is determined in part by our success at selecting qualified franchisees, by our ability to identify satisfactory
sites in appropriate markets and by our ability to continue training and monitoring our franchisees.  We intend to continue to focus
on franchise development opportunities with experienced, well-capitalized, restaurant operators.  In addition, we intend to take the
brand into international markets, starting with Panama.

4

Domestic Franchise Operations

Franchise  and  development  agreements.  We  discontinued  offering  new  Delco  Unit  franchises  during  fiscal  2014.    Our

current standard forms of franchise agreements provide for the following basic terms:

Development fee per unit
Franchise fee per unit
Initial franchise term
Renewal period
Royalty rate % of sales
National ad fund % of sales
Required total ad spending % of sales

Hometown
Buffet Unit

Pizza Inn
Neighborhood
Buffet Unit

  $
  $

  $
  $

- 
30,000 
20 years 
10 years 

- 
15,000 
10 years 
5 years 

  Express Unit  
- 
  $
5,000 
  $
5 years 
5 years 

  Pie Five Unit  
5,000 
  $
20,000 
  $
10 years 
5 years 

4%   
1%   
5%   

5%   
1%   
5%   

5%    
2%    
2%    

6%
2%
5%

Since  the  Pizza  Inn  concept  was  first  franchised  in  1963,  industry  franchising  concepts  and  development  strategies  have
evolved,  and  our  present  franchise  relationships  are  evidenced  by  a  variety  of  contractual  forms.    Common  to  those  forms  are
provisions that: (i) require the franchisee to follow the Pizza Inn system of restaurant operation and management, (ii) require the
franchisee  to  pay  a  franchise  fee  and  continuing  royalties,  and  (iii)  except  for  Express  Units,  prohibit  the  development  of  one
restaurant within a specified distance from another.

We  launched  the  franchise  program  for  Pie  Five  in  fiscal  2013.    Our  Pie  Five  franchise  agreement  requires  that  the
franchisees:  (i)  follow  the  Pie  Five  system  of  restaurant  operation  and  management,  (ii)  pay  a  franchise  fee  and  continuing
royalties,  (iii)  contribute  a  specified  percentage  of  sales  to  a  marketing  fund  managed  by  the  Company,  and  (iv)  only  open
restaurants that comply with site and design standards determined by the Company.

Training.    We  offer  numerous  training  programs  for  the  benefit  of  franchisees  and  their  restaurant  crew  managers.    The
training programs, taught by experienced Company employees, focus on food preparation, service, cost control, sanitation, safety,
local  store  marketing,  personnel  management  and  other  aspects  of  restaurant  operation.    The  training  programs  include  group
classes, supervised work in restaurants and special field seminars.  Initial and certain supplemental training programs are offered
free of charge to franchisees, who pay their own travel and lodging expenses.  New franchisees also receive on-site training from
Company employees to assist with their first two restaurant openings under their development agreements.  Restaurant managers
train their staff through on-the-job training, utilizing video and printed materials produced by us.

Standards.  We require franchisee adherence to a variety of standards designed to ensure proper operations and to protect
and enhance the Pizza Inn and Pie Five brands.  All franchisees are required to operate their restaurants in compliance with these
written policies, standards and specifications, which include matters such as menu items, ingredients, materials, supplies, services,
furnishings, decor and signs.  Our efforts to maintain consistent operations may result, from time to time, in the closing of certain
restaurants that have not achieved and maintained a consistent standard of quality or operations. We also maintain adherence to our
standards  through  ongoing  support  and  education  of  our  franchisees  by  our  franchise  business  consultants,  who  are  deployed
locally in markets where our franchisees are located.

5

 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
   
   
Domestic Kiosk License Agreements

Kiosk license agreements. Our PIE Units are typically offered for five year initial license periods with options for additional
five year renewals.  PIE Unit licensees are not charged development fees, license fees, royalties, or advertising assessments.  PIE
Unit license agreements require that the licensee comply with standards of the Pizza Inn brand, including marketing, kiosk system
configuration, and sales and sourcing of authorized products and services. The mandated products and sourcing provisions within
the PIE Unit licensing agreement result in supplier rebates for the Company.

Training.  New licensees and their PIE Unit employees must attend and successfully complete our training program, which
consists of a single day of training at the licensed location.  PIE Unit managers train their staff through on-the-job training, utilizing
video and printed materials produced by us.

Standards.  We require licensee adherence to a variety of standards designed to ensure proper operations and to protect and
enhance the Pizza Inn brand.  All licensees are required to operate their kiosks in compliance with these written policies, standards
and  specifications,  which  include  matters  such  as  menu  items,  ingredients,  materials,  supplies,  services,  furnishings,  decor  and
signs.  Our efforts to maintain consistent operations may result, from time to time, in the closing of certain kiosks that have not
achieved  and  maintained  a  consistent  standard  of  quality  or  operations.  We  also  maintain  adherence  to  our  standards  through
ongoing support and education of our licensees by our franchise business consultants, who are deployed locally in markets where
our licensees are located.

Company-Owned Restaurant Operations

As of June 30, 2019, we operated one Pie Five Unit in the Dallas/Fort Worth metropolitan area. We do not presently intend

to open or operate additional Company-owned restaurants during fiscal 2020.

International Franchise Operations

We  also  offer  master  license  rights  to  develop  Pizza  Inn  and  Pie  Five  restaurants  in  certain  foreign  countries,  with
negotiated  fees,  development  schedules  and  ongoing  royalties.    A  master  licensee  for  a  foreign  country  pays  a  negotiated  fee  to
purchase  the  right  to  develop  and  operate  restaurants  within  a  defined  territory,  typically  for  a  term  of  20  years,  plus  a  ten-year
renewal option.  The master licensee agrees to a multi-restaurant development schedule and we train the master licensee to monitor
and assist franchisees in their territory with local service and quality control, with support from us.  In return, the master licensee
typically  retains  half  the  franchise  fees  and  half  the  royalties  on  all  restaurants  within  the  territory  during  the  term  of  the
agreement.  Master licensees may open restaurants that they own and operate, or they may open sub-franchised restaurants owned
and operated by third parties through agreements with the master licensee, but subject to our approval.

Our first franchised Pizza Inn restaurant outside of the United States opened in the late 1970s.  As of June 30, 2019, there
were  48  Pizza  Inn  restaurants  operating  internationally.  Except  for  two  restaurants  in  Honduras,  all  of  the  Pizza  Inn  restaurants
operated  or  sub-licensed  by  our  international  master  licensees  are  in  the  United  Arab  Emirates,  Saudi  Arabia  and  adjoining
countries. Our ability to continue to develop select international markets is affected by a number of factors, including our ability to
locate  experienced,  well-capitalized  developers  who  can  commit  to  an  aggressive  multi-restaurant  development  schedule  and
achieve maximum initial market penetration with minimal supervision by us.  We expect the first international franchised Pie Five
Unit to open in fiscal 2020 in Panama.

6

Food and Supply Distribution

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.    The discontinuation of the Norco
food  and  supply  distribution  entity  was  a  strategic  shift  for  the  Company,  releasing  the  Company  from  the  credit  risk,  overhead
expense,  and  delivery  responsibilities  of  directly  supplying  franchised  restaurants  and  PIE  kiosks.    As  a  result  of  the  revised
arrangements, franchisees and licensees began purchasing food and supplies directly from authorized, reputable and experienced
supply and distribution companies.  As a result, we no longer receive revenue from the sale of food, equipment and supplies.

Prior to the discontinuation of the Norco distribution division, supplier incentive funds were included in the margin of the
Norco business unit.  As a result of the Norco strategic shift, the Company reports incentive revenues received from third party
suppliers and distributors as revenue.

The  Company  provides  sourcing,  quality  assurance,  and  research  and  development  for  both  the  Pizza  Inn  and  Pie  Five
systems.  The authorized distributors make deliveries to all domestic units from several distribution centers, with delivery territories
and responsibilities for each determined according to geographical region.  As a franchisor, the Company is able to leverage the
advantages of direct vendor negotiations and volume purchasing of food, equipment and supplies for the franchisees’ and licensees’
benefit  in  the  form  of  a  concentrated,  one-truck  delivery  system,  competitive  pricing  and  product  consistency.    Franchisees  and
licensees  are  able  to  source  all  products  and  ingredients  from  authorized  distributors.    In  order  to  assure  product  quality  and
consistency,  our  franchisees  and  licensees  are  required  to  purchase  from  authorized  distributors  certain  food  products  that  are
proprietary  to  the  Pizza  Inn  and  Pie  Five  systems,  including  cheese,  pizza  sauce,  flour  mixture,  certain  meats  and  spice  blend. 
Franchisees  and  licensees  may  purchase  other  non-proprietary  food  products  and  supplies  either  from  authorized  distributors  or
from other suppliers who meet our requirements for quality and reliability.

Non-proprietary food and ingredients, equipment and other supplies are generally available from several qualified sources. 
With  the  exception  of  several  proprietary  food  products,  such  as  cheese  and  dough  flour,  we  are  not  dependent  upon  any  one
supplier  or  a  limited  group  of  suppliers.    We  contract  with  established  food  processors  for  the  production  of  our  proprietary
products according to our specifications.

We have not experienced any significant shortages of supplies or any delays in receiving our food or beverage inventories,
restaurant supplies or products, and do not anticipate any difficulty in obtaining inventories or supplies in the foreseeable future. 
Prices charged by our suppliers are subject to fluctuation, and franchisees and licensees bear increased costs or benefit from savings
through changes in product pricing.  We do not engage in commodity hedging but enter into pricing arrangements for up to a year
in advance for certain high volume products.

Marketing and Advertising

By communicating a common brand message at the regional, local market and restaurant levels, we believe we can create
and reinforce a strong, consistent marketing message to consumers and increase our market share.  We offer or facilitate several
ways for the brand image and message to be promoted at the local and regional levels.

The  Pizza  Inn  Advertising  Plan  Cooperative  (“PIAP  Cooperative”)  is  a  cooperative  association  that  is  responsible  for
creating and producing various marketing programs and materials, which may include print and digital advertisements, direct mail
materials,  social  media  and  e-mail  marketing,  television  and  radio  commercials,  in-store  promotional  materials,  and  related
marketing and public relations services.  Each operator of a domestic Buffet Unit or Delco Unit is entitled to membership in PIAP
Cooperative.  Nearly all of our existing Pizza Inn franchise agreements for Buffet Units and Delco Units require the franchisees to
become  members  of  PIAP  Cooperative.    Members  contribute  1%  of  their  sales  to  PIAP  Cooperative.    PIAP  Cooperative  is
managed by a board of trustees comprised of franchisee representatives who are elected by the members each year.  We do not have
any ownership interest in PIAP Cooperative.  We provide certain administrative, marketing and other services to PIAP Cooperative
and are paid by PIAP Cooperative for such services.  As of June 30, 2019, substantially all of our domestic Buffet Unit and Delco
Unit  franchisees  were  members  of  PIAP  Cooperative.    Operators  of  Express  Units  do  not  participate  in  PIAP  Cooperative. 
However, they contribute directly to a Pizza Inn Express Fund (“PIEF”) to help fund purchases of Express Unit marketing materials
and similar expenditures. International franchisees and PIE Unit licensees do not participate in the PIAP Cooperative or the PIEF.

7

Pie Five franchisees contribute a specified percentage of their sales to the Company to fund the creation and production of
various  marketing  and  advertising  programs  and  materials,  which  may  include  print  and  digital  advertisements,  direct  mail
materials,  customer  satisfaction  systems,  social  media  and  e-mail  marketing,  television  and  radio  commercials,  in-store
promotional  materials,  and  related  marketing  and  public  relations  services.    We  anticipate  continuing  to  optimize  Pie  Five
marketing activities commensurate with the contributions of the Pie Five system.

Pizza Inn and Pie Five franchisees are required to conduct independent marketing efforts in addition to their participation in
the  national  marketing  programs  for  each  brand.    We  provide  Company-owned  and  franchised  restaurants  with  access  to  an
assortment of local store marketing materials, including pre-approved print, radio, and digital media marketing materials.  We also
provide local store marketing materials and programs specifically to support new restaurant openings.

Trademarks and Quality Control

We  own  various  trademarks,  including  the  names  “Pizza  Inn”  and  “Pie  Five,”  that  are  used  in  connection  with  the
restaurants  and  have  been  registered  with  the  United  States  Patent  and  Trademark  Office.    The  duration  of  our  trademarks  is
unlimited, subject to periodic renewal and continued use.  In addition, we have obtained trademark registrations for our marks in
several foreign countries and have periodically re-filed and applied for registration in others.  We believe that we hold the necessary
rights for protection of the trademarks essential to our business.

Government Regulation

We and our franchisees are subject to various federal, state and local laws affecting the operation of our restaurants.  Each
restaurant is subject to licensing and regulation by several governmental authorities, which include health, safety, sanitation, wage
and hour, alcoholic beverage, building and fire agencies in the state and municipality in which the restaurant is located.  Difficulties
in  obtaining,  or  the  failure  to  obtain,  required  licenses  or  approvals  could  delay  or  prevent  the  opening  of  a  new  restaurant  or
require the temporary or permanent closing of an existing restaurant in a particular area.

We are subject to Federal Trade Commission (“FTC”) regulation and to various state laws regulating the offer and sale of
franchises.    The  FTC  requires  us  to  furnish  to  prospective  franchisees  a  franchise  disclosure  document  containing  prescribed
information.  Substantive state laws that regulate the franchisor-franchisee relationship presently exist in a number of states, and
bills  have  been  introduced  in  Congress  from  time  to  time  that  would  provide  for  further  federal  regulation  of  the  franchisor-
franchisee  relationship  in  certain  respects.    Some  foreign  countries  also  have  disclosure  requirements  and  other  laws  regulating
franchising and the franchisor-franchisee relationship.

Employees

As  of  June  30,  2019,  we  had  45  employees,  including  33  in  our  corporate  office  and  two  full-time  and  10  part-time

employees at the Company-owned restaurant.  None of our employees are currently covered by collective bargaining agreements.

Industry and Competition

The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many
well-established  competitors  with  substantially  greater  brand  recognition  and  financial  and  other  resources  than  the  Company. 
Competitors include a number of international, national and regional restaurant and pizza chains, as well as local restaurants and
pizza operators.  Some of our competitors may be better established in the markets where our restaurants are or may be located. 
Within the pizza segment of the restaurant industry, we believe that our primary competitors are national pizza chains and several
regional chains, including chains executing a “take and bake” concept.  We also compete against the frozen pizza products available
at grocery stores and large superstore retailers.  In recent years, several competitors have developed fast-casual pizza concepts that
compete  with  Pie  Five  in  certain  metropolitan  areas.    A  change  in  the  pricing  or  other  market  strategies  of  one  or  more  of  our
competitors could have an adverse impact on our sales and earnings.

8

With  respect  to  the  sale  of  franchises  and  licenses,  we  compete  with  many  franchisors  of  restaurants  and  other  business
concepts.    We  believe  that  the  principal  competitive  factors  affecting  the  sale  of  franchises  are  product  quality,  price,  value,
consumer acceptance, franchisor experience and support, and the quality of the relationship maintained between the franchisor and
its franchisees.  In general, there is also active competition for management personnel and attractive commercial real estate sites
suitable for our restaurants.

ITEM 1A. RISK FACTORS.

Not required for a smaller reporting company.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

The company leases its 19,576 square foot corporate office facility with average annual lease payments of approximately

$17.50 per square foot.  This lease began on January 2, 2017 and has a ten year term.

As of June 30, 2019, the Company also operated one Pie Five Unit from a leased location.  The operating lease covers 2,400
square feet and has an initial term of ten years at a base rental rate of $40.00 per square foot in the first five years and $44.00 per
square foot in the last five years.  The lease contains provisions permitting renewal for an additional term of five years.

As of June 30, 2019, the Company had contingent and direct lease obligations for 18 additional locations.  Two of the lease
obligations have been subleased, 11 of the lease obligations have been assigned to franchisees, and five of the lease obligations are
direct lease obligations for non-operating locations.  These leased properties range in size from 2,021 to 2,850 square feet, have
annual rental rates ranging from approximately $28.00 to $44.00 per square foot and expire between 2022 and 2028.  The Company
has settled one of the non-operating leases and is currently pursuing alternatives for subleasing or terminating the remaining four
non-operating unexpired leases.

ITEM 3. 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 4. MINE SAFETY DISCLOSURES.

Not applicable.

9

PART II

ITEM 5. MARKET  FOR  REGISTRANT'S  COMMON  EQUITY,  RELATED  STOCKHOLDER  MATTERS  AND  ISSUER  PURCHASES  OF

EQUITY SECURITIES.

As of September 12, 2019, there were approximately 1,984 stockholders of record of the Company's common stock.

The Company had no sales of unregistered securities during fiscal 2019 or 2018.

The Company's common stock is listed on the Capital Market of the NASDAQ Stock Market, LLC (“NASDAQ”) under the
symbol  “RAVE”.  The  following  table  shows  the  highest  and  lowest  price  per  share  of  the  common  stock  during  each  quarterly
period  within  the  two  most  recent  fiscal  years,  as  reported  by  NASDAQ.    Such  prices  reflect  inter-dealer  quotations,  without
adjustment for any retail markup, markdown or commission.

Fiscal 2019:
Fourth Quarter Ended 6/30/2019
Third Quarter Ended 3/24/2019
Second Quarter Ended 12/23/2018
First Quarter Ended 9/23/2018

Fiscal 2018:
Fourth Quarter Ended 6/24/2018
Third Quarter Ended 3/25/2018
Second Quarter Ended 12/24/2017
First Quarter Ended 9/24/2017

  $

  $

High

Low

3.60    $
2.05     
1.74     
1.60     

1.50    $
2.33     
1.95     
2.31     

1.05 
0.64 
0.91 
1.20 

1.09 
1.20 
1.36 
1.27 

The  Company  did  not  pay  any  dividends  on  its  common  stock  during  the  fiscal  years  ended  June  30,  2019  or  June  24,
2018.  Any determination to pay cash dividends in the future will be at the discretion of the Company’s board of directors and will
be dependent upon the Company’s results of operations, financial condition, capital requirements, contractual restrictions and other
factors deemed relevant.  Currently, there is no intention to pay any dividends on our common stock.

2007 Stock Purchase Plan

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 purchases in the fiscal year ended June 30, 2019.

The Company’s ability to purchase shares of our common stock is subject to various laws, regulations and policies as well
as the rules and regulations of the Securities and Exchange Commission (the “SEC”).   Subsequent to June 30, 2019, the Company
has not repurchased any outstanding shares but may make further purchases under the 2007 Stock Purchase Plan.  The Company
may also purchase shares of our common stock other than pursuant to the 2007 Stock Purchase Plan or other publicly announced
plans or programs.

10

 
 
   
 
   
     
 
   
   
   
   
      
  
   
      
  
   
   
   
Equity Compensation Plan Information

The following table furnishes information with respect to the Company’s stock option equity compensation plans as of June

30, 2019:

Plan
Category

Stock option compensation plans approved by

security holders

Stock option compensation plans not approved

by security holders

Number of securities to
be issued upon exercise
of outstanding options,

warrants, and rights    

Weighted-average
exercise price of
outstanding options,
warrants, and rights   

Number of securities
remaining available for
future issuance under
equity compensation plans¹ 

216,550    $

4.82     

2,693,055 

-     

-     

- 

Total

216,550    $

4.82     

2,693,055 

1

Securities remaining available for future issuance are net of a maximum of 232,659 shares of common stock issuable pursuant to outstanding restricted
stock units, subject to applicable vesting requirements and performance criteria. See Note H to the audited consolidated financial statements included in
this report.

ITEM 6. SELECTED FINANCIAL DATA

Not required for a smaller reporting company.

11

 
   
   
      
      
  
   
   
      
      
  
   
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes
appearing elsewhere in this Annual Report on Form 10-K and may  contain  certain  forward-looking  statements.    See  “Forward-
Looking Statements.”

Overview

The  Company  franchises  pizza  buffet  (“Buffet  Units”),  delivery/carry-out  (“Delco  Units”)  and  express  (“Express  Units”)
restaurants under the trademark “Pizza Inn” and operates and franchises fast casual pizza restaurants (“Pie Five Units”) under the
trademarks “Pie Five Pizza Company” or “Pie Five”. The Company also licenses Pizza Inn Express kiosks (“PIE Units”) under the
trademark  “Pizza  Inn”.    We  facilitate  food,  equipment  and  supply  distribution  to  our  domestic  and  international  system  of
restaurants  through  agreements  with  third  party  distributors.    At  June  30,  2019,  Company-owned  and  franchised  restaurants
consisted of the following (in thousands, except unit data):

Fiscal Year Ended June 30, 2019
 (in thousands, except unit data)

Pizza Inn

Ending
Units

Retail
Sales

Pie Five

Ending
Units

Retail
Sales

All Concepts

Ending
Units

Retail
Sales

Domestic Franchised/Licensed
Company-Owned
Total Domestic Units

International Franchised

90,135     
-     
90,135     

155    $
-     
155    $

48     

40,681     
887     
41,568     

57    $
1     
58    $

-     

130,816 
887 
131,703 

212    $
1     
213    $

48     

The  domestic  units  were  located  in  21  states  predominately  situated  in  the  southern  half  of  the  United  States.    The

international restaurants were located in seven foreign countries.

The following table summarizes domestic comparable store retail sales for the Company.

Pizza Inn Domestic Comparable Store Retail Sales
Pie Five Domestic Comparable Store Retail Sales
Total Rave Comparable Store Retail Sales

53 Weeks Ended

June 30,
2019

July 1,
2018

(in thousands)

  $

  $

85,504    $
33,866     
119,370    $

83,330 
35,408 
118,738 

12

   
     
     
     
     
     
 
   
     
     
     
     
     
 
 
 
   
   
 
 
 
   
   
   
   
   
 
 
   
     
     
     
     
     
 
   
   
   
   
      
      
      
      
      
  
   
      
      
  
 
 
 
 
 
   
 
 
 
 
 
   
     
 
   
Basic net income per common share decreased $0.19 to a net loss of $0.05 per share for fiscal 2019 compared to net income
of $0.14 per share in the prior fiscal year.  Net income decreased $2.7 million to a net loss of $0.8 million for fiscal 2019 compared
to net income of $1.9 million for the prior fiscal year on revenues of $12.3 million for fiscal 2019 as compared to $15.1 million in
fiscal 2018.

Diluted  net  income  per  common  share  decreased  $0.18  to  a  net  loss  of  $0.05  per  share  for  fiscal  2019  compared  to  net

income of $0.13 per share in the prior fiscal year.

Adjusted  EBITDA  for  the  fiscal  year  ended  June  30,  2019,  improved  to  $1.2  million  compared  to  $0.6  million  for  the
comparable period of the prior fiscal year.  The following table sets forth a reconciliation of net income to EBITDA and Adjusted
EBITDA for the periods shown (in thousands):

Net income / (loss)
Interest expense
Income taxes
Income taxes - discontinued ops
Depreciation and amortization

EBITDA

Stock compensation expense
Pre-opening costs
(Gain) / loss on sale/disposal of assets
Impairment of long-lived assets and other lease charges
Discontinued operations, excluding taxes
Closed and non-operating store costs

Adjusted EBITDA

Fiscal Year Ended

June 30,
2019

June 24,
2018

(750)   $
104     
(51)    
-     
466     
(231)   $

36     
-     
(551)    
1,664     
-     
238     
1,156    $

1,912 
183 
(3,322)
(60)
874 
(413)

115 
114 
(144)
894 
422 
(369)
619 

  $

  $

  $

Results of operations for the fiscal years 2019 and 2018 included 53 weeks and 52 weeks, respectively.

13

 
 
 
   
 
   
   
   
   
   
   
   
   
   
   
Pizza Inn Brand Summary

The following tables summarize certain key indicators for the Pizza Inn franchised and licensed domestic restaurants that

management believes are useful in evaluating performance.

Pizza Inn Retail Sales - Total Domestic Units
Domestic Units

Buffet Units - Franchised
Delco/Express Units - Franchised
PIE Units - Licensed
Total Domestic Retail Sales

53 Weeks Ended

June 30,
2019

July 1,
2018

(in thousands, except unit data)

  $

  $

82,950 
6,981 
204 
90,135 

  $

  $

Pizza Inn Comparable Store Retail Sales - Total Domestic

85,504 

Pizza Inn Average Units Open in Period
Domestic Units

Buffet Units - Franchised
Delco/Express Units - Franchised
PIE Units - Licensed

Total Domestic Units

88 
60 
6 
154 

81,725 
6,812 
26 
88,563 

83,330 

90 
65 
- 
155 

Pizza Inn total domestic retail sales increased $1.6 million, or 1.8% compared to the prior year.  The increase in domestic
retail sales was primarily due to an increase in domestic comparable store retail sales.  Pizza Inn domestic comparable store retail
sales increased by 2.6%.

The following chart summarizes Pizza Inn restaurant activity for the fiscal year ended June 30, 2019:

Beginning
Units

Fiscal Year Ended June 30, 2019
Concept
Change

Closed

Opened

Domestic Units
Buffet Units - Franchised
Delco/Express Units -

Franchised

PIE Units - Licensed
Total Domestic Units

International Units (all types)    

Total Units

90     

60     
3     
153     

58     

211     

4     

2     
6     
12     

2     

14     

-     

-     
-     
-     

-     

-     

Ending
Units

87 

59 
9 
155 

48 

203 

7     

3     
-     
10     

12     

22     

The net increase of two domestic units is primarily due to new PIE units partially offset by modest declines in Buffet and
Delco units.  The net decrease of ten international Pizza Inn units is due to closure of underperforming units in the Middle East. We
believe that this represents a stabilizing of international unit count.

14

 
 
 
 
 
 
 
 
   
 
 
 
 
   
 
 
   
 
 
   
  
 
 
  
   
 
 
   
  
 
 
  
   
  
 
 
  
   
  
 
 
  
   
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
   
   
   
   
 
   
     
     
     
     
 
   
   
   
   
 
   
      
      
      
      
  
 
   
      
      
      
      
  
   
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.

53 Weeks Ended

June 30,
2019

July 1,
2018

(in thousands, except unit data)

Pie Five Retail Sales - Total Units
Domestic Units - Franchised
Domestic Units - Company-owned

Total Domestic Retail Sales

  $

  $

40,681 
887 
41,568 

  $

  $

Pie Five Comparable Store Retail Sales - Total   

33,866 

Pie Five Average Units Open in Period

Domestic Units - Franchised
Domestic Units - Company-owned

Total Domestic Units

65 
2 
67 

44,407 
4,254 
48,661 

35,408 

74 
7 
81 

Pie Five total domestic retail sales decreased $7.1 million, or 14.6%, compared to the prior year.  Average units open in the
period decreased to 67 from 81 the prior year.  Comparable store retail sales decreased by 4.4% during fiscal 2019 compared to the
prior year.

The following chart summarizes Pie Five restaurant activity for the fiscal year ended June 30, 2019:

Fiscal Year Ended June 30, 2019

Beginning
Units

Opened

Transfer

Closed

Ending
Units

Domestic - Franchised
Domestic - Company-owned
Total Domestic Units

72     
1     
73     

6     
-     
6     

-     
-     
-     

21     
-     
21     

57 
1 
58 

The net decrease of 15 Pie Five units during fiscal 2019 was primarily the result of the closure of poor-performing units,
which we believe provides us a stronger foundation for future brand growth.  We believe that this trend of net store closures will
moderate and then reverse in future periods. One franchised Pie Five unit was acquired by the Company during fiscal 2019 but was
refranchised by the end of the fiscal year.

Pie Five - Company-Owned Restaurants
(in thousands, except store weeks and average data)

Store weeks (excluding partial weeks)
Average weekly sales
Average number of units

Restaurant sales (excluding partial weeks)
Restaurant sales

Loss from continuing operations before taxes
Allocated marketing and advertising expenses
Depreciation/amortization expense
Pre-opening costs
Operations management and extraordinary expenses
Impairment, other lease charges and non-operating store costs
Restaurant operating cash flow

Fiscal Year Ended

June 30,
2019

June 24,
2018

358 
11,707 
7 

4,191 
4,254 

(1,763)
214 
459 
114 
96 
526 
(354)

79     
11,253     
2     

887     
887     

(2,001)    
44     
123     
-     
-     
1,135     
(699)    

15

 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
   
 
 
   
  
 
 
  
 
 
   
  
 
 
  
   
  
 
 
  
   
 
 
   
 
 
   
 
 
 
 
 
 
 
   
   
   
   
 
 
   
     
     
     
     
 
   
   
   
 
 
 
   
 
 
 
   
 
   
   
   
   
      
  
   
   
   
      
  
   
   
   
   
   
   
   
Total retail sales of Company-owned Pie Five restaurants decreased $3.4 million, or 79.1%, to $0.9 million for fiscal 2019
compared to $4.3 million for fiscal 2018 primarily as a result of decreased store count.  Average weekly sales for Company-owned
Pie Five restaurants also decreased $454, or 3.9%, to $11,253 for the fiscal year ended June 30, 2019 compared to $11,707 for the
prior year.  The decrease in average weekly sales was primarily attributable to a similar decline in comparable store retail sales.

Loss from continuing operations before taxes for Company-owned Pie Five stores increased $0.2 million for the fiscal year
ended  June  30,  2019  compared  to  the  same  period  of  the  prior  year  primarily  as  a  result  of  increased  impairment  of  long-lived
assets and other lease charges.  Similarly, operating cash flow from Company-owned Pie Five restaurants declined by $0.3 million
to $0.7 million cash used in fiscal 2019 compared to $0.4 million cash used in fiscal 2018.

16

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, discontinued operations and closed and non-operating store costs.
“Retail  sales”  represents  the  restaurant  sales  reported  by  our  franchisees  and  Company-owned  restaurants,  which  may  be  segmented  by  brand  or
domestic/international locations.
“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 Company-owned restaurant, including: (1) marketing and
promotional expenses, (2) accrued rent, and (3) manager salaries, employee payroll and related training costs.

Fiscal years 2019 and 2018 included 53 weeks and 52 weeks, respectively.  In order to reflect comparable 53 week periods, the
first week of fiscal 2019 has been included in both periods in the presentation of retail sales, average units open and comparable
store retail sales.

17

 
Financial Results

REVENUES:

Franchise and license

Pizza Inn
Franchising

Pie Five
Franchising

Company-Owned
Stores

Corporate

Total

  Fiscal Year-to-Date     Fiscal Year-to-Date     Fiscal Year-to-Date     Fiscal Year-to-Date     Fiscal Year-to-Date  
June 24,
2018  

2019    

2018    

2019    

2018    

2019    

2019    

2018    

2018    

2019    

June 30,

June 24,

June 24,

June 24,

June 30,

June 30,

June 30,

June 30,

June 24,

revenues

  $

Restaurant sales
Interest income and other
Total revenues

7,192    $
-     
-     
7,192     

6,892    $
-     
-     
6,892     

4,191    $
-     
1     
4,192     

3,970    $
-     
-     
3,970     

-    $
889     
(2)    
887     

-    $
4,254     
-     
4,254     

-    $
-     
48     
48     

-    $ 11,383    $ 10,862 
-     
4,254 
889     
4 
47     
4     
4      12,319      15,120 

COSTS AND EXPENSES:

Cost of sales
General and administrative

expenses

Franchise expenses
Pre-opening expenses
(Gain)/loss on sale of assets    
Impairment of long-lived

-     

-     

-     

-     

1,120     

3,654     

-     

-     

1,120     

3,654 

-     
1,680     
-     
-     

-     
1,298     
-     
-     

-     
2,098     
-     
-     

-     
1,347     
-     
-     

196     
-     
-     
-     

772     
-     
114     
-     

5,078     
-     
-     
(551)    

6,825     
-     
-     
(144)    

5,274     
3,778     
-     
(551)    

7,597 
2,645 
114 
(144)

assets

   and other lease charges
Bad debt
Interest expense
Amortization and

depreciation expense
Total costs and expenses

INCOME/(LOSS) FROM

CONTINUING
OPERATIONS BEFORE
TAXES

Revenues:

-     
-     
-     

-     
-     
-     

-     
-     
-     

-     
-     
-     

1,449     
-     
-     

894     
124     
-     

215     
1,265     
104     

-     
227     
183     

1,664     
1,265     
104     

894 
351 
183 

-     
1,680     

-     
1,298     

-     
2,098     

-     
1,347     

123     
2,888     

459     
6,017     

343     
6,454     

415     

874 
7,506      13,120      16,168 

466     

  $

5,512    $

5,594    $

2,094    $

2,623    $ (2,001)   $ (1,763)   $ (6,406)   $ (7,502)   $

(801)   $ (1,048)

Revenues  are  derived  from  (1)  franchise  royalties,  franchise  fees  and  supplier  incentives,  (2)  sales  by  Company-owned
restaurants, and (3) interest income. 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 fiscal 2019 and fiscal 2018 were $12.3 million and $15.1 million, respectively.

Pizza Inn Franchise and License Revenues

Pizza  Inn  franchise  revenues  increased  by  $0.3  million  to  $7.2  million  in  fiscal  2019  compared  to  $6.9  million  in  fiscal

2018. The 4.4% increase was primarily the result of increased retail sales, largely attributable to domestic comparable stores.

Pie Five Franchise and License Revenues

Pie Five franchise revenues increased by $0.2 million to $4.2 million for fiscal 2019 compared to $4.0 million for fiscal
2018.  The  5.6%  increase  was  primarily  driven  by  accelerated  revenue  recognition  of  fees  attributable  to  defaulted  area
developments  and  closed  stores  and  contributions  to  advertising  and  convention  funds  by  franchisees  and  suppliers  partially
offset by decreased franchise royalties from decreased franchised store count.

Restaurant Sales

Restaurant sales, which consist of revenue generated by Company-owned restaurants, decreased 79.1%, or $3.4 million, to
$0.9 million for fiscal 2019 compared to $4.3 million for fiscal 2018.  The decrease in restaurant sales was primarily a result of
decreased Company-owned store count.

Costs and Expenses:

Cost of Sales

Cost of sales primarily includes food and supply costs and labor directly related to Company-owned restaurant sales. These
costs decreased 69.3%, or $2.5 million, to $1.1 million for fiscal 2019 compared to fiscal 2018.  The decrease was primarily the
result of decreased Company-owned store count.

18

 
   
   
   
   
 
 
   
     
     
     
     
     
     
     
     
     
 
   
   
   
   
      
      
      
      
      
      
      
      
      
  
   
      
      
      
      
      
      
      
      
      
  
   
   
   
   
   
      
      
      
      
      
      
      
      
      
  
   
   
   
   
   
   
      
      
      
      
      
      
      
      
      
  
General and Administrative Expenses

Total general and administrative expenses decreased $2.3 million to $5.3 million for fiscal 2019 compared to $7.6 million
for  the  prior  fiscal  year.  General  and  administrative  expenses  for  Company-owned  restaurants  decreased  $0.6  million  to  $0.2
million for fiscal 2019 compared to $0.8 million for the prior fiscal year primarily as a result of lower store count.  General and
administrative expenses for corporate decreased $1.8 million to $5.0 million for fiscal 2019 compared to $6.8 million for the prior
year primarily as a result of reduced general and administrative employees.

Franchise Expenses

Franchise  expenses  include  general  and  administrative  expenses  directly  related  to  the  sale  and  continuing  service  of
domestic  and  international  franchises.    Total  franchise  expenses  increased  $1.1  million  to  $3.8  million  in  fiscal  2019  from  $2.6
million in the prior fiscal year. Pizza Inn franchise expenses increased $0.4 million to $1.7 million in fiscal 2019 compared to $1.3
million in the prior fiscal year primarily as a result of the change in treatment of convention fund contributions due to adoption of
Topic 606.  Pie Five franchise expenses increased by $0.8 million to $2.1 million in fiscal 2019 compared to $1.3 million in the
prior fiscal year primarily as a result of the change in treatment of advertising fund contributions due to adoption of Topic 606.

Pre-Opening Expense

Pre-opening  expenses  are  directly  related  to  the  number  of  new  corporate  store  openings.  There  were  no  pre-opening
expenses for fiscal 2019 compared to $0.1 million in fiscal 2018. The decrease was due to a reduction in openings of Company-
owned restaurants.

(Gain)/Loss on sale of assets

The Company’s (gain) / loss on sale of assets reflects the net difference between the sale price of assets and the net carrying
value of the assets at the time of sale.  (Gain) / loss on sale of assets improved to a gain of $0.6 million in fiscal 2019 compared to a
gain of $0.1 million in the prior year due to the sale of two Pie Five units that we acquired at no cost basis.

Impairment Expenses

Impairment  of  long-lived  assets  and  other  lease  charges  were  $1.7  million  for  fiscal  2019  compared  to  $0.9  million  for
fiscal 2018. Impairment of long-lived assets and other lease charges among Company-owned restaurants of $1.4 million consisted
primarily of impairments of leasehold improvements and equipment and lease charges for closed stores.

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 increased by $0.9 million to $1.3 million in fiscal 2019 compared to
$0.4 million in fiscal 2018 related to uncollectible domestic and international accounts receivable.

Interest Expense

Interest expense decreased $0.1 million for fiscal 2019 to $0.1 million compared to $0.2 million in the prior year due to a
decrease  in  outstanding  principal  balance  of  senior  convertible  notes  as  a  result  of  conversions  during  the  third  quarter  of  fiscal
2018.

Amortization and Depreciation Expense

Amortization and depreciation expense decreased $0.4 million to $0.5 million in fiscal 2019 compared to $0.9 million in

fiscal 2018 primarily as a result of lower depreciation attributable to fewer Company-owned restaurants.

19

Provision for Income Tax

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 has assessed whether
the valuation allowance should be maintained against its deferred tax assets based on consideration of all available evidence, using
a “more likely than not” standard. In assessing the need for the valuation allowance, the Company considered both positive and
negative  evidence  related  to  the  likelihood  of  realization  of  deferred  tax  assets.  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,
management determined it was appropriate to maintain the existing valuation allowance against the Company's deferred tax assets.

Income tax benefit of $0.1 million for fiscal 2019 represents $0.1 million in state and foreign tax expense and a $0.2 million
benefit  on  other  deferred  taxes.  At  the  end  of  tax  year  ended  June  30,  2019,  the  Company  had  net  operating  loss  carryforwards
totaling $23.9 million that are available to reduce future taxable income and will begin to expire in 2032.

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  include  losses  from  leased  buildings  and  operating  losses  associated  with  Company-owned
restaurants closed in prior years.

20

Sources and Uses of Funds

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operating activities and proceeds from the sale of securities.

Cash flows from operating activities generally reflect net income adjusted for certain non-cash items including depreciation
and  amortization,  changes  in  deferred  taxes,  share  based  compensation,  and  changes  in  working  capital.    Cash  provided  by
operations was $0.7 million in fiscal 2019 compared to cash used of $3.9 million in fiscal year 2018.

Cash  flows  from  investing  activities  reflect  net  proceeds  from  sale  of  assets  and  capital  expenditures  for  the  purchase  of
Company  assets.    Cash  provided  by  investing  activities  during  fiscal  2019  of  $0.1  million  was  primarily  attributable  to  sales  of
assets  of  Company-owned  Pie  Five  restaurants  including  notes  receivable  issued  for  fixed  asset  sales  partially  offset  by  capital
expenditures for computers and other miscellaneous assets.  This compares to cash provided by investing activities of $0.7 million
during the fiscal 2018 primarily  attributable  to  sales  of  assets  of  closed  Company-owned  Pie  Five  restaurants  partially  offset  by
capital expenditures for a new Pie Five unit, computers and other miscellaneous assets.

Cash flows from financing activities generally reflect changes in the Company's borrowings and securities activity during
the period.  Net cash provided by financing activities was $0.1 million and $4.1 million for the fiscal years ended June 30, 2019
and  June 24, 2018, respectively.  Cash flows from financing activities for fiscal 2019 were primarily the result of sales of stock in
an  at-the-market  offering.  Cash  flows  from  financing  activities  for  fiscal  2018  were  primarily  the  result  of  the  sale  of  stock  in
connection with a shareholder rights offering that closed in September 2017, plus stock sales in the at-the-market offering, partially
offset by the repayment of a $1.0 million short-term promissory note.

 ATM Offering

On  December  5,  2017,  the  Company  entered  into  an  At  Market  Issuance  Sales  Agreement  with  B.  Riley  FBR,  Inc.  (“B.
Riley FBR”) pursuant to which the Company may offer and sell shares of its common stock having an aggregate offering price of
up to $5,000,000 from time to time through B. Riley FBR acting as agent (the “2017 ATM Offering”).  The 2017 ATM Offering is
being undertaken pursuant to Rule 415 and a shelf Registration Statement on Form S-3 which was declared effective by the SEC on
November  6,  2017.  Through  June  30,  2019,  the  Company  had  sold  an  aggregate  of  191,478  shares  in  the  2017  ATM  Offering,
realizing aggregate gross proceeds of $0.3 million.

Short Term Loan

On  December  22,  2016,  the  Company  obtained  a  $1.0  million  loan  from  its  largest  shareholder,  Newcastle  Partners,  LP
(“Newcastle”), evidenced by a Promissory Note.  The loan bore interest at 10% per annum and was originally due and payable on
April  30,  2017.    On  May  8,  2017,  the  Company  executed  an  Extended  and  Restated  Promissory  Note  in  favor  of  Newcastle
extending  the  due  date  of  the  short  term  loan  until  the  earlier  of  September  1,  2017,  or  the  Company’s  receipt  of  at  least  $2.0
million in additional debt or equity capital.  The short term loan was paid in full during fiscal 2018.  Newcastle is an affiliate of the
Company’s Chairman, Mark E. Schwarz.

Convertible Notes

On March 3, 2017, the Company completed a registered shareholder rights offering of its 4% Convertible Senior Notes due
2022 (“Notes”).  Shareholders exercised subscription rights to purchase all 30,000 of the Notes at the par value of $100 per Note,
resulting in gross offering proceeds to the Company of $3.0 million.

The  Notes  bear  interest  at  the  rate  of  4%  per  annum  on  the  principal  or  par  value  of  $100  per  note,  payable  annually  in
arrears on February 15 of each year, commencing February 15, 2018.  Interest is payable in cash or, at the Company’s discretion, in
shares of Company common stock.  The Notes mature on February 15, 2022, at which time all principal and unpaid interest will be
payable in cash or, at the Company’s discretion, in shares of Company common stock.  The Notes are secured by a pledge of all
outstanding equity securities of our two primary direct operating subsidiaries.

21

Noteholders may convert their notes to common stock as of the 15th day of any calendar month, unless the Company sooner
elects to redeem the notes.  The conversion price is $2.00 per share of common stock.  Accrued interest will be paid through the
effective date of the conversion in cash or, at the Company’s sole discretion, in shares of Company common stock.

The Company determined that the Notes contained a beneficial conversion feature of $0.1 million since the market price of
the Company’s common stock was higher than the effective conversion price of the notes when issued.  The beneficial conversion
feature  and  the  issuance  costs  of  the  notes  aggregated  $0.2  million  and  were  considered  a  debt  discount  and  are  accreted  into
interest expense using the effective interest method over the debt maturity period.

During fiscal 2019, $4 thousand in par value of the Notes were converted to common shares.  At the end of fiscal 2019, $1.7
million in par value of the Notes were outstanding, offset by $0.1 million of unamortized debt issue costs and unamortized debt
discounts.

Liquidity

We expect to fund continuing operations and planned capital expenditures for the next fiscal year primarily from cash on
hand, operating cash flow and sales of securities.  Based on budgeted and year-to-date cash flow information, we believe that we
have sufficient liquidity to satisfy our cash requirements for the 2020 fiscal year.

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.

The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of
such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows
expected to result from use and eventual disposition of the assets compared to their carrying value. If impairment is indicated, the
carrying value of an impaired asset is reduced to its fair value, based on discounted estimated future cash flows. During fiscal year
2019, the Company tested its long-lived assets for impairment and recognized pre-tax, non-cash impairment charges of $0.8 million
primarily related to the carrying value of one Pie Five unit. The Company also had lease charges related to closed units of $0.9
million.

Franchise revenue consists of income from license fees, royalties, area development and foreign master license agreements,
advertising fund revenues, supplier incentive and convention contribution revenues. Franchise fees, area development and foreign
master license agreement fees are amortized into revenue on a straight-line basis over the term of the related contract agreement.
Royalties and advertising  fund  revenues, which  are  based  on  a  percentage  of  franchise  retail  sales,  are  recognized  as  income  as
retail sales occur. Supplier incentive revenues are recognized as earned, typically as the underlying commodities are shipped.  For
periods prior to adoption of Topic 606, franchise fees, area development and foreign master license agreement fees were recognized
when we performed our obligations related to such fees, primarily the store opening date.

22

The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future
taxable income, reversal of existing taxable temporary differences, and tax planning strategies. The Company assesses whether a
valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, using a
“more likely than not” standard. In assessing the need for a valuation allowance, the Company considers both positive and negative
evidence related to the likelihood of realization of deferred tax assets. In making such assessment, more weight is given to evidence
that can be objectively verified, including recent losses. Future sources of taxable income are also considered in determining the
amount of the recorded valuation allowance.

The  Company  accounts  for  uncertain  tax  positions  in  accordance  with  ASC  740-10,  which  prescribes  a  comprehensive
model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that it
has taken or expects to take on a tax return.  ASC 740-10 requires that a company recognize in its financial statements the impact of
tax  positions  that  meet  a  “more  likely  than  not”  threshold,  based  on  the  technical  merits  of  the  position.    The  tax  benefits
recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate settlement.  As of June 30, 2019 and June 24, 2018, the Company had no
uncertain tax positions.

The Company assesses its exposures to loss contingencies from legal matters based upon factors such as the current status
of  the  cases  and  consultations  with  external  counsel  and  provides  for  the  exposure  by  accruing  an  amount  if  it  is  judged  to  be
probable  and  can  be  reasonably  estimated.  If  the  actual  loss  from  a  contingency  differs  from  management’s  estimate,  operating
results could be adversely impacted.

Accounting Standards Adopted

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“Topic 606”), which supersedes
nearly all existing revenue recognition guidance under GAAP, including industry-specific requirements, and provides companies
with a single framework for recognizing revenue from contracts with customers. This update and subsequently issued amendments
require companies to recognize revenue at amounts that reflect the consideration to which the companies expect to be entitled in
exchange for those goods or services at the time of transfer. Topic 606 requires that we assess contracts to determine each separate
and distinct performance obligation. If a contract has multiple performance obligations, we allocate the transaction price using our
best estimate of the standalone selling price to each distinct good or service in the contract.

The Company adopted Topic 606 using the modified retrospective transition method effective June 25, 2018. Results for
reporting periods beginning June 25, 2018 and after are presented in accordance with Topic 606, while prior period amounts are not
adjusted and continue to be reported in accordance with our historical accounting under Topic 605, Revenue Recognition.

A cumulative effect opening adjustment of $1.6 million was recorded as a reduction to retained earnings as of June 25, 2018
to reflect the impact of adopting Topic 606. A tax adjustment of $0.4 million was recorded as an increase to retained earnings as of
March 25, 2019 to reflect the impact of adopting Topic 606. The impact of applying Topic 606 for the fiscal year ended June 30,
2019 was an increase in revenues of $1.4 million and an increase in pre-tax income of $0.5 million.

The  adoption  of  Topic  606  did  not  impact  the  recognition  and  reporting  of  our  two  largest  sources  of  revenue:  franchise
royalties  and  supplier  and  distributor  incentives.  The  items  impacted  by  the  adoption  include  the  timing  of  franchise  and
development revenue recognition and the presentation of advertising funds and supplier convention contributions.

As noted above, an after-tax reduction of $1.6 million was recorded to retained earnings to reflect the cumulative impact of
adopting  Topic  606.  This  is  comprised  of  $1.3  million  related  to  domestic  franchise  and  renewal  fees,  $0.2  million  related  to
domestic area development fees and $0.3 million related to international development and franchise master license fees partially
offset by $0.2 million in deferral of contract-related expenses.

23

The following chart presents the specific line items impacted by the cumulative adjustment to opening retained earnings:

(In thousands, except share amounts)

ASSETS
CURRENT ASSETS

Cash and cash equivalents
Accounts receivable, less allowance for bad debts of $158
Other receivable
Notes receivable
Inventories
Income tax receivable
Property held for sale
Deferred contract charges
Prepaid expenses and other

Total current assets

LONG-TERM ASSETS

Property, plant and equipment, net
Intangible assets definite-lived, net
Long-term notes receivable
Deferred tax asset, net
Long term deferred contract charges
Deposits and other

Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade
Accounts payable - lease termination impairments
Accrued expenses
Deferred rent
Deferred revenues
Total current liabilities

LONG-TERM LIABILITIES

Convertible notes
Deferred rent, net of current portion
Deferred revenues, net of current portion
Other long-term liabilities

Total liabilities

COMMITMENTS AND CONTINGENCIES (SEE NOTE 3)

SHAREHOLDERS' EQUITY

Common stock, $.01 par value; authorized 26,000,000 shares; issued  22,166,674 shares

outstanding 15,047,470 shares

Additional paid-in capital
Accumulated deficit
Treasury stock at cost
Shares in treasury: 7,119,204
Total shareholders' equity

As Reported
June 24,
2018

Total

Adjustment    

Adjusted
Balance Sheet
June 25, 2018  

  $

  $

  $

1,386    $
1,518     
300     
712     
6     
5     
539     
-     
273     
4,739     

1,510     
212     
803     
3,479     
-     
243     
10,986    $

421    $
353     
1,109     
32     
65     
1,980     

1,562     
433     
670     
42     
4,687     

-    $
-     
-     
-     
-     
-     
-     
10     
-     
10     

-     
-     
-     
-     
182     
-     
192    $

-    $
-     
(4)    
-     
243     
239     

-     
-     
1,575     
-     
1,814     

1,386 
1,518 
300 
712 
6 
5 
539 
10 
273 
4,749 

1,510 
212 
803 
3,479 
182 
243 
11,178 

421 
353 
1,105 
32 
308 
2,219 

1,562 
433 
2,245 
42 
6,501 

222     
33,206     
(2,493)    

(24,636)    
6,299     

-     
-     
(1,622)    

-     
(1,622)    

222 
33,206 
(4,115)

(24,636)
4,677 

Total liabilities and shareholders' equity

  $

10,986    $

192    $

11,178 

24

 
   
   
     
     
 
   
     
     
 
   
     
     
 
   
   
   
   
   
   
   
   
   
   
      
      
  
   
      
      
  
   
   
   
   
   
   
   
      
      
  
   
      
      
  
   
      
      
  
   
   
   
   
   
   
      
      
  
   
      
      
  
   
   
   
   
   
   
      
      
  
   
      
      
  
   
      
      
  
   
      
      
  
   
   
   
   
      
      
  
   
   
   
      
      
  
The following charts present the specific line items impacted by the application of Topic 606 in fiscal 2019.

(In thousands, except share amounts)
ASSETS

CURRENT ASSETS

Cash and cash equivalents
Accounts receivable, less allowance for bad debts of $209
Other receivable
Notes receivable, less allowance of bad debt of $916
Inventories
Income tax receivable
Property held for sale
Deferred contract charges
Prepaid expenses and other

Total current assets

LONG-TERM ASSETS

Property, plant and equipment, net
Intangible assets definite-lived, net
Long-term notes receivable
Deferred tax asset, net
Long term deferred contract charges
Deposits and other

Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade
Accounts payable - lease termination impairments
Accrued expenses
Deferred rent
Deferred revenues
Total current liabilities

LONG-TERM LIABILITIES

Convertible notes
Deferred rent, net of current portion
Deferred revenues, net of current portion
Other long-term liabilities

Total liabilities

COMMITMENTS AND CONTINGENCIES (SEE NOTE 3)

SHAREHOLDERS' EQUITY

Common stock, $.01 par value; authorized 26,000,000 shares; issued 22,208,141 outstanding

15,090,837

Additional paid-in capital
Accumulated deficit
Treasury stock at cost
Shares in treasury: 7,117,304
Total shareholders' equity

As Reported
June 30,
2019

Total

Adjustment    

Balance Sheet
Without Adoption
of Topic 606

  $

  $

  $

2,264    $
1,191     
-     
389     
7     
4     
231     
38     
346     
4,470     

500     
196     
735     
4,060     
232     
233     
10,426    $

400    $
832     
834     
37     
275     
2,378     

1,584     
397     
1,561     
72     
5,992     

-    $
-     
-     
-     
-     
-     
-     
(38)    
-     
(38)    

-     
-     
-     
-     
(232)    
-     
(270)   $

-    $
-     
4     
-     
(275)    
(271)    

-     
-     
(1,124)    
-     
(1,395)    

2,264 
1,191 
- 
389 
7 
4 
231 
- 
346 
4,432 

500 
196 
735 
4,060 
- 
233 
10,156 

400 
832 
838 
37 
- 
2,107 

1,584 
397 
437 
72 
4,597 

222     
33,327     
(4,483)    

(24,632)    
4,434     

-     
-     
1,125     

-     
1,125     

222 
33,327 
(3,358)

(24,632)
5,559 

Total liabilities and shareholders' equity

  $

10,426    $

(270)   $

10,156 

25

 
   
 
   
     
     
 
   
     
     
 
   
     
     
 
   
   
   
   
   
   
   
   
   
   
      
      
  
   
      
      
  
   
   
   
   
   
   
   
      
      
  
   
      
      
  
   
      
      
  
   
   
   
   
   
   
      
      
  
   
      
      
  
   
   
   
   
   
   
      
      
  
   
      
      
  
   
      
      
  
   
      
      
  
   
   
   
   
      
      
  
   
   
 
   
      
      
  
REVENUES:

COSTS AND EXPENSES:

Cost of sales
General and administrative expenses
Franchise expenses
Gain on sale of assets
Impairment of long-lived assets and other lease charges
Bad debt
Interest expense
Depreciation and amortization expense

Total costs and expenses

LOSS FROM CONTINUING OPERATIONS BEFORE TAXES

Income tax benefit

LOSS FROM CONTINUING OPERATIONS

Loss from discontinued operations, net of taxes

NET LOSS

INCOME PER SHARE OF COMMON STOCK - BASIC:

Loss from continuing operations
Loss from discontinued operations
Net loss

INCOME PER SHARE OF COMMON STOCK - DILUTED:

Loss from continuing operations
Loss from discontinued operations
Net loss

As Reported
Fiscal Year Ended
June 30,
2019

Income Statement
Without Adoption
of
Topic 606

Total

Adjustments    

  $

12,319    $

(1,398)   $

10,921 

1,120     
5,274     
3,778     
(551)    
1,664     
1,265     
104     
466     
13,120     

(801)    
(51)    
(750)    

-     
(750)   $

(0.05)   $
-     
(0.05)   $

-     
-     
(901)    
-     
-     
-     
-     
-     
(901)    

(497)    
-     
(497)    

-     
(497)   $

(0.03)   $
-     
(0.03)   $

(0.05)   $
-     
(0.05)   $

(0.03)   $
-     
(0.03)   $

1,120 
5,274 
2,877 
(551)
1,664 
1,265 
104 
466 
12,219 

(1,298)
(51)
(1,247)

- 
(1,247)

(0.08)
- 
(0.08)

(0.08)
- 
(0.08)

  $

  $

  $

  $

  $

Weighted average common shares outstanding - basic

15,070     

15,070     

15,070 

Weighted average common and potential dilutive common shares outstanding

15,070     

15,070     

15,070 

26

 
   
 
   
     
     
 
   
     
     
 
   
      
      
  
   
      
      
  
   
   
   
   
   
   
   
   
   
   
      
      
  
   
   
   
   
      
      
  
   
   
      
      
  
   
      
      
  
   
   
      
      
  
   
      
      
  
   
      
      
  
   
   
      
      
  
   
   
      
      
  
   
Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends the existing accounting standards for lease
accounting,  including  requiring  lessees  to  recognize  most  leases  on  their  balance  sheets.  The  new  lease  standard  is  effective  for
public  companies  for  fiscal  years,  (including  interim  periods  therein),  beginning  after  December  15,  2018.  Application  of  ASU
2016-02  will  be  required  beginning  in  the  first  quarter  of  our  fiscal  2020.  Early  adoption  of  ASU  2016-02  as  of  its  issuance  is
permitted. This new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after,
the date of initial application, with an option to use certain transition relief. The Company believes this will have a material impact
on the financial statements as it relates to its corporate office lease and various lease obligations for store locations.

27

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required for a smaller reporting company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See information set forth on Index to Consolidated Financial Statements and Supplementary Data appearing on page F-1 of

this report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

The  Company’s  management,  with  the  participation  of  the  Company’s  principal  executive  officer  and  principal  financial
officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this
report.  Based  on  that  evaluation,  the  principal  executive  officer  and  principal  financial  officer  concluded  that  the  Company’s
disclosure controls and procedures, as of the end of the period covered by this report, were effective in assuring that the information
required  to  be  disclosed  by  the  Company  in  reports  filed  under  the  Securities  Exchange  Act  of  1934  is  (i)  accumulated  and
communicated  to  management,  including  the  principal  executive  officer  and  principal  financial  officer,  as  appropriate  to  allow
timely decisions regarding disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in
the SEC’s rules and forms.

Management Report on Internal Control over Financial Reporting

The  Company’s  management  is  responsible  for  establishing  and  maintaining  adequate  “internal  control  over  financial
reporting”  (as  defined  in  Rule  13a-15(f)  under  the  Securities  Exchange  Act  of  1934).    Under  the  supervision  and  with  the
participation of management, including our principal executive officer and principal financial officer, the Company has conducted
an evaluation of the effectiveness of its internal control over financial reporting. The Company’s management based its evaluation
on  criteria  set  forth  in  the  framework  in  Internal  Control-Integrated  Framework  issued  by  the  Committee  of  Sponsoring
Organizations of the Treadway Commission.  Based upon that evaluation, management has concluded that our internal control over
financial reporting was effective as of June 30, 2019.

ITEM 9B. OTHER INFORMATION.

On  September  26,  2019,  the  board  of  directors  of  the  Company  appointed  Mark  E.  Schwarz  to  serve  as  the  Company’s
principal financial officer on an interim basis.  Mr. Schwarz, age 59, has served as a director and the Chairman of the Board of the
Company  since  2004.    Mr.  Schwarz  is  the  Chairman,  Chief  Executive  Officer  and  Portfolio  Manager  of  Newcastle  Capital
Management, L.P. (“NCM”), a private investment management firm he founded in 1993.  NCM is the general partner of Newcastle
Partners, L.P., which is the largest shareholder of the Company.  Mr. Schwarz is Chairman of the boards of directors of Hallmark
Financial  Services,  Inc.,  a  specialty  property  and  casualty  insurance  company,  and  Wilhelmina  International,  Inc.,  a  model
management and talent representation company.  Within the past five years, he has also served as a director of SL Industries, Inc., a
developer  of  power  systems  used  in  a  variety  of  aerospace,  computer,  datacom,  industrial,  medical,  telecom,  transportation  and
utility equipment applications.  He also serves as a director of various privately held companies.

Mr.  Schwarz  will  serve  as  principal  financial  officer  of  the  Company  at  the  will  of  the  board  of  directors  pending  the
appointment  of  a  permanent  replacement.    He  will  not  receive  any  fixed  compensation  from  the  Company  for  his  service  as
principal financial officer.  However, the board of directors may award him a discretionary bonus at the conclusion of his tenure. 
Mr.  Schwarz  has  no  family  relationship  with  any  other  director  or  other  executive  officer  of  the  Company.    There  are  no
transactions in which Mr. Schwarz has an interest requiring disclosure under Item 404(a) of Regulation S-K.

28

 
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

PART III

The  information  required  by  this  Item  is  incorporated  by  reference  from  the  Company’s  definitive  proxy  statement  to  be

filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

ITEM 11. EXECUTIVE COMPENSATION.

The  information  required  by  this  Item  is  incorporated  by  reference  from  the  Company’s  definitive  proxy  statement  to  be

filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

ITEM 12. SECURITY  OWNERSHIP  OF  CERTAIN  BENEFICIAL  OWNERS  AND  MANAGEMENT  AND  RELATED  STOCKHOLDER

MATTERS.

The  information  required  by  this  Item  is  incorporated  by  reference  from  the  Company’s  definitive  proxy  statement  to  be

filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

The  information  required  by  this  Item  is  incorporated  by  reference  from  the  Company’s  definitive  proxy  statement  to  be

filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The  information  required  by  this  Item  is  incorporated  by  reference  from  the  Company’s  definitive  proxy  statement  to  be

filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

29

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

PART IV

1. The financial statements filed as part of this report are listed in the Index to Consolidated Financial Statements and Supplementary Data appearing

on page F-1 of this report on Form 10-K.

2. Any financial statement schedule filed as part of this report is listed in the Index to Consolidated Financial Statements and Supplementary Data

appearing on page F-1 of this report on Form 10-K.

3. Exhibits:

3.1

3.2

4.1

4.2

4.3

10.1

10.2

10.3

10.4

10.5

10.6

21.1

23.1

31.1

31.2

32.1

32.2

101

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).

Amended and Restated Bylaws 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).

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).

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

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).

2015  Long  Term  Incentive  Plan  of  the  Company  (filed  as  Exhibit  10.1  to  Form  8-K  filed  November  20,  2014  and  incorporated
herein by reference).*

Form of Stock Option Grant Agreement under the Company’s 2015 Long Term Incentive Plan (filed as Exhibit 10.2 to Form 8-K
filed November 20, 2014 and incorporated herein by reference).*

Form  of  Restricted  Stock  Unit  Award  Agreement  under  the  Company’s  2015  Long-Term  Incentive  Plan  (filed  as  Exhibit  10.1  to
Form 10-Q for the fiscal quarter ended December 27, 2015 and incorporated herein by reference).*

Lease Agreement dated November 1, 2016, between A&H Properties Partnership and Rave Restaurant Group, Inc.

First Amendment to Lease and Expansion dated July 1, 2017, between A&H Properties Partnership and Rave Restaurant Group, Inc.

At  Market  Issuance  Sales  Agreement  between  the  Company  and  B.  Riley  FBR,  Inc.  (filed  as  Exhibit  1.01  to  Form  8-K  filed
December 5, 2017).*

List of Subsidiaries.

Consent of Independent Registered Public Accounting Firm.

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

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

Section 1350 Certification of Principal Executive Officer.

Section 1350 Certification of Principal Financial Officer.

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

*Management contract or compensatory plan or agreement.

ITEM 16. FORM 10-K SUMMARY.

None.

30

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused

this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: September 30, 2019

Rave Restaurant Group, Inc.
By: /s/ Robert W. Bafundo
Robert W. Bafundo
President

31

 
 
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.

Name and Position
/s/ Robert W. Bafundo
Robert W. Bafundo
President
(Principal Executive Officer)

/s/Mark E. Schwarz
Mark E. Schwarz
Director and Chairman of the Board
(Principal Financial Officer)

/s/Ramon D. Phillips
Ramon D. Phillips
Director and Vice Chairman of the Board

/s/ Brian T. Bares
Brian T. Bares
Director

/s/Robert B. Page
Robert B. Page
Director

/s/ William C. Hammett, Jr.
William C. Hammett, Jr.
Director

/s/ Clinton J. Coleman
Clinton J. Coleman
Director

  Date
  September 30, 2019

  September 30, 2019

  September 30, 2019

  September 30, 2019

  September 30, 2019

  September 30, 2019

  September 30, 2019

32

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RAVE RESTAURANT GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Description

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Operations for the fiscal years ended June 30, 2019 and June 24, 2018.

Consolidated Balance Sheets at June 30, 2019 and June 24, 2018.

Consolidated Statements of Shareholders' Equity for the fiscal years ended June 30, 2019 and June 24, 2018.

Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2019 and June 24, 2018.

Supplemental Disclosures of Cash Flow Information for the fiscal years ended June 30, 2019 and June 24, 2018.

Notes to Consolidated Financial Statements.

F-1

Page No.

F-2

F-3

F-4

F-5

F-6

F-6

F-7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Index

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Rave Restaurant Group, Inc.
The Colony, Texas

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Rave Restaurant Group, Inc. (the Company) as of June 30, 2019
and June 24, 2018, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the fiscal
years ended, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and June 24, 2018, and
the results of its operations and its cash flows for each of the years in the fiscal years ended June 30, 2019 and June 24, 2018, in
conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion  on  the  Company’s  financial  statements  based  on  our  audits.  We  are  a  public  accounting  firm  registered  with  the  Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company
in  accordance  with  the  U.S.  federal  securities  laws  and  the  applicable  rules  and  regulations  of  the  Securities  and  Exchange
Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but
not  for  the  purpose  of  expressing  an  opinion  on  the  effectiveness  of  the  Company’s  internal  control  over  financial  reporting.
Accordingly, we express no such opinion.

Our  audits  included  performing  procedures  to  assess  the  risks  of  material  misstatement  of  the  consolidated  financial  statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis,  evidence  regarding  the  amounts  and  disclosures  in  the  financial  statements.  Our  audits  also  included  evaluating  the
accounting  principles  used  and  significant  estimates  made  by  management,  as  well  as  evaluating  the  overall  presentation  of  the
financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2010.

/s/ Baker Tilly Virchow Krause, LLP
Plano, Texas
September 30, 2019

F-2

 
 
 
 
 
 
 
 
 
Index

RAVE RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

REVENUES:

COSTS AND EXPENSES:

Cost of sales
General and administrative expenses
Franchise expenses
Pre-opening expenses
Loss/(gain) on sale of assets
Impairment of long-lived assets and other lease charges
Bad debt
Interest expense
Depreciation and amortization expense

Total costs and expenses

LOSS FROM CONTINUING OPERATIONS BEFORE TAXES

Income tax benefit

INCOME / (LOSS) FROM CONTINUING OPERATIONS

Loss from discontinued operations, net of taxes

NET INCOME / (LOSS)

INCOME / (LOSS) PER SHARE OF COMMON STOCK - BASIC:

Income / (loss) from continuing operations
Loss from discontinued operations
Net income / (loss)

INCOME / (LOSS) PER SHARE OF COMMON STOCK - DILUTED:

Income / (loss) from continuing operations
Loss from discontinued operations
Net income / (loss)

Weighted average common shares outstanding - basic

Weighted average common and potential dilutive common shares outstanding

See accompanying Notes to Consolidated Financial Statements.

F-3

Fiscal Year Ended

June 30,
2019

June 24,
2018

  $

12,319    $

15,120 

1,120     
5,274     
3,778     
-     
(551)    
1,664     
1,265     
104     
466     
13,120     

(801)    
(51)    
(750)    

-     
(750)   $

(0.05)   $
-     
(0.05)   $

(0.05)   $
-     
(0.05)   $

3,654 
7,597 
2,645 
114 
(144)
894 
351 
183 
874 
16,168 

(1,048)
(3,322)
2,274 

(362)
1,912 

0.17 
(0.03)
0.14 

0.16 
(0.03)
0.13 

15,070     

13,854 

15,070     

14,983 

  $

  $

  $

  $

  $

 
 
 
 
 
   
     
 
   
     
 
   
      
  
   
      
  
   
   
   
   
   
   
   
   
   
   
   
      
  
   
   
   
   
      
  
   
   
      
  
   
      
  
   
   
      
  
   
      
  
   
      
  
   
   
      
  
   
   
      
  
   
Index

ASSETS

CURRENT ASSETS

RAVE RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

Cash and cash equivalents
Accounts receivable, less allowance for bad debts of $209 and $158, respectively
Other receivable
Notes receivable, less allowance of bad debt of $916 and $0, respectively
Inventories
Income tax receivable
Property held for sale
Deferred contract charges
Prepaid expenses and other

Total current assets

LONG-TERM ASSETS

Property, plant and equipment, net
Intangible assets definite-lived, net
Long-term notes receivable
Deferred tax asset, net
Long-term deferred contract charges
Deposits and other

Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade
Accounts payable - lease termination impairments
Accrued expenses
Deferred rent
Deferred revenues

Total current liabilities

LONG-TERM LIABILITIES

Convertible notes
Deferred rent, net of current portion
Deferred revenues, net of current portion
Other long-term liabilities

Total liabilities

COMMITMENTS AND CONTINGENCIES (SEE NOTE J)

SHAREHOLDERS' EQUITY

Common stock, $.01 par value; authorized 26,000,000 shares; issued 22,208,141 and 22,166,674 shares, respectively;

outstanding 15,090,837 and 15,047,470 shares, respectively

Additional paid-in capital
Accumulated deficit
Treasury stock at cost

Shares in treasury: 7,117,304 and 7,119,204, respectively

Total shareholders' equity

  $

  $

  $

June 30,
2019

June 24,
2018

2,264    $
1,191     
-     
389     
7     
4     
231     
38     
346     
4,470     

500     
196     
735     
4,060     
232     
233     
10,426    $

400    $
832     
834     
37     
275     
2,378     

1,584     
397     
1,561     
72     
5,992     

1,386 
1,518 
300 
712 
6 
5 
539 
- 
273 
4,739 

1,510 
212 
803 
3,479 
- 
243 
10,986 

421 
353 
1,109 
32 
65 
1,980 

1,562 
433 
670 
42 
4,687 

222     
33,327     
(4,483)    

(24,632)    
4,434     

222 
33,206 
(2,493)

(24,636)
6,299 

Total liabilities and shareholders' equity

  $

10,426    $

10,986 

See accompanying Notes to Consolidated Financial Statements.

F-4

 
   
 
   
     
 
   
     
 
   
     
 
   
     
 
   
   
   
   
   
   
   
   
   
   
      
  
   
      
  
   
   
   
   
   
   
   
      
  
   
      
  
   
      
  
   
   
   
   
   
   
      
  
   
      
  
   
   
   
   
   
   
      
  
   
      
  
   
      
  
   
      
  
   
   
   
   
      
  
   
   
   
      
  
Index

BALANCE, JUNE 25,

2017

Stock compensation

expense

Conversion of senior

notes, net
Sale of shares
Equity issue costs - Sr

conv notes

Equity issue costs - ATM

offering
Net income

BALANCE, JUNE 24,

2018

ASC 606 cumulative
opening adjustment

ASC 606 Q4 tax
adjustment

Stock compensation

expense

Conversion of senior

notes, net

Issuance of common

stock

Equity issue costs - ATM

Offering

Net loss

BALANCE, JUNE 30,

2019

RAVE RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)

Common Stock

Shares

Amount

Additional
Paid-in
Capital

Accumulated
Deficit

Treasury Stock

Shares

Amount

Total

10,667    $

178    $

26,784    $

(4,405)    

(7,119)   $

(24,636)   $

(2,079)

-     

614     
3,766     

-     

-     
-     

-     

6     
38     

-     

-     
-     

115     

1,308     
5,140     

(92)    

(49)    
-     

-     

-     
-     

-     
1,912     

-     

-     
-     

-     

-     

-     
-     

-     
-     

115 

1,314 
5,178 

(92)

(49)
1,912 

15,047    $

222    $

33,206    $

(2,493)    

(7,119)   $

(24,636)   $

6,299 

-     

-     

-     

-     

44     

-     
-     

-     

-     

-     

-     

-     

-     
-     

-     

-     

36     

-     

88     

(3)    
-     

(1,622)    

382     

-     

-     

-     

-     
(750)    

-     

-     

-     

2     

-     

-     
-     

-     

-     

-     

4     

-     

-     
-     

(1,622)

382 

36 

4 

88 

(3)
(750)

15,091    $

222    $

33,327    $

(4,483)    

(7,117)   $

(24,632)   $

4,434 

See accompanying Notes to Consolidated Financial Statements.

F-5

   
 
 
 
   
   
   
   
     
     
     
     
     
     
 
   
   
      
      
      
      
      
      
  
   
   
   
   
      
      
      
   
   
      
   
      
      
      
      
      
      
  
   
   
      
      
      
      
      
      
  
   
   
   
   
   
   
   
   
      
      
      
      
      
      
  
   
Index

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

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income / (loss)
Adjustments to reconcile net income/(loss) to cash provided by (used in) operating activities:

Impairment of fixed assets and other assets
Stock compensation expense
Depreciation and amortization
Amortization of intangible assets definite-lived
Amortization of debt issue costs
Gain on the sale of assets
Provision for bad debt (accounts receivable)
Provision for bad debt (notes receivable)
Deferred tax benefit

Changes in operating assets and liabilities:

Accounts receivable
Operating notes receivable
Inventories
Prepaid expenses, deposits and other, net
Deferred contract charges
Deferred revenue
Accounts payable - trade
Accounts payable - lease termination impairments
Accrued expenses, deferred rent and other

Cash provided by (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Payments received on notes receivable issued for fixed asset sales
Proceeds from sale of assets
Capital expenditures

Cash provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from sale of stock
Net change in other debt

Cash provided by financing activities

Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

CASH PAID FOR:
Interest

Income taxes

Non-cash activities:

Conversion of note to common shares

Notes receivable issued for sales of fixed assets

Capital expenditures included in accounts payable

See accompanying Notes to Consolidated Financial Statements.

F-6

Fiscal Year Ended

June 30,
2019

June 24,
2018

  $

(750)   $

1,912 

1,664     
36     
423     
43     
22     
(551)    
349     
916     
(198)    

226     
50     
(1)    
(446)    
(270)    
(139)    
(21)    
(418)    
(276)    
659     

201     
11     
(81)    
131     

88     
-     
88     

878     
1,386     
2,264    $

72    $

168    $

4    $

654    $

-    $

894 
115 
835 
39 
35 
(144)
351 
- 
(3,479)

908 
- 
73 
25 
- 
(767)
(4,241)
- 
(458)
(3,902)

- 
1,789 
(1,081)
708 

5,129 
(1,000)
4,129 

935 
451 
1,386 

187 

64 

1,314 

- 

49 

  $

  $

  $

  $

  $

  $

 
 
 
   
 
   
     
 
   
     
 
   
      
  
   
   
   
   
   
   
   
   
   
   
      
  
   
   
   
   
   
   
   
   
   
   
   
      
  
   
      
  
   
   
   
   
   
      
  
   
      
  
   
   
   
   
      
  
   
   
   
      
  
   
      
  
   
      
  
   
      
  
   
      
  
   
      
  
Index

RAVE RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Description of Business:

Rave Restaurant Group, Inc. and its subsidiaries (collectively referred to as the “Company”, or in the first person notations
of “we”, “us” and “our”) franchise pizza buffet, delivery/carry-out and express restaurants domestically and internationally under
the  trademark  “Pizza  Inn”  and  operate  and  franchise  domestic  fast  casual  restaurants  under  the  trademarks  “Pie  Five  Pizza
Company”  or  “Pie  Five”.    We  facilitate  the  procurement  and  distribution  of  food,  equipment  and  supplies  to  our  domestic  and
international system of restaurants through agreements with third party distributors.

As of June 30, 2019, we owned and operated one Pie Five restaurant (“Pie Five Units”).  As of that date, we also had 57
franchised Pie Five Units, 194 franchised Pizza Inn restaurants, and nine licensed Pizza Inn Express, or PIE, kiosks (“PIE Units”). 
The  146  domestic  franchised  Pizza  Inn  restaurants  were  comprised  of  87  pizza  buffet  restaurants  (“Buffet  Units”),  nine
delivery/carry-out restaurants (“Delco Units”), and 50 express restaurants (“Express Units”).  As of June 30, 2019, there were 48
international  franchised  Pizza  Inn  restaurants.    Domestic  Pizza  Inn  restaurants  and  kiosks  were  located  predominantly  in  the
southern half of the United States, with Texas, Arkansas, North Carolina and Mississippi accounting for approximately 25%, 18%,
17% and 8%, respectively, of the total number of domestic units.

Principles of Consolidation:

The consolidated financial statements include the accounts of Rave Restaurant Group, Inc. and its subsidiaries, all of which

are wholly owned.  All appropriate inter-company 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.  Restricted cash of $0.2 million at June 30, 2019 and June 24, 2018 is omitted from cash and cash equivalents and is
included  in  other  long  term  assets.    The  restricted  cash  is  held  in  an  interest-bearing  money  market  account  and  is  restricted
pursuant to a letter of credit for an insurance claim dating back to the mid-1980’s.

F-7

Index

Concentration of Credit Risk:

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and
cash  equivalents.    At  June  30,  2019  and  June  24,  2018,  and  at  various  times  during  the  fiscal  years  then  ended,  cash  and  cash
equivalents were in excess of Federal Depository Insurance Corporation insured limits.  We do not believe we are exposed to any
significant credit risk on cash and cash equivalents.

Notes  receivable,  which  potentially  subject  the  Company  to  concentrations  of  credit  risk,  consist  primarily  of  structured
Company-financed sales of assets.  At June 30, 2019 and June 24, 2018, and at various times during the fiscal years then ended, the
Company had concentrations of credit risk with five franchisees on notes receivables with both short and long term maturities.  As
of June 30, 2019, the Company had one short term note receivable with one franchisee with a balloon payment of $0.2 million due
during the third quarter of fiscal 2020.  At June 30, 2019, the Company had two additional notes receivable with one franchisee
totaling  $0.9  million  with  an  allowance  reserve  of  $0.9  million.  In  addition,  the  Company  had  five  notes  receivable  with  four
franchisees totaling $0.9 million. Each of the financed asset sales was executed with a 4.0-5.0% stated interest rate, principal and
interest payments due monthly and a balloon payment due after 24 months.

Inventories:

Inventory consists primarily of food, paper products and supplies stored in and used by Company restaurants and was stated

at lower of first-in, first-out (“FIFO”) or market.

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.    This  pronouncement  did  not  have  a  material  impact  on  our  consolidated
financial statements.

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 restaurants closed in prior years, and Company-owned restaurants closed in the reported
period.

F-8

Index

Property, Plant and Equipment:

Property, plant and equipment are stated at cost less accumulated depreciation and amortization.  Repairs and maintenance
are charged to operations as incurred while major renewals and betterments are capitalized.  Upon the sale or disposition of a fixed
asset,  the  asset  and  the  related  accumulated  depreciation  or  amortization  are  removed  from  the  accounts  and  the  gain  or  loss  is
included  in  operations.    The  Company  capitalizes  interest  on  borrowings  during  the  active  construction  period  of  major  capital
projects.  Capitalized interest is added to the cost of the underlying asset and amortized over the estimated useful life of the asset.

Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets or, in
the case of leasehold improvements, over the term of the lease including any reasonably assured renewal periods, if shorter.  The
useful lives of the assets range from three to ten years.

Impairment of Long-Lived Asset and other Lease Charges:

The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of
such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows
expected to result from use and eventual disposition of the assets compared to their carrying value. If impairment is recognized, the
carrying value of an impaired asset is reduced to its fair value, based on discounted estimated future cash flows. During fiscal year
2019, the Company tested its long-lived assets for impairment and recognized pre-tax, non-cash impairment charges of $0.8 million
primarily related to the carrying value of one Pie Five unit. The Company also had lease charges related to closed units of $0.9
million.

Accounts Receivable:

Accounts receivable consist primarily of receivables generated from franchise royalties.  The Company records a provision
for  doubtful  receivables  to  allow  for  any  amounts  that  may  be  unrecoverable  based  upon  an  analysis  of  the  Company's  prior
collection experience, customer creditworthiness and current economic trends.  After all attempts to collect a receivable have failed,
the  receivable  is  written  off  against  the  allowance.    Finance  charges  may  be  accrued  at  a  rate  of  18%  per  year,  or  up  to  the
maximum amount allowed by law, on past due receivables.  The interest income recorded from finance charges is immaterial.

F-9

Index

Notes Receivable:

Notes receivable primarily consist of promissory notes arising from franchisee agreements.  The majority of amounts and
terms are evidenced by formal promissory notes and personal guarantees.  All notes allow for early payment without penalty.  Fixed
principle and interest payments are due monthly.  Interest income is recognized monthly. Notes receivable mature at various dates
through 2022 and bear interest at a weighted average rate of 4.8% at June 30, 2019.

Management  evaluates  the  creditworthiness  of  franchisees  by  considering  credit  history  and  sales  to  evaluate  credit  risk.
Management determines interest rates based on credit risk of the underlining franchisee.  The Company monitors payment history
to determine whether or not a loan should be placed on a nonaccrual status or impaired.  The Company charges off notes receivable
based on an account-by-account analysis of the borrower’s current economic conditions, monthly payments history and historical
loss experience. The allowance for doubtful notes receivable is netted within notes receivable.

The principal balance outstanding on the notes receivable and expected principal collections for the next three years were as

follows as of June 30, 2019 (in thousands):

2020
2021
2022

Income Taxes:

  Notes Receivable
  $

389 
542 
193 
1,124 

  $

Income taxes are accounted for using the asset and liability method pursuant to the authoritative guidance on Accounting for
Income Taxes.  Deferred taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial statement and carrying amounts and the tax bases of existing
assets and liabilities.  The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the
enactment date.  The Company recognizes future tax benefits to the extent that realization of such benefits is more likely than not.

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 has assessed whether
the valuation allowance should be maintained against its deferred tax assets based on consideration of all available evidence, using
a “more likely than not” standard. In assessing the need for the valuation allowance, the Company considered both positive and
negative  evidence  related  to  the  likelihood  of  realization  of  deferred  tax  assets.  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,
management determined it was appropriate to maintain the existing partial valuation allowance against the Company's deferred tax
assets.

Income tax benefit of $0.1 million for fiscal 2019 represents $0.1 million in state and foreign tax expense and a $0.2 million
benefit  on  other  deferred  taxes.  At  the  end  of  tax  year  ended  June  30,  2019,  the  Company  had  net  operating  loss  carryforwards
totaling $23.9 million that are available to reduce future taxable income and will begin to expire in 2032. Under the Tax Cuts and
Jobs Act, approximately $0.3 million of the loss carryforwards are limited to 80% and do not expire.

Under ASC 740, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate resolution. From time to time, the Company may be assessed interest and penalties by
taxing authorities.  In those cases, the charges are recorded as income tax expense in the Consolidated Statements of Operations. 
There were no such charges or accruals for the years ended June 30, 2019 and June 24, 2018.

F-10

 
   
   
Index

Pre-Opening Expense:

The Company's pre-opening costs are expensed as incurred and generally include payroll and other direct costs associated
with training new managers and employees prior to opening a new restaurant, rent and other unit operating expenses incurred prior
to opening, and promotional costs associated with the opening.

Related Party Transactions:

On  December  22,  2016,  the  Company  obtained  a  $1.0  million  loan  from  its  largest  shareholder,  Newcastle  Partners,  LP
("Newcastle"), evidenced by a promissory note.  The loan bore interest at 10% per annum and was originally due and payable on
April 30, 2017.  On May 8, 2017, the Company renewed and extended the promissory note on the same terms until the earlier of
September 1, 2017, or the Company’s receipt of at least $2.0 million in additional debt or equity capital. The note was paid in full
in fiscal 2018.  Newcastle is an affiliate of the Company's Chairman, Mark E. Schwarz.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends the existing accounting standards for lease
accounting,  including  requiring  lessees  to  recognize  most  leases  on  their  balance  sheets.  The  new  lease  standard  is  effective  for
public  companies  for  fiscal  years,  (including  interim  periods  therein),  beginning  after  December  15,  2018.  Application  of  ASU
2016-02  will  be  required  beginning  in  the  first  quarter  of  our  fiscal  2020.  Early  adoption  of  ASU  2016-02  as  of  its  issuance  is
permitted. This new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after,
the date of initial application, with an option to use certain transition relief. The Company believes this will have a material impact
on the financial statements as it relates to its corporate office lease and various lease obligations for store locations.

Revenue Recognition:

Revenue  is  measured  based  on  consideration  specified  in  contracts  with  customers  and  excludes  incentives  and  amounts
collected on behalf of third parties, primarily sales tax. The Company recognizes revenue when it satisfies a performance obligation
by transferring control over a product or service to a customer. Taxes assessed by a governmental authority that are both imposed
on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded
from revenue.

In  May  2014,  the  FASB  issued  ASU  2014-09,  “Revenue  from  Contracts  with  Customers”  (“ASU  2014-09”),  which
supersedes nearly all existing revenue recognition guidance under GAAP, including industry-specific requirements, and provides
companies with a single framework for recognizing revenue from contracts with customers. This update and subsequently issued
amendments require companies to recognize revenue at amounts that reflect the consideration to which the companies expect to be
entitled in exchange for those goods or services at the time of transfer. Topic 606 requires that we assess contracts to determine
each separate and distinct performance obligation. If a contract has multiple performance obligations, we allocate the transaction
price using our best estimate of the standalone selling price to each distinct good or service in the contract.

The Company adopted ASU 2014-09 and Topic 606 using the modified retrospective transition method effective June 25,
2018. Results for reporting periods beginning after June 25, 2018 are presented in accordance with Topic 606, while prior period
amounts  are  not  adjusted  and  continue  to  be  reported  in  accordance  with  our  historical  accounting  under  Topic  605,  Revenue
Recognition.

The  adoption  of  Topic  606  did  not  impact  the  recognition  and  reporting  of  our  two  largest  sources  of  revenue:  franchise
royalties  and  supplier  and  distributor  incentives.  The  items  impacted  by  the  adoption  include  the  timing  of  franchise  and
development revenue recognition and the presentation of advertising funds and supplier convention contributions.

The following describes principal activities, separated by major product or service, from which the Company generates its

revenues:

F-11

Index

Restaurant Sales

Revenue from restaurant sales is recognized when food and beverage products are sold in Company-owned restaurants. The

Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities.

Franchise Revenues

Franchise revenues consist of 1) franchise royalties, 2) supplier and distributor incentive revenues, 3) franchise license fees,

4) area development exclusivity fees and foreign master license fees, 5) advertising funds, and 6) supplier convention funds.

Franchise royalties, which are based on a percentage of franchise restaurant sales, are recognized as sales occur.

Supplier and distributor incentive revenues are recognized when title to the underlying commodities transfer.

Franchise  license  fees  are  typically  billed  upon  execution  of  the  franchise  agreement  and  amortized  over  the  term  of  the
franchise agreement which can range from five to 20 years. Fees received for renewal periods are amortized over the life of the
renewal period.

Area  development  exclusivity  fees  and  foreign  master  license  fees  are  typically  billed  upon  execution  of  the  area
development  and  foreign  master  license  agreements.  Area  development  exclusivity  fees  are  included  in  deferred  revenue  in  the
Consolidated Balance Sheets and allocated on a pro rata basis to all stores opened under that specific development agreement. Area
development exclusivity fees that include rights to subfranchise are amortized as revenue over the term of the contract.

For periods prior to adoption of Topic 606, revenue was recognized when we performed our obligations related to such fees,
primarily the store opening date for initial franchise fees and area development fees, or the date the renewal option was effective for
renewal fees.

Advertising fund contributions for Pie Five units represent contributions collected where we have control over the activities
of  the  fund.  Contributions  are  based  on  a  percentage  of  net  retail  sales.  The  adoption  of  Topic  606  revises  the  determination  of
whether these arrangements are considered principal versus agent. For Pie Five, we have determined that we are the principal in
these  arrangements,  and  advertising  fund  contributions  and  expenditures  are,  therefore,  reported  on  a  gross  basis  in  the
Consolidated  Statements  of  Income.  In  general,  we  expect  such  advertising  fund  contributions  and  expenditures  to  be  largely
offsetting and, therefore, do not expect a significant impact on our reported income before income taxes. Our obligation related to
these funds is to develop and conduct advertising activities. Pie Five marketing fund contributions are billed and collected weekly.

Supplier convention funds are deferred until the obligations of the agreement are met and the event takes place.

Total revenues consist of the following (in thousands):

Restaurant Sales
Franchise Royalties
Supplier and Distributor Incentive Revenues
Franchise License Fees
Area Development Fees and Foreign Master License Fees
Advertising Funds
Supplier Convention Funds
Other

Fiscal Year Ended

June 30,
2019

June 24,
2018

  $

  $

889    $
4,814     
4,519     
1,031     
41     
684     
294     
47     
12,319    $

F-12

4,254 
4,997 
4,752 
278 
835 
- 
- 
4 
15,120 

 
 
 
   
 
   
     
 
   
   
   
   
   
   
   
Index

The following chart presents the specific line items impacted by the cumulative adjustment to opening retained earnings:

(In thousands, except share amounts)

ASSETS
CURRENT ASSETS

Cash and cash equivalents
Accounts receivable, less allowance for bad debts of $158
Other receivable
Notes receivable
Inventories
Income tax receivable
Property held for sale
Deferred contract charges
Prepaid expenses and other

Total current assets

LONG-TERM ASSETS

Property, plant and equipment, net
Intangible assets definite-lived, net
Long-term notes receivable
Deferred tax asset, net
Long term deferred contract charges
Deposits and other

Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade
Accounts payable - lease termination impairments
Accrued expenses
Deferred rent
Deferred revenues
Total current liabilities

LONG-TERM LIABILITIES

Convertible notes
Deferred rent, net of current portion
Deferred revenues, net of current portion
Other long-term liabilities

Total liabilities

COMMITMENTS AND CONTINGENCIES (SEE NOTE 3)

SHAREHOLDERS' EQUITY

Common stock, $.01 par value; authorized 26,000,000 shares; issued  22,166,674 shares

outstanding 15,047,470 shares

Additional paid-in capital
Accumulated deficit
Treasury stock at cost

Shares in treasury: 7,119,204
Total shareholders' equity

As Reported
June 24,
2018

Total

Adjustment    

Adjusted
Balance Sheet
June 25, 2018  

  $

  $

  $

1,386    $
1,518     
300     
712     
6     
5     
539     
-     
273     
4,739     

1,510     
212     
803     
3,479     
-     
243     
10,986    $

421    $
353     
1,109     
32     
65     
1,980     

1,562     
433     
670     
42     
4,687     

-    $
-     
-     
-     
-     
-     
-     
10     
-     
10     

-     
-     
-     
-     
182     
-     
192    $

-    $
-     
(4)    
-     
243     
239     

-     
-     
1,575     
-     
1,814     

1,386 
1,518 
300 
712 
6 
5 
539 
10 
273 
4,749 

1,510 
212 
803 
3,479 
182 
243 
11,178 

421 
353 
1,105 
32 
308 
2,219 

1,562 
433 
2,245 
42 
6,501 

222     
33,206     
(2,493)    

(24,636)    
6,299     

-     
-     
(1,622)    

-     
(1,622)    

222 
33,206 
(4,115)

(24,636)
4,677 

Total liabilities and shareholders' equity

  $

10,986    $

192    $

11,178 

F-13

 
   
   
     
     
 
   
     
     
 
   
     
     
 
   
   
   
   
   
   
   
   
   
   
      
      
  
   
      
      
  
   
   
   
   
   
   
   
      
      
  
   
      
      
  
   
      
      
  
   
   
   
   
   
   
      
      
  
   
      
      
  
   
   
   
   
   
   
      
      
  
   
      
      
  
   
      
      
  
   
      
      
  
   
   
   
   
      
      
  
   
   
   
      
      
  
Index

The following charts present the specific line items impacted by the application of Topic 606 in fiscal 2019.

(In thousands, except share amounts)
ASSETS

CURRENT ASSETS

Cash and cash equivalents
Accounts receivable, less allowance for bad debts of $209
Other receivable
Notes receivable, less allowance of bad debt of $916
Inventories
Income tax receivable
Property held for sale
Deferred contract charges
Prepaid expenses and other

Total current assets

LONG-TERM ASSETS

Property, plant and equipment, net
Intangible assets definite-lived, net
Long-term notes receivable
Deferred tax asset, net
Long term deferred contract charges
Deposits and other

Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade
Accounts payable - lease termination impairments
Accrued expenses
Deferred rent
Deferred revenues
Total current liabilities

LONG-TERM LIABILITIES

Convertible notes
Deferred rent, net of current portion
Deferred revenues, net of current portion
Other long-term liabilities

Total liabilities

As Reported
June 30,
2019

Total

Adjustment    

Balance Sheet
Without Adoption
of Topic 606

  $

  $

  $

2,264    $
1,191     
-     
389     
7     
4     
231     
38     
346     
4,470     

500     
196     
735     
4,060     
232     
233     
10,426    $

400    $
832     
834     
37     
275     
2,378     

1,584     
397     
1,561     
72     
5,992     

-    $
-     
-     
-     
-     
-     
-     
(38)    
-     
(38)    

-     
-     
-     
-     
(232)    
-     
(270)   $

-    $
-     
4     
-     
(275)    
(271)    

-     
-     
(1,124)    
-     
(1,395)    

2,264 
1,191 
- 
389 
7 
4 
231 
- 
346 
4,432 

500 
196 
735 
4,060 
- 
233 
10,156 

400 
832 
838 
37 
- 
2,107 

1,584 
397 
437 
72 
4,597 

COMMITMENTS AND CONTINGENCIES (SEE NOTE 3)

SHAREHOLDERS' EQUITY

Common stock, $.01 par value; authorized 26,000,000 shares; issued 22,208,141 outstanding

15,090,837

Additional paid-in capital
Accumulated deficit
Treasury stock at cost

Shares in treasury: 7,117,304
Total shareholders' equity

222     
33,327     
(4,483)    

(24,632)    
4,434     

-     
-     
1,125     

-     
1,125     

222 
33,327 
(3,358)

(24,632)
5,559 

Total liabilities and shareholders' equity

  $

10,426    $

(270)   $

10,156 

F-14

 
   
 
   
     
     
 
   
     
     
 
   
     
     
 
   
   
   
   
   
   
   
   
   
   
      
      
  
   
      
      
  
   
   
   
   
   
   
   
      
      
  
   
      
      
  
   
      
      
  
   
   
   
   
   
   
      
      
  
   
      
      
  
   
   
   
   
   
   
      
      
  
   
      
      
  
   
      
      
  
   
      
      
  
   
   
   
   
      
      
  
   
   
   
      
      
  
Index

REVENUES:

COSTS AND EXPENSES:

Cost of sales
General and administrative expenses
Franchise expenses
Gain on sale of assets
Impairment of long-lived assets and other lease charges
Bad debt
Interest expense
Depreciation and amortization expense

Total costs and expenses

LOSS FROM CONTINUING OPERATIONS BEFORE TAXES

Income tax benefit

LOSS FROM CONTINUING OPERATIONS

Loss from discontinued operations, net of taxes

NET LOSS

INCOME PER SHARE OF COMMON STOCK - BASIC:

Loss from continuing operations
Loss from discontinued operations
Net loss

INCOME PER SHARE OF COMMON STOCK - DILUTED:

Loss from continuing operations
Loss from discontinued operations
Net loss

As Reported
Fiscal Year Ended
June 30,
2019

Income Statement
Without Adoption
of
Topic 606

Total

Adjustments    

  $

12,319    $

(1,398)   $

10,921 

1,120     
5,274     
3,778     
(551)    
1,664     
1,265     
104     
466     
13,120     

(801)    
(51)    
(750)    

-     
(750)   $

(0.05)   $
-     
(0.05)   $

-     
-     
(901)    
-     
-     
-     
-     
-     
(901)    

(497)    
-     
(497)    

-     
(497)   $

(0.03)   $
-     
(0.03)   $

(0.05)   $
-     
(0.05)   $

(0.03)   $
-     
(0.03)   $

1,120 
5,274 
2,877 
(551)
1,664 
1,265 
104 
466 
12,219 

(1,298)
(51)
(1,247)

- 
(1,247)

(0.08)
- 
(0.08)

(0.08)
- 
(0.08)

  $

  $

  $

  $

  $

Weighted average common shares outstanding - basic

15,070     

15,070     

15,070 

Weighted average common and potential dilutive common shares outstanding

15,070     

15,070     

15,070 

F-15

 
   
 
   
     
     
 
   
      
      
  
   
      
      
  
   
   
   
   
   
   
   
   
   
   
      
      
  
   
   
   
   
      
      
  
   
   
      
      
  
   
      
      
  
   
   
      
      
  
   
      
      
  
   
      
      
  
   
   
      
      
  
   
   
      
      
  
   
Index

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  (“RSU’s”)  represent  the  right  to  receive  shares  of  common  stock  upon  the  satisfaction  of  vesting
requirements, performance criteria and other terms and conditions. Compensation cost for 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.

Fair Value of Financial Instruments:

The carrying amounts of accounts receivable and accounts payable approximate fair value because of the short maturity of

these instruments.

Contingencies:

Provisions  for  legal  settlements  are  accrued  when  payment  is  considered  probable  and  the  amount  of  loss  is  reasonably
estimable in accordance with the authoritative guidance on Accounting for Contingencies.  If the best estimate of cost can only be
identified within a range and no specific amount within that range can be determined more likely than any other amount within the
range, and the loss is considered probable, the minimum of the range is accrued.  Legal and related professional services costs to
defend litigation are expensed as incurred.

Use of Management Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America  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.  Actual results could differ materially from estimates.

Fiscal Year:

The Company's fiscal year ends on the last Sunday in June.  The fiscal year ended June 30, 2019 contained 53 weeks and

the fiscal year ended June 24, 2018 contained 52 weeks.

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 incentives received from third party suppliers and distributors as revenue.

F-16

Index

NOTE B – PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS:

Property, and plant and equipment consist of the following (in thousands):

Equipment, furniture and fixtures
Software
Leasehold improvements

Less:  accumulated depreciation/amortization

Estimated Useful
Lives

June 30,
2019

June 24,
2018

3 - 7 yrs
5 yrs
10 yrs or lease term, if shorter

  $

  $

867    $
810     
434     
2,111     
(1,611)    
500    $

1,090 
778 
1,033 
2,901 
(1,391)
1,510 

Depreciation and amortization expense was approximately $0.5 million and $0.9 million for the fiscal years ended June 30,

2019 and June 24, 2018, respectively.

Intangible assets consist of the following (in thousands):

Estimated Useful
Lives

Acquisition
Cost

June 30,
2019
Accumulated
Amortization    

Net
Value

Acquisition
Cost

June 24,
2018
Accumulated
Amortization    

Net
Value

Trademarks and
tradenames
Name change
Prototypes

10 years
15 years
5 years

  $

  $

278    $
70     
230     
578    $

(153)   $
(21)    
(208)    
(382)   $

125    $
49     
22     
196    $

264    $
70     
218     
552    $

(127)   $
(16)    
(197)    
(340)   $

137 
54 
21 
212 

Amortization  expense  for  intangible  assets  was  approximately  $43  thousand  and  $39  thousand  for  the  fiscal  years  ended

June 30, 2019 and June 24, 2018, respectively.

NOTE C - ACCRUED EXPENSES:

Accrued expenses consist of the following (in thousands):

Compensation
Other
Professional fees
Insurance loss reserves

NOTE D - CONVERTIBLE NOTES:

June 30,
2019

June 24,
2018

  $

265    $
478     
83     
8     

654 
404 
43 
8 

  $

834    $

1,109 

On March 3, 2017, the Company completed a registered shareholder rights offering of its 4% Convertible Senior Notes due
2022 (“Notes”).  Shareholders exercised subscription rights to purchase all 30,000 of the Notes at the par value of $100 per Note,
resulting in gross offering proceeds to the Company of $3.0 million.

The  Notes  bear  interest  at  the  rate  of  4%  per  annum  on  the  principal  or  par  value  of  $100  per  note,  payable  annually  in
arrears on February 15 of each year, commencing February 15, 2018.  Interest is payable in cash or, at the Company’s discretion, in
shares of Company common stock.  The Notes mature on February 15, 2022, at which time all principal and unpaid interest will be
payable in cash or, at the Company’s discretion, in shares of Company common stock.  The Notes are secured by a pledge of all
outstanding equity securities of our two primary direct operating subsidiaries.

F-17

 
   
 
 
   
     
 
   
   
 
   
 
   
 
  
 
 
   
 
 
   
   
   
 
 
   
     
     
     
     
     
 
   
   
 
  
 
   
 
   
   
   
   
      
  
Index

Noteholders may convert their notes to common stock as of the 15th day of any calendar month, unless the Company sooner
elects to redeem the notes.  The conversion price is $2.00 per share of common stock.  Accrued interest will be paid through the
effective date of the conversion in cash or, at the Company’s sole discretion, in shares of Company common stock.

The Company determined that the Notes contained a beneficial conversion feature of $0.1 million since the market price of
the Company’s common stock was higher than the effective conversion price of the notes when issued.  The beneficial conversion
feature  and  the  issuance  costs  of  the  notes  aggregated  $0.2  million  and  were  considered  a  debt  discount  and  are  accreted  into
interest expense using the effective interest method over the debt maturity period.

During fiscal 2019, $4 thousand in par value of the Notes were converted to common shares.  At the end of fiscal 2019, $1.7
million in par value of the Notes were outstanding, offset by $0.1 million of unamortized debt issue costs and unamortized debt
discounts.

NOTE E - INCOME TAXES:

Provision for income taxes from continuing operations consists of the following (in thousands):

Current - Federal
Current - Foreign
Current - State
Deferred - Federal
Deferred - State
Provision for income taxes

Fiscal Year Ended

June 30,
2019

June 24,
2018

  $

  $

-    $
131     
15     
(189)    
(8)    
(51)   $

(33)
51 
30 
(3,370)
- 
(3,322)

The effective income tax rate varied from the statutory rate for the fiscal years ended June 30, 2019 and June 24, 2018 as

reflected below (in thousands):

Federal income taxes based on a statutory rate of 21.0% and 27.6%, repectively of pre-tax loss
State income tax, net of federal effect
Foreign taxes
Permanent adjustments
Rate change
Change in valuation allowance
Other

F-18

June 30,
2019

June 24,
2018

(168)   $
93     
15     
8     
-     
-     
1     
(51)   $

(291)
51 
30 
35 
3,416 
(6,597)
34 
(3,322)

  $

  $

 
 
 
   
 
   
   
   
   
 
   
 
   
   
   
   
   
   
Index

The tax effects of temporary differences that give rise to the net deferred tax assets consisted of the following (in thousands):

Current

Reserve for bad debt
Deferred fees
Other reserves and accruals

Non Current

Credit carryforwards
Net operating loss carryforwards
Depreciable assets

Total gross deferred tax asset

Valuation allowance

Net deferred tax asset

June 30,
2019

June 24,
2018

  $

48    $
17     
795     
860     

156     
5,206     
263     

6,485     

36 
15 
562 
613 

152 
5,122 
17 

5,904 

(2,425)    

(2,425)

  $

4,060    $

3,479 

At the end of tax year ended June 30, 2019, the Company had net operating loss carryforwards totaling $23.9 million that
are available to reduce future taxable income and will begin to expire in 2032. Under the Tax Cuts and Jobs Act, approximately
$0.3 million of the loss carryforwards are limited to 80% and do not expire.

As  discussed  in  Note  A  above,  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.
Following the Company’s exit from substantially all Company-owned restaurants in 2017 and 2018, the Company assessed whether
the valuation allowance should be maintained against its deferred tax assets based on consideration of all available evidence, using
a “more likely than not” standard. In assessing the need for the valuation allowance, the Company considered both positive and
negative  evidence  related  to  the  likelihood  of  realization  of  deferred  tax  assets,  including  an  evaluation  of  negative  evidence
consisting of the Company’s recent history of cumulative losses in recent years together with the Company’s historically profitable
Pizza  Inn  Franchising  and  Pie  Five  Franchising  operations.    Based  on  the  Company’s  review  of  this  evidence,  management
determined that the historical profitability of its franchising operations together with its exit from its unprofitable Company-owned
restaurant operations and forecasts of future income provided sufficient basis for the Company to reverse a portion of the valuation
allowance against deferred taxes during the year ended June 24, 2018.   The Company will continue to monitor the realization of its
tax assets each reporting period.

On December 22, 2017 H.R. 1, originally known as the Tax Act was enacted. Among the significant changes to the U.S.
Internal  Revenue  Code,  the  Tax  Act  lowers  the  U.S.  federal  corporate  income  tax  rate  (“Federal  Tax  Rate”)  from  35%  to  21%
effective January 1, 2018. In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No.
118  (SAB  118),  which  addresses  how  a  company  recognizes  provisional  amounts  when a company does not have the necessary
information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect
of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information
necessary to finalize its accounting, but cannot extend beyond one year. Accounting for the income tax effects of the Tax Act was
completed by the Company during the year ended June 24, 2018.   The remeasurement of the Company’s deferred tax assets and
liabilities resulted in a $3.4 million discrete tax expense which increased the effective tax rate by 1,173% in the year ended June 24,
2018.

F-19

 
   
 
   
     
 
   
     
 
   
   
   
   
      
  
   
   
   
   
      
  
   
   
      
  
   
   
      
  
Index

NOTE F - LEASES:

Premises occupied by Company-owned restaurants are leased for initial terms of five to ten years, and each has multiple
renewal terms.  Certain lease agreements contain either a provision requiring additional rent if sales exceed specified amounts or an
escalation clause based upon a predetermined multiple.

The Company leases its 19,576 square foot corporate office facility with average annual lease payments of approximately

$17.50 per square foot.  This lease began on January 2, 2017 and has a ten year term.

Future minimum rental payments under active non-cancelable leases with initial or remaining terms of one year or more at

June 30, 2019 were as follows (in thousands):

2020
2021
2022
2023
2024
Thereafter

Operating
Leases

  $

  $

1,862 
1,927 
1,865 
1,659 
856 
2,348 
10,517 

Future minimum sublease rental income under active non-cancelable leases with initial or remaining terms of one year or

more at June 30, 2019 were as follows (in thousands):

2020
2021
2022
2023
2024
Thereafter

Sublease Rental
Income

 $

 $

168 
174 
175 
177 
128 
53 
875 

Rental expense consisted of the following (in thousands):

Minimum rentals
Sublease rentals

  Fiscal Year Ended  

June 30,
2019

June 24,
2018

757    $
(149)    
608    $

1,114 
(161)
953 

F-20

 
 
   
 
   
   
   
   
   
 
 
  
 
  
  
  
  
  
 
 
 
 
   
 
 
   
     
 
   
   
 
   
Index

NOTE G - EMPLOYEE BENEFITS:

The Company has a tax advantaged savings plan that is designed to meet the requirements of Section 401(k) of the Internal
Revenue Code (the “Code”).  The current plan is a modified continuation of a similar savings plan established by the Company in
1985.  Employees who have completed six months of service and are at least 21 years of age are eligible to participate in the plan.
The  plan  provides  that  participating  employees  may  elect  to  have  between  1%  and  15%  of  their  compensation  deferred  and
contributed  to  the  plan  subject  to  certain  IRS  limitations.    Effective  June  27,  2005,  the  Company  has  a  discretionary  matching
contribution.  For calendar  years  2018  and  2019,  the  Company contributed  on  behalf  of  each  participating  employee  an  amount
equal  to  50%  of  the  employee’s  contributions  up  to  4%  of  compensation.    Separate  accounts  are  maintained  with  respect  to
contributions made on behalf of each participating employee. Employer matching contributions and earnings thereon are invested
in the same investments as each participant’s employee deferral.  The plan is subject to the provisions of the Employee Retirement
Income Security Act, as amended, and is a profit sharing plan as defined in Section 401(k) of the Code.

For the fiscal years ended June 30, 2019 and June 24, 2018, total matching contributions to the tax advantaged savings plan

by the Company on behalf of participating employees were approximately $39,000 and $44,000, respectively.

NOTE H - STOCK BASED COMPENSATION PLANS:

In  June  2005,  the  2005  Employee  Incentive  Stock  Option  Award  Plan  (the  “2005  Employee  Plan”)  was  approved  by  the
Company’s shareholders with a plan effective date of June 23, 2005.  Under the 2005 Employee Plan, officers and employees of the
Company were eligible to receive options to purchase shares of the Company’s common stock.  Options were granted at market
value of the stock on the date of grant, were subject to various vesting and exercise periods as determined by the Compensation
Committee  of  the  board  of  directors  and  could  be  designated  as  non-qualified  or  incentive  stock  options.    A  total  of  1,000,000
shares  of  common  stock  were  authorized  for  issuance  under  the  2005  Employee  Plan.    The  2005  Employee  Plan  expired  by  its
terms on June 23, 2015.

The shareholders also approved the 2005 Non-Employee Directors Stock Award Plan (the “2005 Directors Plan”) in June
2005, to be effective as of June 23, 2005.  Directors not employed by the Company were eligible to receive stock options under the
2005  Directors  Plan.    Options  for  common  stock  equal  to  twice  the  number  of  shares  of  common  stock  acquired  during  the
previous fiscal year, up to 40,000 shares per year, were automatically granted to each non-employee director on the first day of each
fiscal year.  Options were granted at market value of the stock on the first day of each fiscal year, with vesting periods beginning at
a minimum of six months and with exercise periods up to ten years.  A total of 650,000 shares of Company common stock were
authorized for issuance pursuant to the 2005 Directors Plan.  The 2005 Directors Plan expired by its terms on June 23, 2015.

The  2015  Long  Term  Incentive  Plan  (the  “2015  LTIP”)  was  approved  by  the  Company’s  shareholders  on  November  18,
2014 and became effective June 1, 2015.  Officers, employees and non-employee directors of the Company are eligible to receive
awards  under  the  2015  LTIP.    A  total  of  1,200,000  shares  of  common  stock  are  authorized  for  issuance  under  the  2015  LTIP. 
Awards authorized under  the  2015  LTIP  include  incentive  stock  options, non-qualified stock options,  restricted  shares,  restricted
stock units and rights (either with or without accompanying options).  The 2015 LTIP provides for options to be granted at market
value  of  the  stock  on  the  date  of  grant  and  have  exercise  periods  determined  by  the  Compensation  Committee  of  the  board  of
directors.    The  Compensation  Committee  may  also  determine  the  vesting  periods,  performance  criteria  and  other  terms  and
conditions  of  all  awards  under  the  2015  LTIP.    The  Compensation  Committee  has  adopted  resolutions  under  the  2015  LTIP
automatically granting to each non-employee director on the first day of each fiscal year options to purchase twice the number of
shares of common stock acquired during the previous fiscal year, up to a maximum of 40,000 shares.  Such options are exercisable
at the market value of the stock on the first day of the fiscal year, vest six months from the date of grant and expire 10 years from
the date of grant.

Share based compensation expense is included in general and administrative expense in the statement of operations.

F-21

Index

Stock Options:

A summary of stock option transactions under all of the Company’s stock option plans and information about fixed-price

stock options is as follows:

Fiscal Year Ended

June 30,
2019
Shares

June 24,
2018
Shares

Outstanding at beginning of year

478,056     

478,056 

Granted
Exercised
Forfeited/Canceled/Expired

-     
-     
(261,506)    

- 
- 
- 

Outstanding at end of period

216,550     

478,056 

Exercisable at end of period

216,550     

478,056 

Fiscal Year Ended

June 30,
2019
Weighted-
Average
Exercise
Price

June 24,
2018
Weighted-
Average
Exercise
Price

Outstanding at beginning of year

  $

4.16    $

4.16 

Granted
Exercised
Forfeited/Canceled/Expired

Outstanding at end of period

Exercisable at end of year

-     
-     
4.27     

4.82     

4.82     

- 
- 
- 

4.16 

4.16 

  $

  $

At June 30, 2019, the intrinsic value of options outstanding was $0.1 million.

F-22

 
 
 
 
   
 
 
   
 
   
   
      
  
   
   
   
   
      
  
   
   
      
  
   
 
 
 
 
 
   
 
 
   
 
   
      
  
   
   
   
   
      
  
   
      
  
Index

The following table provides information on options outstanding and options exercisable as of June 30, 2019:

Range of
Exercise Prices

Options
Outstanding
at June 30, 2019

Options Outstanding
Weighted-
Average
Remaining
Contractual
Life (Years)

Options Exercisable

Weighted-
Average
Exercise Price

Shares
Exercisable
at June 30, 2019

Weighted-
Average
Exercise Price

$1.55 - 1.95     
$2.36 - 2.75     
$2.76 - 3.30     
$3.31 - 3.95     
$5.51 - 5.74     
$5.95 - 6.25     
$6.26 - 13.11     

9,800     
40,000     
55,000     
50,000     
8,664     
28,800     
24,286     
216,550     

1.0    $
2.0    $
3.0    $
7.0    $
4.0    $
5.0    $
6.0    $
4.3    $

1.87     
2.71     
3.11     
3.95     
5.74     
6.23     
13.11     
4.82     

9,800    $
40,000    $
55,000    $
50,000    $
8,664    $
28,800    $
24,286    $
216,550    $

1.87 
2.71 
3.11 
3.95 
5.74 
6.23 
13.11 
4.09 

We determine fair value following the authoritative guidance as follows:

Valuation  and  Amortization  Method.    We  estimate  the  fair  value  of  share-based  awards  granted  using  the  Black-Scholes
option valuation model.  We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which
are generally the vesting periods.

Expected Life.  The expected life of awards granted represents the period of time that they are expected to be outstanding. 
Unless  a  life  is  specifically  stated,  we  determine  the  expected  life  using  the  “simplified  method”  in  accordance  with  Staff
Accounting Bulletin No. 110 since we do not have sufficient historical share option exercise experience.

Expected Volatility.  Using the Black-Scholes option valuation model, we estimate the volatility of our common stock at the

date of grant based on the historical volatility of our common stock.

Risk-Free Interest Rate.  We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied
yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the
award.

Expected Dividend Yield.  We have not paid any cash dividends on our common stock in the last ten years and we do not
anticipate  paying  any  cash  dividends  in  the  foreseeable  future.    Consequently,  we  use  an  expected  dividend  yield  of  zero  in  the
Black-Scholes option valuation model.

Expected  Forfeitures.    We  use  historical  data  to  estimate  pre-vesting  option  forfeitures.    We  record  stock-based

compensation only for those awards that are expected to vest.

At June 30, 2019, the Company had no unvested options.  Stock compensation expense related to stock options of zero and

$35 thousand was recognized in fiscal years 2019 and 2018, respectively.

F-23

 
   
   
 
   
   
   
   
   
 
 
     
     
     
     
     
 
      
Index

Restricted Stock Units:

Restricted  stock  units  awarded  under  the  2015  LTIP  represent  the  right  to  receive  shares  of  common  stock  upon  the
satisfaction of vesting requirements, performance criteria and other terms and conditions.  During fiscal 2019, there were no grants
of performance-based restricted stock units. During fiscal 2018, an aggregate of 488,723 performance-based restricted stock units
were granted to certain employees.

The restricted stock units granted to each recipient are allocated among performance criteria pertaining to various aspects of
the Company’s business, as well as its overall operations, measured based on the second fiscal year following the date of grant. 
Achievement of the various performance criteria entitles the recipient to receive shares of common stock in amounts ranging from
50%  to  150%  of  the  number  of  restricted  stock  units  granted.    Grantees  of  restricted  stock  units  do  not  have  any  rights  of  a
stockholder, and do not participate in any distributions on our common stock, until the award fully vests upon satisfaction of the
vesting schedule, performance criteria and other conditions set forth in their award agreement.  Therefore, unvested restricted stock
units are not considered participating securities under ASC 260, “Earnings Per Share,” and are not included in the calculation of
basic or diluted earnings per share.

Compensation cost is measured as an amount equal to the fair value of the restricted stock units 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.

A summary of the status of restricted stock units as of June 30, 2019 and June 24, 2018, and changes during the fiscal years

then ended is presented below:

Outstanding at beginning of year
Granted during the year
Forfeited during the year
Outstanding at end of year

Vested at beginning of year
Vested during the year
Vested at end of year

Unvested at end of year

NOTE I - SHAREHOLDERS’ EQUITY:

June 30,
2019

June 24,
2018

908,293     
-     
(753,187)    
155,106     

487,950 
488,723 
(68,380)
908,293 

-     
-     
-     

- 
- 
- 

155,106     

908,293 

On April 22, 2009, the board of directors of the Company amended the stock repurchase plan first authorized on May 23,
2007, and previously amended on June 2, 2008, by increasing the aggregate number of shares of common stock the Company may
repurchase under the plan to a total of 3,016,000 shares.  No shares were repurchased during fiscal 2019 and, as of June 30, 2019,
there were 848,425 shares available to repurchase under the plan.

On  December  5,  2017,  the  Company  entered  into  an  At  Market  Issuance  Sales  Agreement  with  B.  Riley  FBR,  Inc.  (“B.
Riley FBR”) pursuant to which the Company may offer and sell shares of its common stock having an aggregate offering price of
up to $5,000,000 from time to time through B. Riley FBR acting as agent (the “2017 ATM Offering”).  The 2017 ATM Offering is
being undertaken pursuant to Rule 415 and a shelf Registration Statement on Form S-3 which was declared effective by the SEC on
November  6,  2017.  Through  June  30,  2019,  the  Company  had  sold  an  aggregate  of  191,478  shares  in  the  2017  ATM  Offering,
realizing aggregate gross proceeds of $0.3 million.

The Company pays to B. Riley FBR a fee equal to 3% of the gross sales price in addition to reimbursing certain costs.  The

Company had $4 thousand in expenses associated with the 2017 ATM Offering in fiscal 2019.

F-24

 
   
 
   
   
   
   
   
      
  
   
   
   
   
      
  
   
Index

NOTE J - COMMITMENTS AND CONTINGENCIES:

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 us.

NOTE K - EARNINGS PER SHARE:

The Company computes and presents earnings per share (“EPS”) in accordance with the authoritative guidance on Earnings
Per Share.    Basic  EPS  excludes  the  effect  of  potentially  dilutive  securities  while  diluted  EPS  reflects  the  potential  dilution  that
would occur if securities or other contracts to issue common stock were exercised, converted or resulted in the issuance of common
stock that then shared in the earnings of the Company.

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).

Income/(loss) from continuing operations
Loss from discontinued operations
Net income/(loss) available to common stockholders

Interest saved on convertible notes of $1,584 at 4%
Adjusted net income/(loss)

BASIC:
Weighted average common shares

Income/(loss) from continuing operations per common share
Loss from discontinued operations per common share
Net income/(loss) per common share

DILUTED:
Weighted average common shares
Convertible notes
Dilutive stock options
Weighted average common shares outstanding

Income/(loss) from continuing operations per common share
Loss from discontinued operations per common share
Net income/(loss) per common share

Fiscal Year Ended

June 30,
2019

June 24,
2018

(750)   $
-     
(750)   $

63    $
(687)   $

2,274 
(362)
1,912 

90 
2,002 

15,070     

13,854 

(0.05)   $
-     
(0.05)   $

15,070     
-     
-     
15,070     

(0.05)   $
-     
(0.05)   $

0.17 
(0.03)
0.14 

13,854 
1,129 
- 
14,983 

0.16 
(0.03)
0.13 

  $

  $

  $
  $

  $

  $

  $

  $

We  had  216,550  and  478,056  shares  of  common  stock  potentially  issuable  upon  exercise  of  employee  stock  options  for
years  ended  June  30,  2019  and  June  24,  2018,  respectively,  that  were  excluded  from  the  weighted  average  number  of  shares
outstanding on a diluted basis because the effect of such options would be anti-dilutive. These instruments expire at varying times
from fiscal 2020 through fiscal 2026.

F-25

 
 
 
 
   
 
   
   
      
  
   
      
  
   
   
      
  
   
   
      
  
   
      
  
   
   
   
   
   
      
  
   
Index

NOTE L– SEGMENT REPORTING:

The Company has three reportable operating segments as determined by management using the “management approach” as
defined  by  the  authoritative  guidance  on  Disclosures  about  Segments  of  an  Enterprise  and  Related  Information:    (1)  Pizza  Inn
Franchising,  (2)  Pie  Five  Franchising  and  (3)  Company-Owned  Restaurants.    These  segments  are  a  result  of  differences  in  the
nature of the products and services sold.  Corporate administration costs, which include, but are not limited to, general accounting,
human resources, legal and credit and collections, are partially allocated to the three operating segments.  Other revenue consists of
nonrecurring items.

The  Pizza  Inn  and  Pie  Five  Franchising  segments  establish  franchisees,  licensees  and  territorial  rights.  Revenue  for  this
segment is derived from franchise royalties, franchise fees, sale of area development and foreign master license rights and incentive
payments from third party suppliers and distributors. Assets for this segment include equipment, furniture and fixtures.

The Company-Owned Restaurants segment includes sales and operating results for all Company-owned restaurants.  Assets

for this segment include equipment, furniture and fixtures for the Company-owned restaurants.

Corporate  administration  and  other  assets  primarily  include  cash  and  short-term  investments,  as  well  as  furniture  and

fixtures located at the corporate office and trademarks and other intangible assets.  All assets are located within the United States.

F-26

Index

Summarized in the  following  tables  are  net  sales  and  operating  revenues,  depreciation and amortization expense, income
from continuing operations before taxes, capital expenditures and assets for the Company's reportable segments as of and for the
fiscal years ended June 30, 2019 and June 24, 2018 (in thousands):

Net sales and operating revenues:
Pizza Inn Franchising
Pie Five Franchising
Company-Owned Restaurants (1)
Corporate administration and other

Consolidated revenues

Depreciation and amortization:
Pizza Inn Franchising
Pie Five Franchising
Company-Owned Restaurants (1)

Combined

Corporate administration and other (2)

Depreciation and amortization

Income/(Loss) from continuing operations before taxes:
Pizza Inn Franchising
Pie Five Franchising
Company-Owned Restaurants (1)

Combined

Corporate administration and other

Income/(loss) from continuing operations before taxes

Fiscal Year Ended

June 30,
2019

June 24,
2018

  $

  $

  $

  $

  $

  $

7,192    $
4,192     
887     
48     
12,319    $

-    $
-     
123     
123     
343     
466    $

5,512    $
2,094     
(2,001)    
5,605     
(6,406)    
(801)   $

6,892 
3,970 
4,254 
4 
15,120 

- 
- 
459 
459 
415 
874 

5,594 
2,623 
(1,763)
6,454 
(7,502)
(1,048)

Notes:
(1)Company stores that were closed are included in discontinued operations in the accompanying Condensed Consolidated Statement of

Operations.

(2)Portions of corporate administration and other have been allocated to segments.

The following table provides information on our foreign and domestic revenues:

Geographic information (revenues):
United States
Foreign countries

Consolidated total

  $

  $

12,086    $
233     
12,319    $

14,566 
554 
15,120 

F-27

 
 
 
 
 
   
 
   
     
 
   
   
   
 
   
      
  
   
      
  
   
   
   
   
 
   
      
  
   
      
  
   
   
   
   
 
 
   
     
 
   
LEASE AGREEMENT

Basic Lease Provisions

1.01

Premises:

3551 Plano Parkway, Suite 100, The Colony, Texas 75056

1.02

Lease Term:

The Term of this Lease shall be one hundred twenty (120) months

1.03

Base Rental:

Exhibit 10.4

Term (Months)

Annual Base Rental Rate/RSF

Monthly Base Rental

1-3
4-12
13-24
25-36
37-48
49-60
61-72
73-84
85-96
97-108
109-120
Description
TI Allowance

$0.00
$17.50 NNN
$17.50 NNN
$18.00 NNN
$18.00 NNN
$18.50 NNN
$18.50 NNN
$19.00 NNN
$19.00 NNN
$19.50 NNN
$19.50 NNN
Amount
$300,000

$0.00*
$27,381.67
$27,381.67
$28,164.00
$28,164.00
$28,946.33
$28,946.33
$29,728.67
$29,728.67
$30,511.00
$30,511.00
Expires
12/31/2017

*In addition to the abatement of Monthly Base Rental during the first three (3) months of the Term, Landlord shall abate the
payment by Tenant of Operating Expenses and Electrical Expenses during said three (3) month period.

1.04

Base Year:

2017

1.05

Tenant’s Proportionate
Share:

49.24% (based upon a building containing 38,130 rentable square feet)

1.06

Security Deposit:

$0.00 (to be deposited upon Tenant’s execution of this Lease).

1.07

Notice Addresses:

1.08

Exhibits:

Landlord:  A&H Properties Partnership

Tenant: Rave Restaurant Group, Inc

  510 Regal Row
  Dallas, Texas 75247

Terms and Conditions
Premises
Land
Rules and Regulations
Parking
Work Letter

Exhibit “1”
Exhibit “A”
Exhibit “B”
Exhibit “C”
Exhibit “D”
Exhibit “E”

3551 Plano Parkway, Suite 100
The Colony, Texas 75056

In consideration of the mutual covenants and agreements set forth in this Lease, and other good and valuable consideration,

Landlord does hereby demise and lease to Tenant, and Tenant does hereby lease from Landlord, the Premises upon the terms and
conditions stated in these Basic Lease Provisions and all Exhibits.

EXECUTED this 1st day of Nov, 2016.

Landlord:

Tenant:

A&H PROPERTIES PARTNERSHIP
a Texas partnership

RAVE RESTAURANT GROUP, INC.,
a Texas corporation

By:

/s/ Ali Khoshgowari
Ali Khoshgowari
General Partner

By:

/s/ Clinton Coleman

Name: Clinton Coleman

Title: Chief Executive Officer

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit I

TERMS AND CONDITIONS

TABLE OF CONTENTS

Section 1.
Section 2.
Section 3.
Section 4.
Section 5.
Section 6.
Section 7.
Section 8.
Section 9.
Section 10.
Section 11.
Section 12.
Section 13.
Section 14.
Section 15.
Section 16.
Section 17.
Section 18.
Section 19.
Section 20.
Section 21.
Section 22.
Section 23.
Section 24.
Section 25.
Section 26.
Section 27.
Section 28.
Section 29.
Section 30.
Section 31.
Section 32.
Section 33.
Section 34.
Section 35.
Section 36.

DEFINITIONS AND BASIC PROVISIONS
GRANTING CLAUSE
EARLY OCCUPANCY
RENTAL
USE
SERVICES TO BE PROVIDED BY LANDLORD
REPAIR AND MAINTENANCE
FIRE OR OTHER CASUALTY
COMPLIANCE WITH LAWS AND USAGE
LIABILITY AND INDEMNITY
ADDITIONS AND FIXTURES
ASSIGNMENT AND SUBLETTING
SUBORDINATION
OPERATING EXPENSES
EMINENT DOMAIN
ACCESS BY LANDLORD
LANDLORD’S LIEN
DEFAULTS
NONWAIVER
HOLDING OVER
COMMON AREA
RULES AND REGULATIONS
TAXES
INSURANCE
PERSONAL LIABILITY
NOTICE
LANDLORD’S MORTGAGE
BROKERAGE.
PREPAID RENTAL; SECURITY DEPOSIT; LETTER OF CREDIT
HAZARDOUS SUBSTANCES
ERISA AND UBTI RESTRICTIONS
DISCLAIMER
RESERVED RIGHTS
MISCELLANEOUS
ENTIRE AGREEMENT AND BINDING EFFECT
EXHIBITS AND ADDENDA

EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT D
EXHIBIT E

PREMISES
LAND
RULES AND REGULATIONS
PARKING
WORK LETTER

Page
1
2
2
2
2
2
3
3
4
4
4
5
5
5
7
7
7
7
9
9
9
9
9
9
9
10
10
10
10
10
10
11
11
11
13
13

 
 
1.  DEFINITIONS AND BASIC PROVISIONS.

OFFICE LEASE AGREEMENT

A

B.

C.

D.

“Landlord”:

A&H PROPERTIES PARTNERSHIP,
a Texas general partnership

Address of Landlord:

Landlord’s Telephone:
Landlord’s Facsimile:
Contact Person:

With Copies to:

510 Regal Row
Dallas, TX 75247

214.630.2300
214.630.6932
Ali Khoshgowari

Vincent Serafino Geary Waddell Jenevein, PC
1601 Elm Street, Suite 4100
Dallas, Texas 75201
Attn: Kelly R. Fisher

With rent checks payable to:

A&H Properties Partnership

“Tenant”:

RAVE RESTAURANT GROUP, INC., a Texas corporation

Address of Tenant:
Tenant’s Telephone:
Tenant’s Facsimile:

3551 Plano Parkway, Suite 100, The Colony, Texas 75056

E.       “Building”: The structure commonly known as 3551 Plano Parkway and which is located at 3551 Plano Parkway,
The Colony, Texas 75056, on the tract of land (the “Land”) more particularly described on Exhibit “B” attached hereto and made a
part hereof for all purposes, containing approximately 38,130 rentable square feet.

F.      “Premises”: Commonly known as Suite 100 and containing approximately 18,776 square feet of rentable area on the
first (1st) floor of the Building, as outlined on the floor plan attached hereto as Exhibit “A” and made a part hereof for all purposes.
Measurement  and  calculation  of  rentable  area  has  been  performed  in  accordance  with  the  Building  Owners  and  Managers
Association  standards.  Landlord  and  Tenant  hereby  stipulate  that  notwithstanding  anything  herein  to  the  contrary,  the  Premises
shall be deemed to consist of approximately 18,776 rentable square feet, and that no shortage or overage in the rentable square feet
of the Premises purported by either party shall be the basis for changing the number of rentable square feet herein stipulated.

G.      “Rentable area in the Building” shall be 38,130 square feet of rentable area, unless modified as provided herein.

H.      “Commencement Date” shall mean January 2, 2017. Upon request of either party hereto, Landlord and Tenant agree

to execute and deliver a written declaration in recordable form expressing the Commencement Date hereof.

L.            “Term”:  Commencing  on  the  Commencement  Date  and  ending  one  hundred  twenty  (120)  months  after  the
Commencement Date, plus any partial calendar month following the Commencement Date, unless sooner terminated as provided
herein. In addition, so long as Tenant is not in default of this Lease, Tenant shall have the right to extend the Term of this Lease for
a period of sixty (60) additional months (the “Renewal Term”) upon delivery of written notice to Landlord no later than twelve (12)
months prior to the expiration of the original Term. In the event Tenant properly and timely exercises Tenant’s right to the Renewal
Term, Landlord and Tenant shall mutually agree upon the market Base Rental for such Renewal Term. In the event Landlord and
Tenant  cannot  agree  upon  the  Base  Rental  for  the  Premises  within  sixty  (60)  days  following  Tenant’s  notice  of  exercise  to
Landlord,  the  appraisal  process  below  shall  be  deemed  to  have  been  implemented  by  Tenant.  Once  the  appraisal  process  is
implemented,  Landlord  and  Tenant  shall  each  appoint,  by  written  notice  to  the  other,  a  licensed  real  estate  broker  who  has  had,
within the immediately preceding seven (7) years, at least five (5) years of commercial office building leasing experience in the
Dallas, Texas area, or a licensed real estate appraiser who has had, within the immediately preceding seven (7) years, at least five
(5) years of  commercial  office  appraisal  experience  in  the  Dallas,  Texas  area,  neither  of  which  broker  or  appraiser  shall  have  a
conflict  of  interests  in  representing  either  Landlord  or  Tenant.  If  either  party  fails  to  appoint  such  a  real  estate  broker/appraiser
within ten (10) days following the expiration of the fifteen (15) day period within which Landlord and Tenant tried to agree on the
market Base Rental, then the broker/appraiser who is appointed shall select the second broker/appraiser. Such two broker/appraisers
shall proceed to determine the market Base Rental using the factors as described above. If such two broker/appraisers are unable to
agree upon a market Base Rental then they shall jointly appoint a third licensed appraiser meeting the required qualifications and
the market Base Rental shall be that amount upon which any two of such three broker/appraisers agree. The market Base Rental, as
determined  by  the  process  described  hereinabove  shall  be  binding  on  both  Landlord  and  Tenant.  Each  party  shall  have  the
responsibility for paying the broker/appraiser who was, or who should have been, appointed by such party, and each shall pay one-
half (½) of the costs and expenses of the third broker/appraiser if one is appointed.

J.       “Base Rental”:As set forth in Section 1.03 of the Basic Lease Provisions.

Each such monthly installment shall be due and payable on the first day of each calendar month, monthly in advance

without demand and without setoff or deduction whatsoever.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
K.      “Prepaid Rental”: $0.00, to be applied to the first accruing monthly installment of Base Rental and Operating

Expenses.

L.      “Security Deposit”: As set forth in Section 1.06 of the Basic Lease Provisions.

M.      “Permitted Use”: The Premises shall be used only for general office and permitted test kitchen purposes.

N.      “Common Area”: That part of the Building and other improvements now or hereafter placed, constructed or erected
on the land on which the Building is located (the “Land”) designated  by  Landlord  from  time  to  time  for  the  common  use  of  all
tenants, including among other facilities, sidewalks, service corridors, curbs, truckways, loading areas, private streets and alleys,
lighting facilities, mechanical and electrical rooms, janitors’ closets, halls, lobbies, delivery passages, elevators, drinking fountains,
meeting rooms, public toilets, parking areas and garages, decks and other parking facilities, landscaping, and other common rooms
and common facilities.

1

O.       “Prime Rate”: The rate published as such by The Wall Street Journal, Southwest Edition, (or its successor or assign)

in its listing of “Money Rates”.

P.       “Broker”: CBRE, Inc. (Landlord’s broker) and Square Foot, Inc. (Tenant’s Broker).

Q.      “Base Operating Expenses Rate”: The Actual Operating Expenses Rate for the 2017 calendar year.

R.      “Base Year”: As set forth in Section 1.04 of the Basic Lease Provisions.

S.      “Project” shall mean the Building, the parking facilities, parking garage and other structures (if any), improvements,
landscaping, fixtures, appurtenances and other common areas now and hereafter placed, constructed or erected on the tract of land
which is described on Exhibit “B”.

Each  of  the  foregoing  definitions  and  basic  provisions  shall  be  construed  in  conjunction  with  the  references  thereto
contained in the other provisions of this Lease and shall be limited by such other provisions. Each reference in this Lease to any of
the foregoing definitions and basic provisions shall be construed to incorporate each term set forth above under such definition or
provision.

2.  GRANTING CLAUSE. Landlord, in consideration of the covenants and agreements to be performed by Tenant and upon
the  terms  and  conditions  hereinafter  stated,  does  hereby  lease,  demise  and  let  unto  Tenant,  and  Tenant  does  hereby  lease  from
Landlord, the Premises specified in Section 1.F. hereof to have and to hold for the Term of this Lease, as specified in Section 1.I.
hereof.

3.  EARLY OCCUPANCY. Upon Landlord’s written consent, Tenant may occupy the Premises prior to the Commencement
Date. Such early occupancy of the Premises by Tenant prior to the Commencement Date shall be subject to all of the terms and
provisions  of  this  Lease  excepting  only  those  requiring  the  payment  of  Base  Rental  or  Tenant’s  Proportionate  Share  of  Actual
Operating Expenses (as such term is defined below) during such early occupancy period. However, Tenant shall be obligated to pay
Tenant’s Share of Electrical Costs (as such term is defined below) during such early occupancy period.

Notwithstanding  the  foregoing,  if  this  Lease  is  executed  before  the  Premises  becomes  vacant,  or  if  any  present  tenant  or
occupant  of  the  Premises  holds  over  and  Landlord  cannot  acquire  possession  thereof  prior  to  the  Commencement  Date,  then
Landlord shall not be deemed in default hereunder, and Tenant agrees to accept possession of the Premises at such time as Landlord
is able to tender the same and, in such event, the date of such tender by Landlord shall be deemed to be the Commencement Date,
and Landlord hereby waives the payment of rental and other charges covering any period prior to the date of such tender.

4.  RENTAL. As rental for the lease and use of the Premises, Tenant will pay Landlord or Landlord’s assigns, at the address

of Landlord specified in Section 1.B. hereof, without demand and without deduction, abatement or setoff (except as otherwise
expressly provided for herein), the Base Rental in the manner specified in Section l.J. hereof, in lawful money of the United States.
If the Term of this Lease does not commence on the first day of a calendar month, Tenant shall pay to Landlord in advance a pro
rata part of such sum as rental for such first partial month. Tenant shall not pay any installment of rental more than one (1) month in
advance. All past due installments of rental or other payment specified herein shall bear interest at the highest lawful rate per
annum from the date due until paid.

In  addition,  Tenant  hereby  acknowledges  that  late  payment  of  rent  and  other  sums  due  hereunder  will  cause  Landlord  to
incur costs and other financial hardships not contemplated by this Lease, the exact amount of which will be difficult to ascertain.
Such costs include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord
by the terms of any mortgage or trust deed covering the Building. Accordingly, if any installment of rent or any other sum due from
Tenant shall not be received by Landlord or Landlord’s designee within ten (10) days after such amount shall be due, Tenant shall
pay to Landlord a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such
late  charge  by  Landlord  shall  in  no  event  constitute  a  waiver  of  Tenant’s  default  with  respect  to  such  overdue  payment,  nor  be
construed as liquated damages, nor prevent Landlord from exercising any of the other rights an remedies granted hereunder. The
failure of Tenant to pay such charge as herein stated shall, at Landlord’s option, be an Event of Default hereunder.

If  Tenant  fails  to  timely  pay  two  (2)  consecutive  installments  of  Base  Rental,  or  other  payment  specified  herein,  or  any
combination thereof, Landlord may require Tenant to pay (in addition to any interest) Base Rental and other payments specified
herein (as estimated by Landlord, if necessary) quarterly in advance, and, in such event, all future payments shall be made on or
before the due date in cash or by cashier’s check or money order, and the delivery of Tenant’s personal or corporate check shall no
longer  constitute  payment  thereof.  Any  acceptance  of  Tenant’s  personal  or  corporate  check  thereafter  by  Landlord  shall  not  be
construed as a waiver of the requirement that such payments be made in cash or by cashier’s check or money order. Any amount so
estimated by Landlord and paid by Tenant shall be adjusted promptly after actual figures become available and paid or credited to
Landlord or Tenant, as the case may be.

5.    USE.  Tenant  shall  use  the  Premises  solely  for  the  Permitted  Use  specified  in  Section  l.M.  hereof  and  for  no  other
business  or  purpose.  Tenant  shall  be  responsible  to  contract  directly  and  pay  at  Tenant’s  sole  cost  and  expense  with  the  service
provider for telephone service, cable/telecommunications service and alarm system installation and monitoring. In addition, Tenant
shall be responsible for the cost of all other utilities consumed at the Premises.

6.  SERVICES TO BE PROVIDED BY LANDLORD.

A.            Subject  to  the  rules  and  regulations  hereinafter  referred  to,  Landlord  shall  furnish  Tenant,  at  Landlord’s  expense,

while Tenant is occupying the Premises and is not in default hereunder, the following services during the Term of this Lease:

(1)     Air conditioning and heating in season, at such times as Landlord normally furnishes such services to other tenants in
the Building, and at such temperatures and in such amounts as are considered by Landlord to be standard, but such service on
Saturday afternoons, Sundays and holidays to be furnished only upon the request of Tenant, who shall bear the cost thereof.
Tenant acknowledges that such service and temperature may be subject to change by local, county, state or federal regulation.
Whenever machines or equipment that generate abnormal heat are used in the Premises which affect the temperature otherwise
maintained  by  the  air  conditioning  system,  Landlord  shall  have  the  right  to  install  supplemental  air  conditioning  in  the
Premises,  and  the  cost  thereof,  including  the  cost  of  installation,  operation,  use  and  maintenance,  shall  be  paid  by  Tenant  to
Landlord as additional rental upon demand.

(2)     Water at those points of supply provided for general use.

2

(3)     Landlord shall not provide janitor service to the Premises, which janitor service shall be contracted for by Tenant at
Tenant’s  sole  cost  and  expense;  however,  Tenant  shall  pay  the  additional  costs  attributable  to  the  cleaning  of  improvements
within the Premises other than building standard improvements if determined to be reasonably necessary by Landlord.

(4)     Elevators for ingress to and egress from the Building as may in the judgment of Landlord be reasonably required.
Landlord may reasonably limit the number of elevators in operation after usual and customary business hours and on Saturday
afternoons, Sundays and legal holidays.

(5)          Proper  facilities  to  furnish  sufficient  electrical  power  for  building  standard  lighting,  personal  computers  and  other
machines of similar low electrical consumption, but not including electricity required for electronic data processing equipment,
special lighting in excess of building standard, or any other item of electrical equipment which singly consumes more than 0.25
kilowatts per hour at rated capacity or requires a voltage other than 120 volts single phase. Landlord shall have the right at any
time and from time to time during the Term of this Lease to install equipment within the Premises for the purpose of measuring
or estimating Tenant’s electrical usage therein.

(6)          As  an  Operating  Expense,  upon  Tenant’s  request,  Landlord  shall  purchase  and  install  replacement  lamps  of  types

generally commercially available (including, but not limited to, incandescent and fluorescent) used in the Premises.

B.          Landlord’s  obligations  to  furnish  services  under  Section  6.A.  shall  be  subject  to  the  rules  and  regulations  of  the
supplier  of  such  services  and  governmental  rules  and  regulations.  No  interruption  or  malfunction  of  any  of  such  services  shall
constitute an eviction or disturbance of Tenant’s use and possession of the Premises or the Building or a breach by Landlord of any
of  Landlord’s obligations  hereunder  or render  Landlord  liable  for  damages  or  entitle  Tenant  to  be  relieved  from  any  of  Tenant’s
obligations hereunder (including the obligation to pay rental) or grant Tenant any right of setoff or recoupment. In the event of any
such interruption, however, Landlord shall use reasonable diligence during normal business hours to restore such service or cause
same to be restored in any circumstances in which such restoration is within the reasonable control of Landlord and the interruption
was not caused in whole or in part by Tenant’s fault

C.        Without  limiting  the  generality  of  the  immediately  preceding  paragraphs,  Tenant  acknowledges  that  LANDLORD
MAKES NO REPRESENTATION OR WARRANTY REGARDING WHETHER OR NOT LANDLORD WILL PROVIDE
SECURITY SERVICES, OR IF SO, WHAT FORM OF SECURITY SERVICES WILL BE PROVIDED.

7.   REPAIR AND MAINTENANCE.

A.            Landlord  shall,  except  as  may  be  provided  elsewhere  herein,  maintain  the  structural  portions  of  the  Building,  the
Building systems and the Common Area of the Building in a manner consistent with comparable buildings within the vicinity of
the  Building.  Landlord  shall,  at  Landlords  sole  cost  and  expense,  make  necessary  repairs  of  damage  to  the  Building  corridors,
lobby, replacement of roof, structural members of the Building and equipment used to provide the services referred to in Section 6
hereof, unless any such damage is caused in whole or in part by negligence of Tenant, or Tenant’s agents or employees, in which
event  Tenant  shall  bear  the  cost  of  such  repairs.  Tenant  shall  promptly  give  Landlord  notice  of  any  damage  in  the  Premises
requiring  repair  by  Landlord,  as  aforesaid.  Unless  otherwise  stipulated  herein,  Landlord  shall  not  be  required  to  make  any
improvements or repairs of any kind or character on the Premises during the Lease Term.

B.      Tenant shall maintain the Premises in a clean, attractive, safe, operable condition and in good repair, except as to
damage  required  to  be  repaired  by  Landlord,  as  provided in Section 7.A.  hereof  Tenant  shall  not  commit  or  allow  any  waste  or
damage to be committed on any portion of the Premises or Building. Tenant shall not in any manner deface or injure the Premises
or  the  Building  but  shall,  at  its  sole  cost  and  expense,  maintain  the  Premises  and  make  all  needed  repairs  and  replacements,
including, without limitation, replacement or repair of all fixtures installed by Tenant and all plate glass, walls, carpeting and other
floor  covering  placed  or  found  therein.  Tenant  shall  repair  or  replace,  at  Tenant’s  cost  and  expense,  any  damage  done  to  the
Premises, the Building, and the Common Area, or any part thereof, arising out of or in connection with the use of the Premises, the
Building,  and/or  the  Common  Area  by  Tenant,  Tenant’s  agents,  employees,  invitees,  visitors,  and  Tenant  agrees  to  restore  the
Premises, the Building, and the Common Area to the same or as good a condition as it was prior to such damage. All repairs and
replacements shall be effected in compliance with all building and fire codes and other applicable laws and regulations. If Tenant
fails to make such repairs or replacements within thirty (30) days after delivery of notice to Tenant, Landlord may, at its option,
make  the  repairs  or  replacements,  and  Tenant  shall  pay  the  cost  thereof  to  Landlord  within  thirty  (30)  days  after  Landlord  has
delivered to Tenant an invoice thereof. Any repairs required to be made by Tenant to the mechanical, electrical, sanitary, heating,
ventilating, air conditioning or other system of the Building shall be performed only by contractor(s) designated by Landlord and
only  upon  the  prior  written  approval  of  Landlord  as  to  the  work  to  be  performed  and  materials  to  be  furnished  in  connection
therewith.  Any  other  repairs  in  or  to  the  Building,  the  Complex,  and  the  facilities  and  systems  thereof  for  which  Tenant  is
responsible shall be performed by Landlord at Tenant’s expense; but Landlord may, at Landlord’s option, before commencing any
such work or at any time thereafter, require Tenant to furnish to Landlord such security, in form (including, without limitation, a
bond  issued  by  a  corporate  surety  licensed  to  do  business  in  the  state  in  which  the  Building  is  situated)  and  in  such  amount  as
Landlord  shall  deem  necessary  to  assure  the  payment  for  such  work  by  Tenant.  Upon  the  expiration  of  the  Term  of  this  Lease,
Tenant  shall  surrender  and  deliver  up  the  Premises  with  all  improvements  located  thereon  (except  as  provided  in  Section  ll  .B.
hereof) to Landlord broom-clean and in the same condition in which they existed at the commencement of the Lease, excepting
only ordinary wear and tear and damage arising from any cause not required to be repaired by Tenant, failing which Landlord may
restore the Premises to such condition, and Tenant shall pay the cost thereof

C.      This Section 7  shall  not  apply  in  the  case  of  damage  or  destruction  by  fire  or  other  casualty  which  is  covered  by
insurance maintained by Landlord on the Building (as to which Section 8 hereof shall apply), or damage resulting from an eminent
domain taking (as to which Section 15 hereof shall apply).

8.   FIRE AND OTHER CASUALTY.

A.     Tenant shall give prompt written notice to Landlord of any damage caused to the Premises by fire or other casualty.

B.     In the event the Premises or any portion of the Building shall be damaged or destroyed by fire or casualty, Landlord
shall have the election to terminate this Lease or to repair and reconstruct the Premises and the Building to substantially the same
condition to which it existed prior to such damage or destruction, except that Landlord shall not be required to rebuild, repair or
replace any part of the partitions, fixtures, furniture, equipment, and other improvements which may have been installed by Tenant
or other tenants within the Building. Landlord’s obligation to rebuild and repair under this Section 8 shall in any event be limited to
the extent of insurance proceeds available to Landlord for such restoration.

C.     Tenant agrees that during any period of reconstruction or repair of the Premises it will continue the operation of its
business  within  the  Premises  to  the  extent  practicable.  During  the  period  from  the  occurrence  of  the  casualty  until  Landlord’s
repairs  are  completed,  the  Base  Rental  shall  be  reduced  to  such  extent  as  may  be  fair  and  reasonable  under  the  circumstances;
however,  there  shall  be  no  abatement  of  the  other  charges  provided  for  herein.  If  Landlord  has  elected  to  repair  and  restore  the
Premises,  this  Lease  shall  continue  in  full  force  and  effect  and  such  repairs  shall  be  made  within  a  reasonable  time  thereafter,
subject to delays arising from shortages of labor or material, acts of God, war or other conditions beyond Landlord’s reasonable
control.

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D.          In  the  event  that  this  Lease  is  terminated  as  herein  permitted,  Landlord  shall  refund  to  Tenant  the  prepaid  rental
(unaccrued as of the date of damage or destruction) less any sum then owing Landlord by Tenant. If Landlord has elected to repair
and reconstruct the Premises, then the Term of this Lease shall be extended by a period of time equal to the period of such repair
and reconstruction. Any insurance which may be carried by Landlord or Tenant against loss or damage to the Building or to the
Premises shall be for the sole benefit of the party carrying such insurance under its control, and it is understood that Landlord shall
in no event be obligated to carry insurance  on  Tenant’s  contents.  Tenant  shall  use  proceeds  from  insurance  carried  by  Tenant  to
repair and restore Tenant’s property.

E.     If the Premises or any other portion of the Building be damaged by fire or other casualty resulting from the fault or
negligence of Tenant or any of Tenants agents, employees, or invitees, the Base Rent shall not be diminished during the repair of
such damage, and Tenant shall be liable to Landlord for the cost and expense of the repair and restoration of the Building caused
thereby to the extent such cost and expense is not covered by insurance proceeds.

9.   COMPLIANCE WITH LAWS AND USAGE. Tenant, at Tenant’s own expense, (a) shall comply with all federal, state,
municipal, fire underwriting and other laws, ordinances, orders, rules and regulations applicable to the Premises and the business
conducted  therein  by  Tenant,  (b)  shall  not  engage  in  any  activity  which  would  cause  Landlord’s  fire  and  extended  coverage
insurance  to  be  cancelled  or  the  rate  therefor  to  be  increased  (or,  at  Landlord’s  option,  Tenant  shall  pay  any  such  increase  to
Landlord immediately upon demand as additional rental in the event of such rate increase by reason of such activity), (c) shall not
commit,  and  shall  cause  Tenant’s  agents,  employees  and  invitees  not  to  commit,  any  act  which  is  a  nuisance  or  annoyance  to
Landlord or to other tenants, or which might, in the exclusive judgment of Landlord, damage Landlord’s goodwill or reputation, or
tend to injure or depreciate the Building, (d) shall not commit or permit waste in the Premises or the Building, (e) shall comply with
rules and regulations from time to time promulgated by Landlord applicable to the Premises and/or the Building, (f) shall not paint,
erect or display any sign, advertisement, placard or lettering which is visible in the corridors or lobby of the Building or from the
exterior of the Building without Landlord’s prior written approval, and (g) shall not occupy or use, or permit any portion of the
Premises to be occupied or used, for any business or purpose other than the Permitted Use specified in Section I.M. hereof. If a
controversy  arises  concerning  Tenant’s  compliance  with  any  federal,  state,  municipal  or  other  laws,  ordinances,  orders,  rules  or
regulations applicable to the Premises and the business conducted therein by Tenant, Landlord may retain consultants of recognized
standing to investigate Tenant’s compliance. If it is determined that Tenant has not complied as required, Tenant shall reimburse
Landlord  on  demand  for  all  consulting  and  other  costs  incurred  by  Landlord  in  such  investigation.  Landlord  and  Tenant
acknowledge that, in accordance with the provisions of the Americans with Disabilities Act of 1990 and the Texas Elimination of
Architectural Barriers Act, each as amended from time to time, and all regulations and guidelines issued by authorized agencies
with  respect  thereto  (collectively,  the  “ADA”  and  the  “EAB”,  respectively),  responsibility  for  compliance  with  the  terms  and
conditions of Title III of the ADA and the EAB may be allocated as between Landlord and Tenant. Notwithstanding anything to the
contrary contained in the Lease, Landlord and Tenant agree that the responsibility for compliance with the ADA and the EAB shall
be  allocated  as  follows:  (i)  Tenant  shall  be  responsible  for  compliance  with  the  provisions  of  Title  III  of  the  ADA  and  with  the
provisions of the EAB with respect to the Premises, including restrooms within the Premises, and (ii) Landlord shall be responsible
for compliance with the provisions of Title III of the ADA and with the provisions of the EAB with respect to the exterior of the
Building, parking areas, sidewalks and walkways, and any and all areas appurtenant thereto, together with all common areas of the
Building not included within the Premises. The allocation of responsibility for ADA and EAB compliance between Landlord and
Tenant,  and  the  obligations  of  Landlord  and  Tenant  established  by  such  allocations,  shall  supersede  any  other  provisions  of  the
Lease that may contradict or otherwise differ from the requirements of this Section.

10.  LIABILITY AND INDEMNITY.

A.     Tenant agrees to indemnify and save Landlord harmless from all claims (including costs and expenses of defending
against such claims) arising or alleged to arise from any act or omission of Tenant or Tenant’s agents, employees, contractors, or
arising from any injury to any person or damage to the property of any person occurring during the Term of this Lease in or about
the Premises. Tenant agrees to use and occupy the Premises and other facilities of the Building at Tenant’s own risk and hereby
releases Landlord, Landlord’s agents or employees, from all claims for any damage or injury to the full extent permitted by law,
REGARDLESS  OF  CAUSE  OR  ORIGIN,  INCLUDING  NEGLIGENCE  OF  LANDLORD,  ITS  AGENTS,  OFFICERS,
OR  EMPLOYEES  BUT  EXCEPTING  THE  GROSS  NEGLIGENCE  OR  WILLFUL  MISCONDUCT  OF  LANDLORD,
ITS AGENTS, OFHCERS, OR EMPLOYEES.

B.     Tenant waives any and all rights of recovery, claim, action, or cause of action, against Landlord, its agents, officers, or
employees,  for  any  loss  or  damage  that  may  occur  to  the  Premises,  or  any  improvements  thereto,  or  the  Building,  or  any
improvements  thereto,  or  any  personal  property  of  such  party  therein,  by  reason  of  fire,  the  elements,  or  any  other  cause  which
could be insured against under the terms of standard fire and extended coverage insurance policies, REGARDLESS OF CAUSE
OR  ORIGIN,  INCLUDING  NEGLIGENCE  OF  LANDLORD,  ITS  AGENTS,  OFFICERS,  OR  EMPLOYEES  BUT
EXCEPTING THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LANDLORD, ITS AGENTS, OFFICERS,
OR  EMPLOYEES,  and  Tenant  covenants  that  no  insurer  shall  hold  any  right  of  subrogation  against  Landlord  and  all  such
insurance policies shall be amended or endorsed to reflect such waiver of subrogation.

C.     Tenant, to the extent permitted by law, waives all claims Tenant may have against Landlord, and against Landlord’s
agents and employees for injury to person or damage to or loss of property sustained by Tenant or by any occupant of the Premises,
or  by  any  other  person,  resulting  from  any  part  of  the  Building  or  any  equipment  or  appurtenances  becoming  out  of  repair,  or
resulting  from  any  accident  in  or  about  the  Building  or  resulting  directly  or  indirectly  from  any  act  or  neglect  of  any  tenant  or
occupant  of  any  part  of  the  Building  or  of  any  other  person,  REGARDLESS  OF  CAUSE  OR  ORIGIN,  INCLUDING
NEGLIGENCE OF LANDLORD, ITS AGENTS, OFFICERS, OR EMPLOYEES, unless such damage is a result of the gross

negligence or willful misconduct of Landlord, or Landlord’s agents or employees. If any damage results from any act or neglect of
Tenant, Landlord may, at Landlord’s option, repair such damage, and Tenant shall thereupon pay to Landlord the total cost of such
repair. All personal property belonging to Tenant or any occupant of the Premises that is in or on any part of the Building shall be
there at the risk of Tenant or of such other person only, and Landlord, Landlord’s agents and employees shall not be liable for any
damage  thereto  or  for  the  theft  or  misappropriation  thereof,  REGARDLESS  OF  CAUSE  OR  ORIGIN,  INCLUDING
NEGLIGENCE  OF  LANDLORD,  ITS  AGENTS,  OFFICERS,  OR  EMPLOYEES,  unless  such  damage,  theft  or
misappropriation is a result of the gross negligence or willful misconduct of Landlord or Landlord’s agents or employees. Tenant
agrees to indemnify and hold Landlord harmless from and against any and all loss, cost, claim and liability (including reasonable
attorneys’ fees) for injuries to all persons and for damage to or loss of property occurring in or about the Building, due to any act or
negligence or default under this Lease by Tenant, Tenant’s contractors, agents or employees.

D.     Landlord hereby indemnifies and holds Tenant harmless from and against any and all claims, demands, liabilities, and
expenses, including attorneys’ fees, arising from (i) the breach of this Lease by Landlord. In the event any action or proceeding
shall  be  brought  against  Tenant  by  reason  of  any  such  claim,  Landlord  shall  defend  the  same  at  Landlord’s  expense  by  counsel
reasonably satisfactory to Tenant.

11.  ADDITIONS AND FIXTURES.

A.     Tenant will make no alteration, change, improvement, repair, replacement or physical addition in or to the Premises
without the prior written consent of Landlord. If such prior  written  consent  of  Landlord  is  granted,  the  work  in  such  connection
shall  be  at  Tenant’s  expense  but  by  workmen  of  Landlord  or  by  workmen  and  contractors  approved  in  advance  in  writing  by
Landlord  and  in  a  manner  and  upon  terms  and  conditions  and  at  times  satisfactory  to  and  approved  in  advance  in  writing  by
Landlord. In any instance where Landlord grants such consent, Landlord may grant such consent contingent and conditioned upon
Tenant’s contractors, laborers, materialmen and others furnishing labor or materials for Tenant’s job working in harmony and not
interfering with any labor utilized by Landlord, Landlord’s contractors or mechanics or by any other tenant or such other tenant’s
contractors or mechanics; and if at any time such entry by one (1) or more persons furnishing labor or materials for Tenant’s work
shall  cause  disharmony  or  interference  for  any  reason  whatsoever  without  regard  to  fault,  the  consent  granted  by  Landlord  to
Tenant may be withdrawn at any time upon written notice to Tenant.

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B.          Tenant,  if  Tenant  so  elects,  may  remove  Tenant’s  trade  fixtures,  office  supplies  and  movable  office  furniture  and
equipment  not  attached  to  the  Building  provided  (i)  such  removal  is  made  prior  to  the  expiration  of  the  Term  of  this  Lease,  (ii)
Tenant is not in default of any obligation or covenant under this Lease at the time of such removal, and (iii) Tenant promptly repairs
all damage caused by such removal. All other property at the Premises and any alteration or addition to  the Premises (including
wall-to-wall carpeting, paneling or other wall covering) and any other article attached or affixed to the floor, wall or ceiling of the
Premises shall become the property of Landlord shall be in good condition, normal wear and tear excepted, and shall remain upon
and be surrendered with the Premises as part thereof at the expiration of the Term of this Lease, Tenant hereby waiving all rights to
any payment or compensation therefor. If, however, Landlord so requests in writing, Tenant will, prior to the termination of this
Lease, remove in a good and workmanlike manner any and all alterations, additions, fixtures, equipment and property placed or
installed by Tenant in the Premises and will repair any damage occasioned by such removal.

12.  ASSIGNMENT AND SUBLETTING.

A.     Neither Tenant nor Tenant’s legal representatives or successors in interest by operation of law or otherwise shall assign
this  Lease  or  sublease  the  Premises  or  any  part  thereof  or  mortgage,  pledge  or  hypothecate  its  leasehold  interest  or  grant  any
concession or license within the Premises without the prior express written permission of Landlord, such written permission not to
be  unreasonably,  withheld,  conditioned  delayed  and  any  attempt  to  do  any  of  the  foregoing  without  the  prior  express  written
permission of Landlord shall be void and of no effect. In the event Tenant requests Landlord’s prior express permission as to any
such assignment, sublease or other transaction, Landlord shall have the right and option, as of the requested effective date of such
assignment, sublease or other transaction (but no obligation), to cancel and terminate this Lease as to the portion of the Premises
with respect to which Landlord has been requested to permit such assignment, sublease or other transaction, and if Landlord elects
to cancel and terminate this Lease as to the aforesaid portion of the Premises, then the rental and other charges payable hereunder
shall thereafter be proportionately reduced. In the event of any such attempted assignment or attempted sublease, or should Tenant,
in any other nature of transaction, permit or attempt to permit anyone to occupy the Premises (or any portion thereof) without the
prior express written permission of Landlord, Landlord shall thereupon have the right and option to cancel and terminate this Lease
effective upon ten (10) days’ notice to Tenant given by Landlord at any time thereafter either as to the entire Premises or as to only
the portion thereof which Tenant shall have attempted to assign or sublease or otherwise permitted some other party’s occupancy
without Landlord’s prior express written permission, and if Landlord elects to cancel and terminate this Lease as to the aforesaid
portion  of  the  Premises,  then  the  rental  and  other  charges  payable  hereunder  shall  thereafter  be  proportionately  reduced.  This
prohibition  against  assignment  or  subletting  shall  be  construed  to  include  a  prohibition  against  any  assignment  or  subletting  by
operation of law.

B.     Notwithstanding that the prior express written permission of Landlord to any of the aforesaid transactions may have

been obtained, the following shall apply:

(1)       In  the event  of  an  assignment,  contemporaneously  with  the  granting  of Landlord’s aforesaid consent, Tenant shall
cause the assignee to expressly assume in writing and agree to perform all of the covenants, duties and obligations of Tenant
hereunder, and such assignee shall be jointly and severally liable therefor along with Tenant; Tenant shall further cause such
assignee  to  grant  Landlord  an  express  first  and  prior  contract  lien  and  security  interest  in  the  manner  hereinafter  stated  as
applicable to Tenant;

(2)    In any case where Landlord consents to an assignment, sublease, grant of a concession or license or mortgage, pledge
or  hypothecation  of  the  leasehold,  the  undersigned  Tenant  will  nevertheless  remain  directly  and  primarily  liable  for  the
performance of all of the covenants, duties and obligations of Tenant hereunder (including, without limitation, the obligation to
pay  all  rental  and  other  sums  herein  provided  to  be  paid),  and  Landlord  shall  be  permitted  to  enforce  the  provisions  of  this
Lease  against  the  undersigned  Tenant  and/or  any  assignee,  sublessee,  concessionaire,  licensee  or  other  transferee  without
demand upon or proceeding in any way against any other person; and

(3)     If the rental due and payable by a sublessee under any such permitted sublease (or a combination of the rental payable
under such sublease plus any bonus or other consideration therefor or incident thereto) exceeds the hereinabove provided rental
payable under this Lease, or if with respect to a permitted assignment, permitted license or other transfer by Tenant permitted
by Landlord, the consideration payable to Tenant by the assignee, licensee or other transferee exceeds the rental payable under
this Lease, then Tenant shall be bound and obligated to pay Landlord fifty percent (50%) such excess rental and other excess
consideration  within  ten  (10)  days  following  receipt  thereof  by  Tenant  from  such  sublessee,  assignee,  licensee  or  other
transferee, as the case might be.

C.     Consent by Landlord to a particular assignment or sublease or other transaction shall not be deemed a consent to any
other or subsequent transaction. If this Lease is assigned, or if the Premises are subleased (whether in whole or in part), or in the
event of the mortgage, pledge or hypothecation of the leasehold interest or grant of any concession or license within the Premises
without the prior express written permission of Landlord, or if the Premises are occupied in whole or in part by anyone other than
Tenant without the prior express written permission of Landlord, then Landlord may nevertheless collect rental and other charges
from  the  assignee,  sublessee,  mortgagee,  pledgee,  party  to  whom  the  leasehold  interest  was  hypothecated,  concessionaire  or
licensee  or  other  occupant  and  apply  the  net  amount  collected  to  the  rental  and  other  charges  payable  hereunder,  but  no  such
transaction or collection of rental and other charges or application thereof by Landlord shall be deemed a waiver of these provisions
or a release of Tenant from the further performance by Tenant of Tenant’s covenants, duties and obligations hereunder.

13.  SUBORDINATION. Tenant accepts this Lease subject and subordinate to any ground lease, mortgage, deed of trust or
other lien presently existing or hereafter placed upon the Premises or upon the Building or any part thereof, and to any renewals,

modifications, extensions and refinancings thereof, which might now or hereafter constitute a lien upon the Building or any part
thereof, and to zoning ordinances and other  building  and  fire  ordinances  and  governmental  regulations  relating  to  the  use  of  the
Premises,  but  Tenant  agrees  that  any  such  ground  lessor,  mortgagee  and/or  beneficiary  of  any  deed  of  trust  or  other  lien
(“Landlord’s  Mortgagee”)  and/or  Landlord  shall  have  the  right  at  any  time  to  subordinate  such  ground  lease,  mortgage,  deed  of
trust or other lien to this Lease on such terms and subject to such conditions as such Landlord’s Mortgagee may deem appropriate
in  its  discretion.  Upon  demand  Tenant  agrees  to  execute  such  further  instruments  subordinating  this  Lease,  as  Landlord  may
request, and such nondisturbance and attornment agreements, as any such Landlord’s Mortgagee shall request, in form satisfactory
to Landlord’s Mortgagee. In the event that Tenant shall fail to execute any such instrument within ten (10) days after requested,
Tenant hereby irrevocably appoints Landlord as Tenant’s attorney-in-fact to execute such instrument in Tenant’s name, place and
stead,  it  being  stipulated  by  Landlord  and  Tenant  that  such  agency  is  coupled  with  an  interest  in  Landlord  and  is,  accordingly,
irrevocable. Upon foreclosure of the Building or upon acceptance of a deed in lieu of such foreclosure, Tenant hereby agrees to
attorn to the new owner of such property after such foreclosure or acceptance of a deed in lieu of foreclosure, if so requested by
such new owner of the Building.

14.  OPERATING EXPENSES & ELECTRICAL EXPENSES.

A.     For purposes of this Section 14, the following definitions and calculations shall apply:

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(1)     The term “Project” shall mean the Building, the parking facilities, parking garage and other structures, improvements,
landscaping, fixtures, appurtenances and other common areas now and hereafter placed, constructed or erected on the tract of
land which is described on Exhibit “B”,

(2)    The term “Operating Expenses” shall mean all reasonable expenses, costs and disbursements of every kind and nature
which Landlord shall pay or become obligated to pay because of or in connection with the ownership, operation, maintenance,
repair,  replacement,  protection  and  security  of  the  Project,  determined  on  an  accrual  basis  in  accordance  with  generally
accepted accounting principles, including, without limitation, the following:

(i)   Salaries and wages of all employees of Landlord and/or Landlord’s agents (whether paid directly by Landlord itself or
reimbursed  by  Landlord  to  such  other  party)  engaged  in  the  operation,  maintenance,  leasing,  and  security  of  the  Project  and
personnel  who  may  provide  traffic  control  relating  to  ingress  and  egress  to  the  parking  areas  of  the  Building  to  the  surrounding
public streets, All taxes, insurance and benefits for  the employees providing  these  services  are  also  included  (including  pension,
retirement and fringe benefits);

(ii)   Cost of all supplies and materials used in the operation and maintenance of the Project;

(iii)   Cost of all water, gas and sewage service supplied to, and all heating, lighting, air conditioning and ventilating of, the

Project;

(iv)  Cost of all maintenance, janitorial and service agreements for the Project and the equipment therein, including, without
limitation,  alarm  service,  parking  facilities,  window  cleaning,  janitorial  service,  landscaping,  fire  protection,  sprinklers,  traffic
control, security services, and elevator maintenance;

(v)   Cost of all insurance relating to the Project, including the cost of casualty, rental and liability insurance applicable to

the Project and Landlord’s personal property used in connection therewith;

(vi)  All taxes, assessments and governmental charges (foreseen or unforeseen, general or special, ordinary or extraordinary)
whether federal, state, county or municipal and whether levied by taxing districts or authorities presently taxing the Project or by
others subsequently created or otherwise, and any other taxes and assessments attributable to the Project or its operation, and all
taxes of whatsoever nature that are imposed in substitution for or in lieu of any of the taxes, assessments or other charges herein
defined,  including  Landlord’s  margin  taxes;  provided,  It  is  agreed  that  Tenant  will  be  responsible  for  ad  valorem  taxes  on  its
personal property and on the value of leasehold improvements to the extent that the same exceed standard Building allowances,

(vii)  Cost of repairs and general maintenance, including, without limitation, reasonable depreciation charges applicable to
all  equipment  used  in  repairing  and  maintaining  the  Project,  but  specifically  excluding  repairs  and  general  maintenance  paid  by
proceeds of insurance or by Tenant or by other third parties;

(viii)    Cost  of  capital  improvement  items,  including  installation  thereof,  which  are  acquired  primarily  for  the  purpose  of
reducing  Operating  Expenses;  and  capital  improvements  that  are  required  to  comply  with  any  governmental  law  or  regulation;
provided,  however,  capital  expenditures  relating  to  replacement  of  the  roof  or  parking  lot  shall  not  be  considered  an  Operating
Expense (although repairs and maintenance of the roof and parking lot shall be deemed an Operating Expense),

(ix)   Reasonable management fees paid by Landlord to third parties or management companies owned by, or management
divisions of, Landlord, not to exceed the then prevailing market rate for the management of high quality class A office buildings
comparable to the Project. The current management fee for operation of the Project shall be four (4.00%) of the total Operating
Expenses and Base Rental for the Project, and such management fee shall not exceed 4% of the total Operating Expenses during
the Term,

To the extent that any Operating Expenses are attributable to the Project and other projects of Landlord, a fair and

reasonable allocation of such Operating Expenses shall be made between the Project and such other projects,

(3)     The term “Base Operating Expenses Rate” is stipulated to be the rate specified in Section 1.Q. hereof per square foot

of rentable area in the Premises,

(4)     The term “Actual Operating Expenses” shall mean, with respect to each calendar year during the Term of this Lease,
the  actual  Operating  Expenses  for  such  year.  The  term  “Actual  Operating  Expenses  Rate”  shall  mean,  with  respect  to  each
calendar year during the Term of this Lease, the Actual Operating Expenses attributable to each square foot of rentable area in
the Building, and shall be calculated by dividing the Actual Operating Expenses by the total number of square feet of rentable
area in the Building, as specified in Section I.G. hereof. The term “Tenant’s Proportionate Share of Actual Operating Expenses”
shall mean, with respect to each calendar year during the Term of this Lease, an amount equal to the product of (i) the positive
difference  (if  any)  obtained  by  subtracting  the  Base  Operating  Expenses  Rate  from  the  Actual  Operating  Expenses  Rate,
multiplied by (ii) the weighted average number of square feet of rentable area in the Premises in such year; provided, however,
if  the  Actual  Operating  Expenses  Rate  is  determined  on  the  basis  of  a  partial  calendar  year,  then  in  making  the  foregoing
calculation, the Base Operating Expenses Rate shall be multiplied by a fraction, the numerator of which is the number of days
in such partial calendar year and the denominator of which is 365, and the foregoing weighted average shall be calculated only
on the basis of the portion of such calendar year covered by the Term of this Lease.

For  example,  if  the  Actual  Operating  Expenses  Rate  for  a  calendar  year  is  $8.20  and  the  Base  Operating  Expenses
Rate  is  $8.00,  and  the  Premises  contains  1,000  square  feet  of  rentable  area  during  the  entire  calendar  year,  Tenant’s
Proportionate Share of Actual Operating Expenses is $200.00, calculated as follows: ($8.20 - $8.00) x 1,000 = $200.00,

B.     If the Actual Operating Expenses Rate during any calendar year is greater than the Base Operating Expenses Rate,
Tenant  shall  be  obligated  to  pay  to  Landlord  as  additional  rental  an  amount  equal  to  Tenant’s  Proportionate  Share  of  Actual
Operating Expenses. To implement the foregoing, Landlord shall provide to Tenant within one hundred twenty (120) days (or as
soon thereafter as reasonably possible) after the end of the calendar year in which the Commencement Date occurs, a statement of
the Actual Operating Expenses for such calendar year, the Actual Operating Expenses Rate for such calendar year, and Tenant’s
Proportionate Share of Actual Operating Expenses. If the Actual Operating Expenses Rate for such calendar year exceeds the Base
Operating Expenses Rate, Tenant shall pay to Landlord, within thirty (30) days after Tenant’s receipt of such statement, an amount
equal to Tenant’s Proportionate Share of Actual Operating Expenses for such calendar year.

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C.     Beginning with the Commencement Date of this Lease (or as soon thereafter as reasonably possible), Landlord shall
provide  to  Tenant  a  statement  of  the  projected  annual  Operating  Expenses  per  square  foot  of  rentable  area  in  the  Project  (the
“Projected Operating Expenses Rate”), which estimate is currently $8.32 per rentable square foot per annum. Tenant shall pay to
Landlord on the first day of each month an amount (the “Projected Operating Expenses Installment”) equal to one-twelfth (1/12) of
the  product  of  (i)  the  positive  difference  (if  any)  obtained  by  subtracting  the  Base  Operating  Expenses  Rate  from  the  Projected
Operating Expenses Rate for such calendar year, multiplied by (ii) the number of square feet of rentable area in the Premises on the
first  day  of  the  prior  month.  Until  Tenant  has  received  the  statement  of  the  Projected  Operating  Expenses  Rate  from  Landlord,
Tenant shall continue to pay Projected Operating Expenses Installments to Landlord in the same amount (if any) as required for the
last month of the prior calendar year. Upon Tenant’s receipt of such statement of the Projected Operating Expenses Rate, Tenant
shall  pay  to  Landlord,  or  Landlord  shall  pay  to  Tenant  (whichever  is  appropriate),  the  difference  between  the  amount  paid  by
Tenant prior to receiving such statement and the amount payable by Tenant as set forth in such statement. Landlord shall provide
Tenant  a  statement  within  one  hundred  twenty  (120)  days  (or  as  soon  thereafter  as  reasonably  possible)  after  the  end  of  each
calendar  year,  showing  the  Actual  Operating  Expenses  Rate  as  compared  to  the  Projected  Operating  Expenses  Rate  for  such
calendar year. If Tenant’s Proportionate Share of Actual Operating Expenses for such calendar year exceeds the aggregate of the
Projected  Operating  Expenses  Installments  collected  by  Landlord  from  Tenant,  Tenant  shall  pay  to  Landlord,  within  thirty  (30)
days following Tenant’s receipt of such statement, the amount of such excess. If Tenant’s Proportionate Share of Actual Operating
Expenses for such calendar year is less than the aggregate of the Projected Operating Expenses Installments collected by Landlord
from Tenant, Landlord shall credit such overpayment to Tenant’s next accruing rental installments, but if the Lease has expired and
there are no existing defaults by Tenant, Landlord shall pay such overpayment to Tenant, within thirty (30) days following Tenant’s
receipt of such statement, the amount of such excess. Landlord shall have the right from time to time during each calendar year to
revise the Projected Operating Expenses Rate and provide Tenant with a revised statement thereof, and thereafter Tenant shall pay
Projected Operating Expenses Installments on the basis of the revised statement. If the Commencement Date of this Lease is not the
first day of a calendar year, or the expiration or termination date of this Lease is not the last day of a calendar year, then Tenant’s
Proportionate  Share  of  Actual  Operating  Expenses  shall  be  prorated.  The  foregoing  adjustment  provisions  shall  survive  the
expiration or termination of the Term of this Lease.

D.     Notwithstanding any other provision herein to the contrary, it is agreed that if the Project is not at least 95% occupied
during any calendar year an adjustment shall be made in computing the Actual Operating Expenses and Electrical Costs for such
year so that the Actual Operating Expenses and Electrical Costs are computed as though the Project had been at least 95% occupied
during such year. The foregoing adjustment shall be applied only to Electrical Costs and those items of Actual Operating Expenses
which vary with the level of occupancy of the Project.

15.  EMINENT DOMAIN. If there shall be taken by exercise of the power of eminent domain during the Term of this Lease
any  part  of  the  Premises  or  the  Building,  Landlord  may  elect  to  terminate  this  Lease  or  to  continue  same  in  effect.  If  Landlord
elects to continue this Lease, the rental shall be reduced in proportion to the area of the Premises so taken, and Landlord shall repair
any damage to the Premises or the Building resulting from such taking. All sums awarded or agreed upon between Landlord and
the condemning authority for the taking of the interest of Landlord or Tenant, whether as damages or as compensation, will be the
property  of  Landlord  without  prejudice,  however,  to  claims  of  Tenant  against  the  condemning  authority  on  account  of  the
unamortized  cost  of  leasehold  improvements  paid  for  by  Tenant  taken  by  the  condemning  authority.  If  this  Lease  should  be
terminated under any provision of this Section 15, rental shall be payable up to the date that possession is taken by the condemning
authority, and Landlord will refund to Tenant any prepaid unaccrued rental less any sum then owing by Tenant to Landlord.

16. ACCESS BY LANDLORD. Landlord, Landlord’s agents and employees shall have access to and the right to enter upon
any  and  all  parts  of  the  Premises  at  any  reasonable  time  (except  in  cases  of  emergency,  defined  to  be  any  situation  in  which
Landlord perceives imminent danger of injury to person and/or damage to or loss of property, in which case Landlord may enter
upon any and all parts of the Premises at any time) to examine the condition thereof, to clean, to make any repairs, alterations or
additions  required  to  be  made  by  Landlord  hereunder,  to  show  the  Premises  to  prospective  purchasers  or  tenants  or  mortgage
lenders (prospective or current) and for any other purpose deemed reasonable by Landlord, and Tenant shall not be entitled to any
abatement or reduction of rental by reason thereof.

17.  LANDLORD’S  LIEN.  In  addition  to  the  statutory  landlord’s  lien,  Landlord  shall  have  at  all  times  a  valid  security
interest to secure payment of all rentals and other sums of money becoming due hereunder from Tenant, and to secure payment of
any  damages  or  loss  which  Landlord  may  suffer  by  reason  of  the  breach  by  Tenant  of  any  covenant,  agreement  or  condition
contained  herein,  upon  all  goods,  wares,  equipment,  fixtures,  furniture,  improvements  and  other  personal  property  of  Tenant
presently, or which may hereafter be, situated in the Premises, and all proceeds therefrom, and such property shall not be removed
therefrom without the consent of Landlord until all  arrearages  in  rental  as  well  as  any  and  all  other  sums  of  money  then  due  to
Landlord hereunder shall first have been paid and discharged and all the covenants, agreements and conditions hereof have been
fully  complied  with  and  performed  by  Tenant.  Upon  the  occurrence  of  an  Event  of  Default  as  set  forth  in  Section 18  hereof  by
Tenant,  Landlord  may,  to  the  extent  permitted  by  law  and  in  addition  to  any  other  remedies  provided  herein,  enter  upon  the
Premises and take possession of any and all goods, wares, equipment, fixtures, furniture, improvements and other personal property
of Tenant situated in the Premises, without liability for trespass or conversion, and sell the same at public or private sale, with or
without having such property at the sale, after giving Tenant reasonable notice of the time and place of any public sale or of the
time  after  which  any  private  sale  is  to  be  made,  at  which  sale  Landlord  or  Landlord’s  assigns  may  purchase  unless  otherwise
prohibited  by  law.  Unless  otherwise  provided  by  law,  and  without  intending  to  exclude  any  other  manner  of  giving  Tenant
reasonable notice, the requirement of reasonable notice shall be met if such notice is given in the manner prescribed in this Lease at
least ten (I 0) days before the time of sale. Any sale made pursuant to the provisions of this Section 17 shall be deemed to have
been a public sale conducted in a commercially reasonable manner if held in the Premises or where the property is located after the
time,  place  and  method  of  sale  and  a  general  description  of  the  types  of  property  to  be  sold  have  been  advertised  in  a  daily

newspaper published in the county in which the Building is located, for five (5) consecutive days before the date of the sale. The
proceeds from any such disposition, less any and all expenses connected with the taking of possession, holding and selling of the
property (including reasonable attorneys’ fees) shall be applied as a credit against the indebtedness secured by the security interest
granted in this Section 17. Any surplus shall be paid to Tenant or as otherwise required by law: Tenant shall pay any deficiencies
forthwith.  Upon  request  of  Landlord,  Tenant  agrees  to  execute  Uniform  Commercial  Code  financing  statements  relating  to  the
aforesaid security interest.

Notwithstanding  the  foregoing,  in  the  event  that  an  Event  of  Default  has  not  occurred  or  is  continuing  at  the  time  of
Tenant’s  request,  Landlord  shall  subordinate  its  landlord’s  liens  to  a  bona-fide  third  party  lender  upon  terms  and  conditions
reasonably acceptable to Landlord and said lender.

18.  DEFAULTS.

A.     Each of the following acts or omissions of Tenant or occurrences shall constitute an “Event of Default”:

(1)     Failure or refusal by Tenant to pay rental or other payments hereunder within ten (10) days after receipt of written

notice from Landlord.

(2)     Failure to perform or observe any covenant or condition of this Lease by Tenant to be performed or observed upon

the expiration of a period of thirty (30) days following written notice to Tenant of such failure.

(3)     Tenant shall cease to conduct its business in the Premises or shall vacate, abandon or desert any substantial portion

of the Premises, whether or not rent continues to be paid.

(4)     The filing or execution or occurrence of any one of the following: (i) a petition in bankruptcy or other insolvency
proceeding  by  or  against  Tenant,  (ii)  petition  or  answer  seeking  relief  under  any  provision  of  the  Bankruptcy  Act,  (iii)  an
assignment  for  the  benefit  of  creditors  or  composition,  (iv)  a  petition  or  other  proceeding  by  or  against  Tenant  for  the
appointment of a trustee, receiver or liquidator of Tenant or any of Tenant’s property, or (v) a proceeding by any governmental
authority for the dissolution or liquidation of Tenant.

7

(5)     Tenant’s leasehold interest hereunder shall be taken in execution or other process of laws in any action against the

Tenant.

B.     This Lease and the Term and estate hereby granted and the demise hereby made are subject to the limitation that if and
whenever any Event of Default shall occur, Landlord may, at Landlord’s option, in addition to all other rights and remedies given
hereunder or by law or equity, do any one (1) or more of the following without notice or demand, any such notice or demand being
hereby waived:

(1)     Terminate this Lease, in which event Tenant shall immediately surrender possession of the Premises to Landlord.

(2)     Enter upon and take possession of the Premises and expel or remove Tenant and any other occupant therefrom,

with or without having terminated the Lease.

(3)     Alter locks and other security devices at the Premises.

C.     Exercise by Landlord of any one (I) or more remedies hereunder granted or otherwise available shall not be deemed to
be an acceptance of surrender of the Premises by Tenant, whether by agreement or by operation of law, it being understood that
such surrender can be effected only by the written agreement of Landlord and Tenant. No such alteration of security devices and no
removal  or  other  exercise  of  dominion  by  Landlord  over  the  property  of  Tenant  or  others  at  the  Premises  shall  be  deemed
unauthorized  or  constitute  a  conversion,  Tenant  hereby  consenting,  after  any  Event  of  Default,  to  the  aforesaid  exercise  of
dominion over Tenant’s property within the Building. All claims for damages by reason of such re-entry and/or possession and/or
alteration  of  locks  or  other  security  devices  are  hereby  waived,  as  are  all  claims  for  damages  by  reason  of  any  distress  warrant,
forcible detainer proceedings, sequestration proceedings or other legal process. Tenant agrees that any re-entry by Landlord may be
pursuant  to  judgment  obtained  in  forcible  detainer  proceedings  or  other  legal  proceedings  or  without  the  necessity  for  any  legal
proceedings, as Landlord may elect, and Landlord shall not be liable in trespass or otherwise.

D.    In the event that Landlord elects to terminate this Lease by reason of an Event of Default, then, notwithstanding such
termination,  Tenant  shall  be  liable  for  and  shall  pay  to  Landlord,  at  the  address  specified  in  Section l .B.  hereof,  the  sum  of  all
rental and other indebtedness accrued to the date of such termination, plus, as damages, an amount equal to the then present value
of  the  rental  reserved  hereunder  for  the  remaining  portion  of  the  Term  of  this  Lease  (had  such  Term  not  been  terminated  by
Landlord prior to the expiration of the Term of this Lease), less the then present value of the fair rental value of the Premises for
such period.

In the event that Landlord elects to terminate the Lease by reason of an Event of Default, in lieu of exercising the rights of
Landlord  under  the  preceding  paragraph  of  this  Section  18.D.,  Landlord  may  instead  hold  Tenant  liable  for  all  rental  and  other
indebtedness  accrued  to  the  date  of  such  termination,  plus  such  rental  and  other  indebtedness  as  would  otherwise  have  been
required to be paid by Tenant to Landlord during the period following termination of the Term of this Lease measured from the date
of such termination by Landlord until the expiration of the Term of this Lease (had Landlord not elected to terminate the Lease on
account  of  such  Event  of  Default)  diminished  by  any  net  sums  thereafter  received  by  Landlord  through  reletting  the  Premises
during said period (after deducting expenses incurred by Landlord as provided in Section 18.F. hereof). Actions to collect amounts
due  by  Tenant  provided  for  in  this  paragraph  of  this  Section  18.D.  may  be  brought  from  time  to  time  by  Landlord  during  the
aforesaid period, on one (1) or more occasions, without the necessity of Landlord’s waiting until the expiration of such period, and
in  no  event  shall  Tenant  be  entitled  to  any  excess  of  rental  (or  rental  plus  other  sums)  obtained  by  reletting  over  and  above  the
rental provided for in this Lease.

E.     In the event that Landlord elects to repossess the Premises without terminating this Lease, then Tenant shall be liable

for and shall pay to Landlord, at the address specified in Section 1.B. hereof, all rental and other indebtedness accrued to the date of
such repossession, plus rental required to be paid by Tenant to Landlord during the remainder of the Term of this Lease until the
expiration of the Term of this Lease, diminished by any net sums thereafter received by Landlord through reletting the Premises
during said period (after deducting expenses incurred by Landlord as provided in Section 18.F. hereof). In no event shall Tenant be
entitled to any excess of any rental obtained by reletting over and above the rental herein reserved. Actions to collect amounts due
by Tenant as provided in this Section 18.E. may be brought from time to time, on one (1) or more occasions, without the necessity
of Landlord’s waiting until the expiration of the Term of this Lease.

F.     In case of an Event of Default, Tenant shall also be liable for and shall pay to Landlord, at the address specified in
Section J.B. hereof, in addition to any sum provided to be paid above: (i) broker’s fees incurred by Landlord in connection with
reletting the whole or any part of the Premises, (ii) the cost of removing and storing Tenant’s or other occupant’s property, (iii) the
cost of repairing, altering, remodeling or otherwise putting the Premises into condition acceptable to a new tenant or tenants, and
(iv) all reasonable expenses incurred by Landlord in enforcing Landlord’s remedies, including reasonable attorneys’ fees. Past due
rental and other past due payments shall bear interest from maturity at the highest lawful rate per annum until paid.

G.          Tenant  acknowledges  that  Landlord  has  entered  into  this  Lease  in  reliance  upon,  among  other  matters,  Tenant’s
agreement  and  continuing  obligation  to  pay  all  rental  due  throughout  the  Term.  As  a  result,  Tenant  hereby  knowingly  and
voluntarily waives, after advice of competent counsel, any duty of Landlord (and any affirmative defense based upon such duty)
following any default to relet the Premises or otherwise mitigate Landlord’s damages arising from such default. If such waiver is
not effective under then applicable law or Landlord otherwise elects, at Landlord’s sole option, to attempt to relet all or any part of
the Premises, Tenant agrees that Landlord has no obligation to: (i) relet the Premises prior to leasing any other space within the
Building; (ii) relet the Premises (A) at a rental rate or otherwise on terms below market, as then determined by Landlord in its sole

discretion; (B) to any entity not satisfying Landlord’s then standard financial credit risk criteria; (C) for a use (1) not consistent with
Tenant’s use prior to default; (2) which would violate then applicable law or any restrictive covenant or other lease affecting the
Building; (3) which would impose a greater burden upon the Building’s parking, HVAC or other facilities; and/or (4) which would
involve  any  use  of  hazardous  substances;  (iii)  divide  the  Premises,  install  new  demising  walls  or  otherwise  reconfigure  the
Premises  to  make  same  more  marketable;  (iv)  pay  any  leasing  or  other  commissions  arising  from  such  reletting,  unless  Tenant
unconditionally  delivers  Landlord,  in  good  and  sufficient  funds,  the  full  amount  thereof  in  advance;  (v)  pay,  and/or  grant  any
allowance for, tenant finish or other costs associated with any new lease, even though same may be amortized over the applicable
lease  term,  unless  Tenant  unconditionally  delivers  Landlord,  in  good  and  sufficient  funds,  the  full  amount  thereof  in  advance;
and/or  (vi)  relet  the  Premises,  if  to  do  so,  Landlord  would  be  required  to  alter  other  portions  of  the  Building,  make  ADA-type
modifications  or  otherwise  install  or  replace  any  sprinkler,  security,  safety,  HVAC  or  other  Building  operating  systems.  Tenant
further acknowledges that if Tenant, notwithstanding Tenant’s waiver above, raises Landlord’s mitigation as an affirmative defense
to a claim made by Landlord prior to any actual reentry of the Premises by Landlord then, in such event, Tenant will be deemed to
have automatically waived, and released and discharged Landlord from and against, any and all other claims and defenses to the
payment of rental.

H.     If Tenant should fail to make any payment or cure any default hereunder within the time herein permitted, Landlord,
without  being  under  any  obligation  to  do  so  and  without  thereby  waiving  such  default,  may  make  such  payment  and/or  remedy
such other default for the account of Tenant (and enter the Premises for such purpose), and thereupon Tenant shall be obligated to,
and  hereby  agrees  to,  pay  Landlord,  upon  demand,  all  costs,  expenses  and  disbursements  (including  reasonable  attorneys’  fees)
incurred by Landlord in taking such remedial action.

I.          In  the  event  of  any  default  by  Landlord,  Tenant’s  exclusive  remedy  shall  be  an  action  for  damages  (Tenant  hereby
waiving the benefit of any laws granting Tenant a lien upon the property of Landlord and/or upon rental due Landlord), but prior to
any such action Tenant will give Landlord written notice specifying such default with particularity, and Landlord shall thereupon
have thirty (30) days (plus such additional reasonable period as may be required in the exercise by Landlord of due diligence) in
which to cure any such default. Unless and until Landlord fails to so cure any default after such notice, Tenant shall not have any
remedy or cause of action by reason thereof. All obligations of Landlord hereunder will be construed as covenants, not conditions;
and all such obligations will be binding upon Landlord only during the period of Landlord’s possession of the Building and not
thereafter.

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J.            Landlord  Default;  Tenant  Remedies.  If  Landlord  fails  to  perform  any  of  Landlord’s  obligations  under  this  Lease,
which failure continues for a period of more than thirty (30) days after Tenant’s delivery of written notice to Landlord specifying
such  failure,  or  if  such  failure  is  of  a  nature  as  to  require  more  than  thirty  (30)  days  for  remedy  and  continues  beyond  the  time
reasonably necessary to cure (and Landlord has not undertaken procedures to cure the failure within such thirty (30) day period and
diligently pursued such efforts to complete such cure), Tenant may, in addition to any other remedy available at law or in equity, at
its  option,  upon  written  notice  incur  any  reasonable  expense  necessary  to  perform  the  obligation  of  Landlord  specified  in  such
notice  and  invoice  Landlord  for  the  reasonable  cost  of  such  performance.  If  Landlord  fails  to  pay  such  reasonable  costs  within
thirty  (30)  days  following  written  notice  from  Tenant,  then  Tenant  shall  have  the  right  to  deduct  such  expense  from  the  Rent,
Additional  Rent  and  other  charges  next  becoming  due.  Tenant  agrees  to  give  any  first  institutional  mortgagee  of  the  Building,
which may by written notice to Tenant so request, a duplicate notice of any notice of default to Landlord and Tenant further agrees
that such mortgagee shall thereafter have the same simultaneous time to cure such default as provided Landlord hereunder.

The term “Landlord” shall mean only the owner, for the time being, of the Building, and in the event of the transfer by such
owner of its interest in the Building, such owner shall thereupon be released and discharged from all covenants and obligations of
the Landlord thereafter accruing, but such covenants and obligations shall be binding during the Term of this Lease upon each new
owner for the duration of such owner’s ownership.

19. NONWAIVER. Neither acceptance of rental or other payments by Landlord nor failure by Landlord to complain of any
action, nonaction or default of Tenant shall constitute a waiver of any of Landlord’s rights hereunder. Waiver by Landlord of any
right for any default of Tenant shall not constitute a waiver of any right for either a subsequent default of the same obligation or any
other default. Receipt by Landlord of Tenant’s keys to the Premises shall not constitute an acceptance of surrender of the Premises.

20. HOLDING OVER. If Tenant should remain in possession of the Premises after the expiration of the Term of this Lease,
without  the  execution  by  Landlord  and  Tenant  of  a  new  lease  or  an  extension  of  this  Lease,  then  Tenant  shall  be  deemed  to  be
occupying the Premises on a month to month lease, subject to all the covenants and obligations of this Lease and at a daily rental of
150% of the per day rental provided for the last month of the Term of this Lease, computed on the basis of a thirty (30) day month.
The inclusion of the preceding sentence shall not be construed as Landlord’s consent for Tenant to hold over. No holding over by
Tenant after the expiration of the Lease Term shall be construed to extend the Lease term; and in the event of any unauthorized
holding  over,  Tenant  shall  indemnify,  defendant  and  hold  harmless  Landlord  from  and  against  all  claims  for  damages  (and
reimburse Landlord upon demand for any sums paid in settlement of any such claims) by any other Tenant or prospective Tenant to
whom Landlord may have leased all or part of the Premises effective before or after the expiration of the Lease Term and by any
broker  claiming  any  commission  or  fee  in  respect  of  any  such  lease  or  offer  to  lease.  Tenant  shall  also  pay  Landlord  all  of
Landlord’s direct and consequential damages relating to Tenant’s holdover. If any property not belonging to Landlord remains at
the Premises -after the expiration of the Term of this Lease, Tenant hereby authorizes Landlord to make such disposition of such
property  as  Landlord  may  desire  without  liability  for  compensation  or  damages  to  Tenant  in  the  event  that  such  property  is  the
property of Tenant; and in the event that such property is the property of someone other than Tenant, Tenant agrees to indemnify
and  hold  Landlord  harmless  from  all  suits,  actions,  liability,  loss,  damages  and  expenses  in  connection  with  or  incident  to  any
removal, exercise or dominion over and/or disposition of such property by Landlord.

21.  COMMON  AREA.  The  Common  Area,  as  defined  in  Section  l.N.  hereof,  shall  be  subject  to  Landlord’s  sole
management and control and shall be operated and maintained in such manner as Landlord in Landlord’s discretion shall determine.
Landlord reserves the right to change from time to time the dimensions and location of the Common Area, to construct additional
stories on the Building and to place, construct or erect new structures or other improvements on any part of the Land without the
consent  of  Tenant.  Tenant,  and  Tenant’s  employees  and  invitees  shall  have  the  nonexclusive  right  to  use  the  Common  Area  as
constituted from time to time, such use to be in common with Landlord, other tenants of the Building and other persons entitled to
use  the  same,  and  subject  to  such  reasonable  rules  and  regulations  governing  use  as  Landlord  may  from  time  to  time  prescribe.
Tenant shall not solicit business or display merchandise within the Common Area, or distribute handbills therein, or take any action
which would interfere with the rights of other persons to use the Common Area. Landlord may temporarily close any part of the
Common Area for such periods of time as may be necessary to prevent the public from obtaining prescriptive rights or to make
repairs or alterations.

22.  RULES  AND  REGULATIONS.  Tenant,  and  Tenant’s  agents,  employees  and  invitees  shall  comply  fully  with  all
requirements of the rules and regulations of the Building which are attached hereto as Exhibit C and made a part hereof Landlord
shall at all times have the right to change such rules and regulations or to amend or supplement them in such manner as may be
deemed advisable for the safety, care and cleanliness of the Premises and the Building and for preservation of good order therein,
all of which rules and regulations, changes and amendments shall be forwarded to Tenant and shall be carried out and observed by
Tenant.  Tenant  shall  further  be  responsible  for  the  compliance  with  such  rules  and  regulations  by  the  employees,  agents  and
invitees of Tenant.

23. TAXES. Tenant shall be liable for the timely payment of all taxes levied or assessed against personal property, furniture
or fixtures or equipment placed by Tenant in the Premises. If any such taxes for which Tenant is liable are levied or assessed against
Landlord or Landlord’s property and if Landlord elects to pay the same, or if the assessed value of Landlord’s property is increased
by inclusion of personal property, furniture or fixtures or equipment placed by Tenant in the Premises, and Landlord elects to pay
the  taxes  based  on  such  increase,  Tenant  shall  pay  to  Landlord  upon  demand  that  part  of  such  taxes  for  which  Tenant  is  liable
hereunder.

24. INSURANCE. Tenant shall at its expense procure and maintain throughout the Term the following insurance policies:
(i)  comprehensive  general  liability  insurance  in  amounts  of  not  less  than  $1,000,000  each  occurrence,  $2,000,000  aggregate,

insuring  Tenant,  Landlord  and  Landlord’s  managing  agent  against  all  liability  for  injury  to  or  death  of  a  person  or  persons  or
damage to property arising from the use and occupancy of the Premises, (ii) worker’s compensation insurance in no less than the
minimum  limits  prescribed  by  statute,  and  (iii)  all-risk  casualty  insurance  covering  Tenant’s  leasehold  betterments  and
improvements  and  Tenant’s  furniture,  fixtures,  equipment  and  other  personalty  within  the  Premises,  with  replacement  value
coverage. Tenant’s insurance shall provide primary coverage to Landlord when any policy issued to Landlord provides duplicate or
similar coverage, and in such circumstance Landlord’s policy will be excess over Tenant’s policy. Tenant shall obtain the necessary
endorsements  to  have  Landlord  named  as  an  additional  insured  on  Tenant’s  policy.  Tenant  shall  furnish  copies  of  such
endorsements and certificates of such insurance indicating Landlord as additional insured and such other evidence satisfactory to
Landlord of the maintenance of all insurance coverages required hereunder. Tenant shall obtain a written obligation on the part of
each insurer to notify Landlord at least fifteen (15) days prior to modification or cancellation of such insurance. In the event Tenant
shall  not  have  delivered  to  Landlord  a  policy  or  certificate  evidencing  such  insurance  at  least  fifteen  (15)  days  prior  to  the
Commencement Date and at least fifteen (15) days prior to the expiration dates of each expiring policy, Landlord may obtain such
insurance as Landlord may reasonably require to protect Landlord’s interest. The cost for such policies shall be paid by Tenant to
Landlord as additional rental upon demand plus an administrative charge as determined by Landlord. All such insurance policies
shall be in form, and issued by companies, reasonably satisfactory to Landlord.

25. PERSONAL LIABILITY. The liability of Landlord to Tenant for any default by Landlord under the terms of this Lease
shall  be  limited  to  the  proceeds  of  sale  on  execution  of  the  interest  of  Landlord  in  the  Building  and  in  the  Land,  and  neither
Landlord,  nor  any  party  comprising  Landlord,  its  partners,  officers  or  shareholders  shall  be  personally  liable  for  any  deficiency.
This  clause  shall  not  be  deemed  to  limit  or  deny  any  remedies  which  Tenant  may  have  in  the  event  of  default  by  Landlord
hereunder which do not involve the personal liability of Landlord.

9

26. NOTICE. Any notice which may or shall be given under the terms of this Lease shall be in writing and shall be either
delivered  by  hand  (including  commercially  recognized  messenger  and  express  mail  service)  or  sent  by  United  States  Mail,
registered or certified, return receipt requested, postage prepaid, if for Landlord, to the Building office and at the address specified
in Section l.B. hereof, or if for Tenant, to the Premises or, if prior to the Commencement Date, at the address specified in Section
l.D.  hereof,  or  at  such  other  addresses  as  either  party  may  have  theretofore  specified  by  written  notice  delivered  in  accordance
herewith.  Such  address  may  be  changed  from  time  to  time  by  either  party  by  giving  notice  as  provided  herein.  Notice  shall  be
deemed given when delivered (if delivered by hand) or, whether actually received or not, when postmarked (if sent by mail). If the
term “Tenant” as used in this Lease refers to more than one (1) person and/or entity, and notice given as aforesaid to any one of
such persons and/or entities shall be deemed to have been duly given to Tenant.

27. LANDLORD’S MORTGAGEE. If the Building and/or Premises are at any time subject to a ground lease, mortgage,
deed of trust or other lien, then in any instance in which Tenant gives notice to Landlord alleging default by Landlord hereunder,
Tenant  will  also  simultaneously  give  a  copy  of  such  notice  to  each  Landlord’s  Mortgagee  (provided  Landlord  or  Landlord’s
Mortgagee shall have advised Tenant of the name and address of Landlord’s Mortgagee) and each Landlord’s Mortgagee shall have
the  right  (but  no  obligation)  to  cure  or  remedy  such  default  during  the  period  that  is  permitted  to  Landlord  hereunder,  plus  an
additional  period  of  thirty  (30)  days,  then  Tenant  will  accept  such  curative  or  remedial  action  (if  any)  taken  by  Landlord’s
Mortgagee with the same effect as if such action had been taken by Landlord.

28. BROKERAGE. Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with
this transaction and that no broker, agent or other person brought about this transaction, other than Broker specified in Section 1.P.
hereof, and Tenant agrees to indemnify and hold Landlord harmless from and against any claims by any other broker, agent or other
person  claiming  a  commission  or  other  form  of  compensation  by  virtue  of  having  dealt  with  Tenant  with  regard  to  this  leasing
transaction. The provisions of this Section 28 shall survive the termination of this Lease.

29. PREPAID RENTAL: SECURITY DEPOSIT. Landlord hereby acknowledges receipt from Tenant of the sum stated in
Section 1.K. hereof to be applied to the first accruing monthly installments of rental. Landlord further acknowledges receipt from
Tenant of a Security Deposit in the amount stated in Section l.L. hereof to be held by Landlord as security for the performance by
Tenant  of  Tenant’s  covenants  and  obligations  under  this  Lease,  it  being  expressly  understood  that  such  deposit  shall  not  be
considered an advance payment of rental or a measure of Landlord’s damages in case of default by Tenant. The Security Deposit
shall be held by Landlord without liability to Tenant for interest, and Landlord may commingle such deposit with any other funds
held by Landlord. If Tenant should be late in the making of any payment of rental or other sum due under this Lease, Tenant agrees
that,  upon  request  of  Landlord,  Tenant  will  increase  forthwith  the  amount  of  the  Security  Deposit  to  a  sum  double  the  existing
amount  thereof.  Upon  the  occurrence  of  any  Event  of  Default,  Landlord  may,  from  time  to  time,  without  prejudice  to  any other
remedy, use such fund to the extent necessary to make good any arrears of rental and any other damage, injury, expense or liability
caused to Landlord by such Event of Default. Following any such application of the Security Deposit, Tenant shall pay to Landlord
on  demand  the  amount  so  applied  in  order  to  restore  the  Security  Deposit  to  the  amount  thereof  immediately  prior  to  such
application.  If  Tenant  is  not  then  in  default  hereunder,  any  remaining  balance  of  such  deposit  shall  be  returned  by  Landlord  to
Tenant  upon  termination  of  this  Lease;  provided,  however,  Landlord  shall  have  the  right  to  retain  and  expend  such  remaining
balance for cleaning and repairing the Premises if Tenant shall fail to deliver up the same at the expiration or earlier termination of
this Lease in the condition required by the provisions of this Lease. If Landlord transfers Landlord’s interest in the Premises during
the Term of this Lease (including any renewal thereof), Landlord may assign the Security Deposit to the transferee and thereafter
shall have no further liability for the return of the Security Deposit.

30.  HAZARDOUS  SUBSTANCES.  Tenant  shall  not  cause  or  permit  any  Hazardous  Substances  to  be  brought  upon,
produced, stored, used, discharged or disposed of in or near the Project unless Landlord has consented to such storage or use in its
sole  discretion.  “Hazardous  Substances”  include  those  hazardous  substances  described  in  the  Comprehensive  Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and
Recovery  Act,  as  amended,  42  U.S.C.  Section  6901  et  seq.,  any  other  applicable  federal,  state  or  local  law,  and  the  regulations
adopted under these laws.

31. ERISA  AND  UBTI  RESTRICTIONS.  Notwithstanding  anything  to  the  contrary  contained  herein,  including,  without
limitation, Section 24 above, no assignment or subletting by Tenant, nor any other transfer or vesting of Tenant’s interest hereunder
(whether by merger, operation of law or otherwise), shall be permitted if:

A.        Landlord,  or  any  person  designated  by  Landlord  as  having  an  interest  therein,  directly  or  indirectly,  controls,  is
controlled by, or is under common control with (i) the proposed assignee, sublessee or successor-in-interest of Tenant or (ii) any
person which, directly or indirectly, controls, is controlled by or is under common control with, the proposed assignee, sublessee or
successor-in-interest of Tenant;

B.          the  proposed  assignment  or  sublease  (i)  provides  for  a  rental  or  other  payment  for  the  leasing,  use,  occupancy  or
utilization of all or any portion  of the Premises based, in whole or in part, on the income or profits derived by any person from the
property so leased, used, occupied or utilized other than an amount based on a fixed percentage or percentages of gross receipts or
sales or (ii) does not provide that such assignee or subtenant shall not enter into any lease, sublease, license, concession or other
agreement for the use, occupancy or utilization of all or any portion of the Premises which provides for a rental or other payment
for such use, occupancy or utilization based, in whole or in part, on the income or profits derived by any person from the property
so leased, used, occupied or utilized other than an amount based on a fixed percentage or percentages of gross receipts or sales; or

C.     in the reasonable opinion of Landlord and Landlord’s counsel, such proposed assignment, subletting or other transfer
or  vesting  of  Tenant’s  interest  hereunder  (whether  by  merger,  operation  at  law  or  otherwise)  will  (i)  cause  a  violation  of  the
Employee  Retirement  Income  Security  Act  of  1974  by  Landlord,  or  by  any  person  which,  directly  or  indirectly,  controls,  is
controlled by, or is under common control with, Landlord or any person who controls Landlord or (ii) result or may in the future
result in Landlord, or any person which, directly or indirectly, has an interest in Landlord, receiving “unrelated business taxable
income” (as defined in the Internal Revenue Code).

10

32.      DISCLAIMER.  TENANT  ACKNOWLEDGES  AND  AGREES  THAT,  EXCEPT  TO  THE  EXTENT
SPECIFICALLY  SET  FORTH  IN  THIS  LEASE,  LANDLORD  HAS  NOT  MADE,  DOES  NOT  MAKE  AND
SPECIFICALLY  NEGATES  AND  DISCLAIMS  (AND  TENANT  HAS  NOT  RELIED  ON)  ANY  REPRESENTATIONS,
WARRANTIES,  PROMISES,  COVENANTS,  AGREEMENTS  OR  GUARANTEES,  EXPRESS  OR  IMPLIED,  OF  ANY
KIND  OR  CHARACTER  WHATSOEVER  CONCERNING  OR  WITH  RESPECT  TO  (I)  THE  VALUE,  NATURE,
QUALITY  OR  CONDITION  (INCLUDING,  WITHOUT  LIMITATION,  THE  ENVIRONMENTAL  CONDITION)  OF
THE PREMISES; (II) THE SUITABILITY OF THE PREMISES FOR ANY AND ALL ACTIVITIES AND USES WHICH
TENANT MAY CONDUCT THEREON; (III) THE COMPLIANCE OF THE PREMISES WITH ANY LAWS; (IV) THE
HABITABILITY,  MERCHANTABILITY,  MARKETABILITY,  PROFITABILITY  OR  FITNESS  FOR  A  PARTICULAR
PURPOSE  OF  THE  PREMISES;  (V)  THE  MANNER  OR  QUALITY  OF  THE  CONSTRUCTION  OR  MATERIALS
INCORPORATED  INTO  THE  PREMISES;  (VI)  THE  MANNER,  QUALITY,  STATE  OF  REPAIR  OR  LACK  OF
REPAIR OF THE PREMISES; (VII) THE LAWFULNESS, EITHER NOW OR IN THE FUTURE, OF THE USE OF THE
PREMISES  FOR  THE  PERMITTED  USE  SET  FORTH  IN  SECTION  1.M.  OF  THE  DEFINITIONS  AND  BASIC
PROVISIONS; OR (VIII) ANY OTHER MATTER WITH RESPECT TO THE PREMISES, IT BEING AGREED THAT
ALL  RISKS  INCIDENT  TO  ALL  OF  THESE  MATTERS  ARE  TO  BE  BORNE  BY  TENANT.  TENANT  FURTHER
ACKNOWLEDGES AND AGREES THAT TENANT HAS INSPECTED THE PREMISES AND TENANT HAS RELIED
AND  SHALL  RELY  SOLELY  ON  ITS  OWN  INVESTIGATION  OF  THE  PREMISES  AND  NOT  ON  ANY
INFORMATION PROVIDED OR TO BE PROVIDED BY LANDLORD. TENANT FURTHER ACKNOWLEDGES AND
AGREES  THAT  ANY  INFORMATION  PROVIDED  OR  TO  BE  PROVIDED  BY  OR  ON  BEHALF  OF  LANDLORD
WITH RESPECT TO THE PREMISES, WAS OBTAINED FROM A VARIETY OF SOURCES AND THAT LANDLORD
HAS  NOT  MADE  ANY  INDEPENDENT  INVESTIGATION  OR  VERIFICATION  OF  SUCH  INFORMATION  AND
MAKES  NO  REPRESENTATIONS  AS  TO  THE  ACCURACY  OR  COMPLETENESS  OF  SUCH  INFORMATION.
TENANT  FURTHER  ACKNOWLEDGES  AND  AGREES  THAT,  EXCEPT  TO  THE  EXTENT  SPECIFICALLY  SET
FORTH IN THIS LEASE, THE LEASING OF THE PREMISES AS PROVIDED FOR HEREIN IS MADE ON AN “AS-
IS”,  “WHERE-IS”  CONDITION  AND  BASIS  WITH  ALL  FAULTS.  IN  THE  EVENT  OF  ANY  DEFECT  OR
DEFICIENCY IN ANY NATURE IN THE PREMISES, WHETHER PATENT OR LATENT, LANDLORD SHALL HAVE
NO  RESPONSIBILITY  OR  LIABILITY  WITH  RESPECT  THERETO  (EXCEPT  AS  OTHERWISE  EXPRESSLY
PROVIDED  IN  THIS  LEASE)  OR  FOR  ANY  INCIDENTAL  OR  CONSEQUENTIAL  DAMAGES  ARISING
THEREFROM.  TENANT  AND  ANYONE  CLAIMING  BY,  THROUGH  OR  UNDER  TENANT  HEREBY  FULLY  AND
IRREVOCABLY  RELEASE  LANDLORD  AND  THE  LANDLORD  INDEMNIFIED  PARTIES  FROM  ANY  AND  ALL
DAMAGE TO PROPERTY AND INJURY TO PERSONS AND ALL OTHER CLAIMS THAT IT MAY NOW HAVE OR
HEREAFTER ACQUIRE AGAINST  THEM  ARISING  FROM  OR  RELATED  TO  ANY  CONSTRUCTION  DEFECTS,
ERRORS,  OMISSIONS  OR  OTHER  CONDITIONS  NOW  OR  HEREAFTER  AFFECTING  THE  PREMISES,
INCLUDING,  BUT  NOT  LIMITED  TO,  ENVIRONMENTAL  MATTERS  AND  HAZARDOUS  MATERIALS,  EXCEPT
TO THE EXTENT THAT LANDLORD HAS, PURSUANT TO THE TERMS OF THIS LEASE, EXPRESSLY ASSUMED
AN  OBLIGATION  WITH  RESPECT  TO  SUCH  CONDITIONS.  THIS  RELEASE  INCLUDES  CLAIMS  OF  WHICH
TENANT  IS  PRESENTLY  UNAWARE  OR  WHICH  TENANT  DOES  NOT  PRESENTLY  SUSPECT  TO  EXIST  IN  ITS
FAVOR WHICH, IF KNOWN BY TENANT, WOULD MATERIALLY AFFECT TENANT’S RELEASE OF LANDLORD
AND THE LANDLORD INDEMNIFIED PARTIES.

33. RESERVED RIGHTS. Without limiting in any way Landlord’s right to promulgate rules and regulations, Landlord shall
have the following rights, exercisable upon at least five (5) days’ written notice and without liability to Tenant for damage or injury
to  property,  persons  or  business  and  without  effecting  an  eviction,  constructive  or  actual,  or  disturbance  of  Tenant’s  use  or
possession or giving rise to any claim for set off or abatement of rent:

A.     To change the Building’s and/or the Complex’s name, design or street address.

B.     To approve, restrict, install, affix, maintain, and remove any and all signs on the exterior and interior of the Building.

C.          To  designate  and  approve,  prior  to  installation,  all  types  of  window  shades,  blinds,  drapes,  awnings,  window

ventilators and other similar equipment and to control all internal lighting that may be visible from the exterior of the Building.

D.     To retain at all times, and to use in appropriate instances, keys to all doors within and to the Premises.

E.     To decorate and to make repairs, alterations, additions, changes or improvements, whether structural or otherwise, in
and about the Building, or any part thereof, and for such purposes to enter upon the Premises and, during the continuance of any
such work, to temporarily close doors, entryways, public space and corridors in the Building, to interrupt or temporarily suspend
Building  services  and  facilities  and  to  change  the  arrangement  and  location  of  entrances  or  passageways,  doors  and  doorways,
corridors, elevators, stairs, toilets or other public parts of the Building, all without abatement of rent or affecting any of Tenant’s
obligations hereunder, so long as the Premises are reasonably accessible.

F.      To have and retain a paramount title to the Premises free and clear of any act of Tenant purporting to burden or

encumber them.

G.     To grant to anyone the exclusive right to conduct any business or render any service in or to the Building, provided

such exclusive right shall not operate to exclude Tenant from the use expressly permitted herein.

H.     To approve the weight, size and location of safes and other heavy equipment and articles in and about the Premises
and the Building, and to require all such items and furniture and similar items to be moved into and out of the Building and the
Premises only at such times and in such manner as Landlord shall direct in writing. Movements of Tenant’s property into or out of
the Building and within the Building are entirely at the risk and responsibility of Tenant, and Landlord reserves the right to require
permits before allowing any such property to be moved into or out of the Building.

I.      To have access for Landlord and other Tenants of the Building to any mail chutes located on the Premises according to

the rules of the United States Postal Service.

J.            To  take  all  such  reasonable  measures  as  Landlord  may  deem  advisable  for  the  security  of  the  Building  and  its
occupants,  including  without  limitation,  the  closing  of  the  Building  after  normal  business  hours  and  on  Saturdays,  Sundays  and
holidays;  subject,  however,  to  Tenant’s  right  to  admittance  when  the  Building  is  closed  after  normal  business  hours  under  such
reasonable regulations as Landlord may prescribe from time to time which may include, by way of example but not of limitation,
that persons entering or leaving the Building, whether or not during normal business hours, identify themselves to a security officer
by registration or otherwise and that such persons establish their right to enter or leave the Building.

34. MISCELLANEOUS.

A.     Provided Tenant complies with Tenant’s covenants, duties and obligations hereunder, within any notice, grace or cure
periods Tenant shall quietly have, hold and enjoy the Premises subject to the terms and provisions of this Lease without hindrance
from Landlord or any person or entity claiming by, through or under Landlord.

B.     In any circumstance where Landlord is permitted to enter upon the Premises during the Term of this Lease, whether
for the purpose of curing any default of Tenant, repairing damage resulting from fire or other casualty or an eminent domain taking
or is otherwise permitted hereunder or by law to go upon the Premises, no such entry shall constitute an eviction or disturbance of
Tenant’s use and possession of the Premises or a breach by Landlord of any of Landlord’s obligations hereunder or render Landlord
liable for damages for loss of business or otherwise or entitle Tenant to be relieved from any of Tenant’s obligations hereunder or
grant Tenant any right of setoff or recoupment or other remedy; and in connection with any such entry incident to performance of
repairs, replacements, maintenance or construction, all of the aforesaid provisions shall be applicable notwithstanding that Landlord
may elect to take building materials in, to or upon the Premises that may be required or utilized in connection with such entry by
Landlord.

C.     Landlord may restrain or enjoin any breach or threatened breach of any covenant, duty or obligation of Tenant herein
contained  without  the  necessity  of  proving  the  inadequacy  of  any  legal  remedy  or  irreparable  harm.  The  remedies  of  Landlord
hereunder shall be deemed cumulative, and no remedy of Landlord, whether exercised by Landlord or not, shall be deemed to be in
exclusion of any other. Except as may be otherwise herein expressly provided, in all circumstances under this Lease where prior
consent or permission of one (l) party (“first party”) is required before the other party (“second party”)  is  authorized to take  any
particular type of action, the matter of whether to grant such consent or permission shall be within the sole and exclusive judgment
and discretion of the first party; and it shall not constitute any nature of breach by the first party hereunder or any defense to the
performance of any covenant, duty or obligation of the second party hereunder that the first party delayed or withheld the granting
of such consent or permission, whether or not the delay or withholding of such consent or permission was prudent or reasonable or
based on good cause.

11

D.          In  all  instances  where  Tenant  is  required  to  pay  any  sum  or  do  any  act  at  a  particular  indicated  time  or  within  an

indicated period, it is understood that time is of the essence.

E      Except as otherwise set forth in this Lease to the contrary, the obligation of Tenant to pay all rental and other sums
hereunder provided to be paid by Tenant and the obligation of Tenant  to  perform  Tenant’s  other  covenants  and  duties  hereunder
constitute independent, unconditional obligations to be performed at all times provided for hereunder, save and except only when
an abatement thereof or reduction therein is hereinabove expressly provided for and not otherwise. Tenant waives and relinquishes
all rights which Tenant might have to claim any nature of lien against or withhold, or deduct from or offset against any rental and
other sums provided hereunder to be paid Landlord by Tenant. Tenant waives and relinquishes any right to assert, either as a claim
or as a defense, that Landlord is bound to perform or is liable for the nonperformance of any implied covenant or implied duty of
Landlord not expressly herein set forth.

F.      Under no circumstances whatsoever shall Landlord ever be liable hereunder for consequential damages or special

damages.

G.     Landlord retains the exclusive right to create any additional improvements to structural and/or mechanical systems,

interior and exterior walls and/or glass, which Landlord deems necessary without the prior consent of Tenant.

R.     All monetary obligations of Landlord and Tenant (including, without limitation, any monetary obligation of Landlord
or  Tenant  for  damages  for  any  breach  of  the  respective  covenants,  duties  or  obligations  of  Landlord  or  Tenant  hereunder)  are
performable exclusively in the county in which the Building is located.

L.     The laws of the State in which the Building is located shall govern the interpretation, validity, performance and

enforcement of this Lease.

J.     If any clause or provision of this Lease is or becomes illegal, invalid, or unenforceable because of present or future
laws  or  any  rule  or  regulation  of  any  governmental  body  or  entity,  effective  during  the  Term  of  this  Lease,  the  intention  of  the
parties hereto is that the remaining parts of this Lease shall not be affected thereby.

K.     IT IS MUTUALLY AGREED BY AND BETWEEN LANDLORD AND TENANT THAT THE RESPECTIVE
PARTIES HERETO SHALL AND THEY HEREBY DO WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM  BROUGHT  BY  EITHER  OF  THE  PARTIES  HERETO  AGAINST  THE  OTHER  ON  ANY
MATTERS  WHATSOEVER  ARISING  OUT  OF  OR  IN  ANY  WAY  CONNECTED  WITH  THIS  LEASE,  THE
RELATIONSHIP OF LANDLORD AND TENANT, TENANT’S USE OR OCCUPANCY OF THE PREMISES, AND ANY
EMERGENCY STATUTORY OR ANY OTHER STATUTORY REMEDY

L.      [Reserved]

M.     No receipt of money by Landlord from Tenant after the expiration of the Term of this Lease, or after the service of any
notice, or after the commencement of any suit, or after final judgment for possession of the Premises, shall reinstate, continue or
extend  the  Term  of  this  Lease  or  affect  any  such  notice,  demand  or  suit  or  imply  consent  for  any  action  for  which  Landlord’s
consent is required.

N.     Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the
singular number shall be held to include the plural, unless the context otherwise requires. The headings of the Paragraphs of this
Lease have been inserted for convenience only and are not to be considered in any way in the construction or interpretation of this
Lease.

O.     Tenant agrees that Tenant shall from time-to-time, within ten (10) days of a request by Landlord and/or Landlord’s
Mortgagee, execute and deliver to Landlord a statement in recordable form certifying (i) that the Lease is unmodified and in full
force and effect (or, if there have been modifications, that the same is in full force and effect as so modified), (ii) the dates to which
rental and other charges payable under this Lease have been paid, and (iii) that Landlord is not in default hereunder (or, if Landlord
is  in  default,  specifying  the  nature  of  such  default).  Tenant  further  agrees  that  Tenant  shall  from  time  to  time  upon  request  by
Landlord  execute  and  deliver  to  Landlord  an  instrument  in  recordable  form  acknowledging  Tenant’s  receipt  of  any  notice  of
assignment of this Lease by Landlord.

P.     In no event shall Tenant have the right to create or permit there to be established any lien or encumbrance of any nature
against the Premises or the Building for any improvement or improvements by Tenant, and Tenant shall fully pay the cost of any
improvement or improvements made or contracted for by Tenant. Any mechanic’s lien filed against the Premises or the Building
for work claimed to have been done, or materials  claimed  to  have  been  furnished  to  Tenant,  shall  be  duly  discharged  by  Tenant
within twenty (20) days after the filing of the lien.

Q.     Whenever a period of time is herein prescribed for action to be taken by Landlord, Landlord shall not be liable or
responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, riots, acts
of  God,  shortages  of  labor  or  materials,  war,  governmental  laws,  regulations  or  restrictions,  or  any  other  causes  of  any  kind
whatsoever which are beyond the reasonable control of Landlord.

R.     This Lease shall not be recorded by either party without the consent of the other.

S.     Nothing herein contained shall be deemed or construed by the parties hereto, nor by any third party, as creating the
relationship of principal and agent, or of partnership or of joint venture between the parties hereto, it being understood and agreed
that neither the method of the computation of rental, nor any other provision contained herein, nor any acts of the parties hereto,
shall be deemed to create any relationship between the parties hereto other than the relationship of landlord and tenant.

T.          Whenever  it  is  provided  herein  that  a  monetary  sum  shall  be  due  to  Landlord  together  with  interest  at  the  highest
lawful rate, if at such time there shall be no highest rate prescribed by applicable law, interest shall be due at the rate of six percent
(6%) in excess of Prime Rate as defined in Section 1.O. hereof.

U.     Tenant warrants that Tenant is, and shall remain throughout the Term of this Lease, authorized to do business and in
good  standing  in  the  State  in  which  the  Building  is  located.  Tenant  agrees,  upon  request  by  Landlord,  to  furnish  Landlord
satisfactory evidence of Tenant’s authority for entering into this Lease.

12

V.      In case it should be necessary or proper for Landlord to bring any action under this Lease (including specifically,

without limitation, for the review of instruments evidencing a proposed assignment, subletting or other transfer by Tenant
submitted to Landlord for consent) or the enforcement of any of Landlord’s rights hereunder, Tenant agrees to pay to Landlord
reasonable attorneys’ fees as may be awarded by a court of competent jurisdiction.

W.     In the event Tenant requests from Landlord the written consent of Landlord to any proposed action for which this
Lease requires such consent, Landlord may require (in addition to the payment of reasonable attorney’s or professional fees) the
payment  by  Tenant  of  a  fee  representing  the  administrative  costs  incurred  by  Landlord  in  processing  such  request,  regardless  of
whether such consent is granted. Such fee shall be payable by Tenant at the time such request is made by Tenant.

X.     Submission of this Lease for examination does not constitute an offer, right of first refusal, reservation of, or option
for, the Premises or any other premises in the Building. This Lease shall become effective only upon execution and delivery by
both Landlord and Tenant.

Y.          If  Tenant  is  composed  of  more  than  one  (I)  person  or  entity,  each  person  and/or  entity  comprising  Tenant  shall  be
jointly  and  severally  liable  for  the  performance  of  the  obligations  of  Tenant  under  this  Lease,  including  specifically,  without
limitation, the payment of rental and all other sums payable hereunder.

Z.          Any  charges  against  Tenant  by  Landlord  for  services  or  for  work  done  on  the  Premises  by  order  of  Tenant,  or

otherwise accruing under this Lease, shall be considered as rental due and shall be included in any lien for rental.

AA.    Tenant has no right to protest the real estate tax rate assessed against the Project and/or the appraised value of the
Project  determined  by  any  appraisal  review  board  or  other  taxing  entity  with  authority  to  determine  tax  rates  and/or  appraised
values (each a “Taxing Authority”). Tenant hereby knowingly, voluntarily and intentionally waives and releases any right, whether
created by law or otherwise, to (a) file or otherwise protest before any Taxing Authority any such rate or value determination even
though  Landlord  may  elect  not  to  file  any  such  protest;  (b)  receive,  or  otherwise  require  Landlord  to  deliver,  a  copy  of  any
reappraisal  notice  received  by  Landlord  from  any  Taxing  Authority;  and  (c)  appeal  any  order  of  a  Taxing  Authority  which
determines  any  such  protest.  The  foregoing  waiver  and  release  covers  and  includes  any  and  all  rights,  remedies  and  recourse  of
Tenant,  now  or  at  any  time  hereafter,  under  Section  41.413  and  Section  42.015  of  the  Texas  Tax  Code  (as  currently  enacted  or
hereafter  modified)  together  with  any  other  or  further  laws,  rules  or  regulations  covering  the  subject  matter  thereof.  Tenant
acknowledges and agrees that the foregoing waiver and release was bargained for by Landlord and Landlord would not have agreed
to enter into this Lease in the absence of this waiver and release.

BB.    The parties acknowledge that the parties and their counsel have reviewed and revised this Lease and that the normal
rule  of  construction  to  the  effect  that  any  ambiguities  are  to  be  resolved  against  the  drafting  party  shall  not  be  employed  in  the
interpretation of this Lease or any exhibits or amendments hereto.

CC.    Tenant represents and warrants to Landlord that neither Tenant nor any of its affiliates, nor any of their respective
partners, members, shareholders or other equity owners, and none of their respective employees, officers, directors, representatives
or agents, is a person or entity with whom U.S. persons or entities are restricted from doing business under regulations of the Office
of Foreign Asset Control (“OFAC”) of the Department of the Treasury (including those named on OFAC’s Specially Designated
and  Blocked  Persons  List)  or  under  any  statute,  executive  order  (including  the  September  24,  2001,  Executive  Order  Blocking
Property  and  Prohibiting  Transactions  with  Persons  Who  Commit,  Threaten  to  Commit,  or  Support  Terrorism),  or  other
governmental action.

35.  ENTIRE  AGREEMENT  AND  BINDING  EFFECT.  This  Lease  and  any  contemporaneous  work  letter,  addenda  or
exhibits  signed  by  the  parties  constitute  the  entire  agreement  between  Landlord  and  Tenant;  no  prior  written  or  prior
contemporaneous oral promises or representations shall be binding. This Lease shall not be amended, changed or extended except
by written instrument signed by both parties hereto. The provisions of this Lease shall be binding upon and inure to the benefit of
the  heirs,  personal  representatives,  successors  and  assigns  of  the  parties,  but  this  provision  shall  in  no  way  alter  the  restriction
herein in connection with assignment, subletting and other transfer by Tenant.

36.  EXHIBITS  AND  ADDENDA.  Exhibits  A  through  F  and  any  other  exhibits,  riders  and  addenda  attached  hereto  are

incorporated herein and made a part of this Lease for all purposes.

[Exhibits to Follow]

13

EXHIBIT A

DIAGRAM OF PREMISES

EXHIBIT B

LEGAL DESCRIPTION OF LAND

Pizza Inn Corporate Addn Blk 1 Lot lr-1

The Colony, Texas

Exhibit B - Page 1

EXHIBIT C

RULES AND REGULATIONS

I.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

Except as specifically provided for in this Lease, no sign, placard, picture, advertisement, name or notice will be inscribed, displayed or printed or
affixed on or to any part of the outside or inside of the Building or the Premises without the written consent of Landlord first having been obtained.

Any  directory  of  the  Building  provided  by  Landlord  will  be  exclusively  for  the  display  of  the  name  and  location  of  tenants  in  the  Building,  and
Landlord  reserves  the  right  to  exclude  any  other  names  therefrom  and  may  limit  the  number  of  listings  per  tenant.  Tenant  will  pay  Landlord’s
standard charge for Tenant’s listing thereon and for any changes by Tenant.

Tenant will not place anything or allow anything to be placed near the glass of any window, door, partition or wall which may appear unsightly from
outside the Premises. No awnings or other projections will be attached to the outside walls and roof of the Building without prior written consent of
Landlord.  No  curtains,  blinds,  shades  or  screens  will  be  attached  to  or  hung  in  or  used  in  connection  with  any  window  or  door  of  the  Premises
without the prior consent of Landlord.

“Normal Business Hours” for purposes of Landlord’s obligation to provide air conditioning (both heating and cooling) will mean 7:00 a.m. to 6:00
p.m. Monday through Friday and 8:00 a.m. to 1:00 p.m. on Saturday except for the following holidays: New Year’s Day, Presidents’ Day, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veterans’ Day, Thanksgiving and Christmas.

The Premises will not be used for the manufacturing or storage of merchandise except as such storage may be incidental to the use of the Premises
for the purposes permitted in this Lease. The Premises will not be used for lodging or sleeping, or for any illegal purposes.

The  sidewalks,  halls,  passages,  exits,  entrances,  elevators  and  stairways  will  not  be  obstructed  by  any  of  the  tenants  or  be  used  by  them  for  any
purpose other than for ingress to and egress from their respective Premises. The halls, passages, exits, entrances, elevators, stairways, terraces and
roof are not for the use of the general public, and Landlord will in all cases retain the right to control and prevent access thereto by all persons whose
presence, in the judgment of Landlord, will be prejudicial to the safety, character, reputation and interest of the Building and its tenants, provided that
nothing herein contained will be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of business,
unless such persons are engaged in illegal activities. No tenant and no employee or invitee of any tenant will go upon the roof of the Building.

Except as expressly permitted in writing by Landlord, no additional locks or bolts of any kind will be placed upon any of the doors or windows by
Tenant, nor will any changes be made to existing locks or the mechanisms thereof. Landlord will furnish two (2) keys for each lock it installs on the
Premises  without  charge  to  Tenant.  Landlord  will  make  a  reasonable  charge  for  any  additional  keys  requested  by  Tenant,  and  Tenant  will  not
duplicate or obtain keys from any other source. Tenant will upon the termination of the Term of this Lease return to Landlord all keys so issued. The
Tenant will bear the cost for the replacing or changing of any lock or locks due to any keys issued to Tenant being lost.

The toilets and wash basins and other plumbing fixtures will not be used for any purpose other than those for which they were constructed, and no
sweepings, rubbish, rags or foreign substances will be thrown therein.

No furniture, freight or equipment of any kind will be brought into the Building without the consent of Landlord, and all moving of the same into or
out  of  the  Building  will  be  done  at  such  time  and  in  such  manner  as  Landlord  will  designate.  No  furniture,  packages,  supplies,  equipment  or
merchandise will be received in the Building or carried up or down in the elevators except between such hours and in such elevators that will  be
designated by Landlord. There will not be used in any space or in the public areas of the Building, either by Tenant or others, any hand trucks except
those equipped with rubber tires and side guards.

No tenant will make or permit to be used any unseemly or disturbing noises, or disturb or interfere with occupants of this or neighboring buildings or
Premises, whether by the use of any musical instrument, radio, phonograph, unusual noise or in any other way. No Tenant will throw anything out of
doors or down the passage ways.

Tenant will not use or keep in the Premises or the Building any kerosene, gasoline, or any inflammable, combustible or explosive fluid, chemical or
substance or use any method of heating or air conditioning other than those supplied or approved by Landlord.

Tenant will see that the windows and doors of the Premises are closed and securely locked before leaving the Building. No tenant will permit or
suffer any windows to be opened in the Premises while the air conditioning is in operation except at the direction of Landlord. Tenant must observe
strict care and caution that all water faucets and other apparatus are entirely shut off before Tenant and Tenant’s employees leave the Building. For
any default or carelessness, Tenant will make good all injuries sustained by all other tenants or occupants of the Building or Landlord.

Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord, is intoxicated or under the influence
of liquor or drugs, or who will in any manner do any act in violation of any of the rules or regulations of the Building.

The requirements of Tenant will be attended to only upon application at the Building’s office. Employees of the Landlord will not perform any work
or do anything outside of their regular duties unless under special instructions from Landlord, and no employees will admit any person (Tenant or
otherwise) to any office without specific instructions from Landlord.

No tenant will disturb, solicit, or canvass any occupant of the Building, nor will Tenant permit or cause others to do so, and Tenant will co-operate to
prevent same by others.

No  vending  machine  or  machines  of  any  description  will  be  installed,  maintained  or  operated  upon  the  Premises  without  the  written  consent  of
Landlord. Tenant will not permit in the Premises any cooking or the use of apparatus for the preparation of any food or beverages (except where the
Landlord has approved the installation of cooking facilities as part of the Tenant’s leasehold improvements), nor the use of any electrical apparatus
likely to cause an overload of the electrical circuits.

Exhibit C - Page 1

17.

18.

19.

20.

All persons entering and leaving the Building at any time other than during normal business hours will register in the books kept by Landlord at or
near the night entrance or entrances, and Landlord will have the right to prevent any persons entering or leaving the Building unless provided with a
key to the premises to which such person seeks entrance, and a pass in a form to be approved by Landlord and provided at Tenant’s expense. Any
persons found in the Building at such times without such keys or passes will be subject to the surveillance of the employees and agents of Landlord.
Landlord will be under no responsibility for failure to enforce this rule.

Tenant will not use any janitor closets or telephone or electrical closets for anything other than their originally intended purposes. In the event Tenant
purchases privately owned communications equipment for which telephone closets were not installed in connection with initial occupancy of Tenant,
such equipment will not be installed in existing telephone closets.

Tenant’s right to have heavy furnishings, equipment, and files in the Premises will be limited to items weighing less than the load-bearing limits of
floors  within  the  Premises  as  established  by  Landlord.  Heavy  items  must  be  placed  in  locations  approved  in  advance  by  Landlord.  Upon  written
demand  from  Landlord,  Tenant  will  promptly  remove  from  the  Premises  any  items  which,  in  the  judgment  of  Landlord,  constitute  a  structural
overload  on  floors  within  the  Premises.  If  Landlord  approves  the  presence  of  a  heavy  item  for  which  reinforcement  of  the  floor  or  other
precautionary measures are necessary, Tenant will bear the entire cost of such reinforcement or other precautionary measures. If the services of a
structural engineer are, in the judgment of Landlord, necessary to determine the location for and/or precautionary measures to be taken in connection
with any heavy load, Landlord will engage such engineer, but the fees and expenses of such engineer will be paid by Tenant upon demand.

Tenant will not, without the prior written consent of Landlord, use the name or any photograph, drawing or other likeness of the Building for any
purpose other than as the address of the business to be conducted by Tenant in the Premises, nor will Tenant do or permit anything to be done in
connection  with  Tenant’s  business  or  advertising  which,  in  the  reasonable  judgment  of  Landlord,  might  mislead  the  public  as  to  any  apparent
connection or relationship between Landlord, the Building and Tenant.

21.

Tenant, its invitees, and employees shall be allowed to smoke only in those designated smoking areas outside the Building.

Exhibit C - Page 2

EXHIBIT D

PARKING

Unreserved Parking Spaces.

Landlord hereby grants to Tenant and persons designated by Tenant a license to the non-exclusive use of sixty (60) spaces in the
parking lot (the “Lot”) adjacent to the Building on a first come, first served basis, at no charge. The spaces in the parking lot are
collectively referred to herein as the “Spaces”.

The term of such license(s) will commence on the Commencement Date and will continue until the earlier to occur of the
expiration date under the Lease or termination of the Lease or Tenant’s abandonment of the Premises.

Control of Parking.

Tenant  shall  at  all  times  comply  with  all  applicable  ordinances,  rules,  regulations,  codes,  laws,  statutes  and  requirements  of  all
federal, state, county and municipal governmental bodies or their subdivisions respecting the use of the Lot. Landlord reserves the
right from time to time to adopt, modify and enforce reasonable rules governing the use of the Lot, including any key-card, sticker
or  other  identification  or  entrance  system,  and  hours  of  operation.  Landlord  may  refuse  to  permit  any  person  who  violates  such
rules to park in the Lot, and any violation of the rules will subject the car to removal from same.

Liability.

The spaces hereunder will be provided on an unreserved “first-come, first-served” basis. Tenant acknowledges that Landlord has or
may  arrange  for  the  Lot  to  be  operated  by  an  independent  contractor,  not  affiliated  with  Landlord.  In  such  event,  Tenant
acknowledges  that  Landlord  will  have  no  liability  for  claims  arising  through  acts  or  omissions  of  such  independent  contractor.
Landlord will have no liability whatsoever for any damage to property or any other items located in the Lot, nor for any personal
injuries or death arising out of any use of the Lot, and in all events, Tenant agrees to look first to its insurance carrier and to require
that Tenant’s employees look first to their respective insurance carriers for payment of any losses sustained in connection with any
use  of  the  Lot.  Tenant  hereby  waives  on  behalf  of  Tenants  insurance  carriers  all  rights  of  subrogation  against  Landlord  or
Landlord’s agents. Landlord reserves the right to assign specific spaces, and to reserve spaces for visitors, small cars, handicapped
persons and for other tenants, guests of tenants or other parties, and Tenant and persons designated by Tenant hereunder will not
park in any such assigned or reserved spaces. Landlord also reserves the right to close all or any portion of the Lot in order to make
repairs  or  perform  maintenance  services,  or  to  alter,  modify,  restripe  or  renovate  the  Lot,  or  if  required  by  casualty,  strike,
condemnation, act of God, governmental law or requirement or other reason beyond Landlord’s reasonable control. If, for any other
reason,  Tenant  or  persons  properly  designated  by  Tenant,  are  denied  access  to  the  Lot,  and  Tenant  or  such  persons  will  have
complied  with  this  Exhibit  D,  Landlord’s  liability  will  be  limited  to  parking  charges  (excluding  tickets  for  parking  violations)
incurred  by  Tenant  or  such  persons  in  utilizing  alternative  parking,  which  amount  Landlord  will  pay  upon  presentation  of
documentation supporting Tenants claims in connection therewith.

Default. Remedies.

If  Tenant  defaults  under  this  Exhibit D,  Landlord  will  have  the  right  to  remove  from  the  Lot  any  vehicles  hereunder  which  are
involved or are owned or driven by parties involved in causing such default, without liability therefor whatsoever. In addition, if
Tenant defaults under this Exhibit D, Landlord will have the right to cancel Tenant’s parking spaces (including Reserved Spaces) on
ten (10) days’ written notice. If Tenant defaults with respect to the same term or condition under this Exhibit D, more than three (3)
times during any twelve (12) month period, the next default of such term or condition, will, at Landlord’s election, constitute an
incurable  default  of  the  parking  arrangements.  Such  cancellation  right  will  be  cumulative  and  in  addition  to  any  other  rights  or
remedies available to Landlord at law or equity, or provided under this Lease.

Exhibit D - Page 1

EXHIBIT E

WORK LETTER

TENANT HEREBY ACCEPTS THE PREMISES IN THEIR AS IS, WHERE IS CONDITION, WITH NO OBLIGATION
OF LANDLORD TO RENOVATE OR IMPROVE THE PREMISES IN ANY WAY, NOR IS LANDLORD OBLIGATED
TO  PAY  FOR  ANY  SUCH  RENOVATION  OR  REMODELING.  TENANT  ACKNOWLEDGES  AND  AGREES  THAT
THE  PREMISES  IS  BEING  LEASED  TO  TENANT  “AS  IS”,  ‘WHERE  IS”,  AND  “WITH  ALL  FAULTS”,  WITH
TENANT  ACCEPTING  ALL  FAULTS  AND  DEFECTS,  IF  ANY,  THEREIN;  AND  LANDLORD  MAKES  NO
REPRESENTATION  OR  WARRANTY  OF  ANY  KIND,  EXPRESS  OR  IMPLIED,  WITH  RESPECT  TO  THE
PREMISES, INCLUDING, WITHOUT LIMITATION, LANDLORD MAKES NO, AND EXPRESSLY DISCLAIMS ANY,
WARRANTY  AS  TO  HABITABILITY,  FITNESS  OR  SUITABILITY  OF  THE  PREMISES  FOR  A  PARTICULAR
PURPOSE,  PROFITABILITY  OR  OTHER  TENANTS  IN  THE  BUILDING,  NOR  AS  TO  THE  ABSENCE  OF  ANY
TOXIC  OR  HAZARDOUS  SUBSTANCES.  TENANT  FURTHER  ACKNOWLEDGES  AND  AGREES  THAT  TENANT
HAS BEEN GIVEN THE OPPORTUNITY TO INSPECT THE PREMISES PRIOR TO EXECUTION OF THIS LEASE.

Tenant Improvement Allowance:

Landlord shall provide Tenant with the above-mentioned Tenant Improvement Allowance (in the amount of
$300,000.00) to be applied towards all hard and soft costs associated with work in the Premises. Tenant shall
provide drawings to Landlord prior to commencement of work for Landlord’s review, which shall not be
unreasonably withheld.

Tenant’s contractors shall perform the work, and Landlord shall reimburse Tenant within twenty (20) days upon
receipt of invoices.

Tenant’s access to such allowance shall expire on December 31, 2017.

Restoration:

Upon  the  expiration  of  the  Term,  Tenant  shall  restore  the  kitchen  and  non-office  standard  portions  to  standard
whitebox  condition,  unless  otherwise  noted  by  Landlord.  Such  work  shall  be  completed  within  60  days  of  the
expiration of the Term.

Server Room:

Tenant shall have 24/7 access to the existing 2nd floor server room.

Exhibit E - Page 1

 
 
 
 
 
 
 
 
 
 
Exhibit 10.5

FIRST AMENDMENT TO LEASE AND EXPANSION

This FIRST AMENDMENT TO LEASE AND EXPANSION (this “Amendment”) is made this 7/25/2017 day of July,

2017 but effective as of July 1, 2017 (the “Effective  Date”), by and between A&H PROPERTIES PARTNERSHIP, a Texas
partnership (“Landlord”.) and RAVE RESTAURANT GROUP, INC., a Texas corporation (“Tenant”), with reference to the
following facts and objectives:

RECITALS

WHEREAS,  Landlord  and  Tenant  entered  into  that  certain  Lease  Agreement,    dated  January  1,  2017  (as  amended,  the
“Lease”), in which Landlord leased to Tenant, those certain premises located at 3551 Plano Parkway, Suite 100, The Colony, Texas
75056,  consisting  of  approximately  eighteen  thousand  seven  hundred  seventy  six  (  18,776)  square  feet  as  more  particularly
described in the Lease (the “Premises”).

WHEREAS, Landlord and Tenant desire to amend the Lease to expand the original premises by adding an additional 800
square feet of warehouse space located at 3553 Plano Parkway, The Colony, Texas 75056 (the “Expansion Space”), as depicted on
Exhibit “A” attached hereto and incorporated herein for all purposes.

NOW, THEREFORE, for  good  and  valuable  consideration  the  receipt  and  adequacy  of  which  is  hereby  acknowledged,

Landlord and Tenant hereby agree as follows:

1.

Expansion of Premises; Term of Expansion Space:

Landlord and Tenant hereby agree to expand the Premises by adding the Expansion Space to the Premises on July 1, 2017
(the “Expansion Commencement Date”). It is the intention of Landlord and Tenant that the term of the Expansion Space shall be
co-terminus with the Term of the Premises.

 
 
 
 
 
 
2.

Minimum Guaranteed Rental:

Commencing on the Expansion Commencement Date, in addition to the Monthly Base Rent paid under the Lease, Tenant

shall pay the amounts below for the Expansion Space:

Sq. Ft.

Term
(Months)

7/1/17-12/31/17
1/1/18-12/31/18
1/1/19-12/31/19
1/1/20-12/31/20
1/1/21-12/31/21
1/1/22-12/31/22
1/1/23-12/31/23
1/1/24-12/31/24
1/1/25-12/31/25
1/1/26-12/31/26
Total

3.

Additional Rent:

800
Annual 
Base
Rental
Rate/RSF
$17.50 NNN
$17.50 NNN
$18.00 NNN
$18.00 NNN
$18.50 NNN
$18.50 NNN
$19.00 NNN
$19.00 NNN
$19.50 NNN
$19.50 NNN

Annual 
Base 
Rental

 $7,000.00 
 $14,000.00 
$14,400.00
$14,400.00
$14,800.00
$14,800.00
$15,200.00
$15,200.00
$15,600.00
$15,600.00
$141,000.00

Monthly
Base
Rent

 $1,166.67 
 $1,166.67 
$1,200.00
$1,200.00
$1,233.33
$1,233.33
$1,266.67
$1,266.67
$1,300.00
$1,300.00

In lieu of operating expenses and electricity costs on the Expansion Space, Tenant shall pay one-half (1/2) of the natural gas

consumption on the building in which the Expansion Space is located.

4.

Condition of the Expansion Space:

Landlord  shall  deliver,  and  Tenant  shall  accept  the  Expansion  Space  in  current  “as  is,  where  is”  condition,  with  no

obligation of Landlord to construct or pay for any improvements to the Expansion Space.

2

 
 
 
 
 
5.

Integration into Lease:

Upon execution, this Amendment will be integrated into and made a part of the Lease. Except as otherwise provided herein,
all other terms and conditions of the Lease, as hereby amended, are ratified and shall remain unchanged and in full force and effect.
In  the  event  of  any  conflict  between  this  Amendment  and  the  Lease,  the  terms  and  conditions  of  this  Amendment  shall  prevail.
Capitalized terms used but not defined in this Amendment shall have the meanings given them in the Lease.

[Signature Page to Follow]

3

 
 
IN WITNESS WHEREOF, this Amendment has been duly executed by the parties hereto as of the dates noted below.

Landlord:

A&H PROPERTIES PARTNERSHIP,
a Texas partnership

By: /s/ Ali Khoshgowari
Ali Khoshgowari
General Partner

Tenant:

RAVE RESTAURANT GROUP, INC.,
a Texas corporation 

/s/ Scott Crane

By:
Name:Scott Crane
Title: CEO

 
 
 
 
 
 
 
 
 
 
Exhibit “A”

Expansion Space

Exhibit 21.1

Name of Subsidiary

Pizza Inn, Inc.*

(d/b/a Pizza Inn)

SUBSIDIARIES OF RAVE RESTAURANT GROUP, INC.

Jurisdiction of Organization

Missouri

Pie Five Pizza Company, Inc.*

(d/b/a Pie Five Pizza Company or Pie Five)

Pie Five Restaurants, Inc.*

PIBC Holding, Inc.*

Pizza Inn Beverage Corp.*

Pie Five Beverage Corp.*

Texas

Texas

Texas

Texas

Texas

* Does business under its corporate name as well as any referenced assumed name.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Rave Restaurant Group, Inc.
The Colony, Texas

We  hereby consent  to  the  incorporation  by  reference  in  the Registration  Statements  on  Forms  S-8  (Nos. 033-71700, 333-77617,
333-76296, 333-177436 and 333-207428) and Forms S-3 (Nos. 333-219483 and 333-221169) of Rave Restaurant Group, Inc. of
our report dated September 30, 2019, relating to the consolidated financial statements, which appears in this Form 10-K.

Baker Tilly Virchow Krause, LLP
Plano, TX

September 30, 2019

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to section 3.02 of the Sarbanes-Oxley Act of 2002

I, Robert W. Bafundo, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Rave Restaurant Group, Inc. (“the Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the

financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The  Registrant’s  other  certifying  officer  and  I  are  responsible  for  establishing  and  maintaining  disclosure  controls  and  procedures  (as  defined  in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the Registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;

c. Evaluated  the  effectiveness  of  the  Registrant’s  disclosure  controls  and  procedures  and  presented  in  this  report  our  conclusions  about  the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most
recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the

Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a. All  significant  deficiencies  and  material  weaknesses  in  the  design  or  operation  of  internal  control  over  financial  reporting  which  are

reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal

control over financial reporting.

Date: September 30, 2019

By:

/s/ Robert W. Bafundo
Robert W. Bafundo
President
(Principal Executive Officer)

Exhibit 31.2

I, Mark E. Schwarz, certify that:

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 3.02 of the Sarbanes-Oxley Act of 2002

1.

I have reviewed this Annual Report on Form 10-K of Rave Restaurant Group, Inc. (“the Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the

financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The  Registrant’s  other  certifying  officer  and  I  are  responsible  for  establishing  and  maintaining  disclosure  controls  and  procedures  (as  defined  in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the Registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;

c. Evaluated  the  effectiveness  of  the  Registrant’s  disclosure  controls  and  procedures  and  presented  in  this  report  our  conclusions  about  the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most
recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the

Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a. All  significant  deficiencies  and  material  weaknesses  in  the  design  or  operation  of  internal  control  over  financial  reporting  which  are

reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal

control over financial reporting.

Date: September 30, 2019

By:

/s/ Mark E. Schwarz
Mark E. Schwarz
Director and Chairman of the Board
(Principal Financial Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned officer of Rave Restaurant Group, Inc. (the “Company”), does hereby certify, to such officer’s knowledge,
that  the  accompanying  Annual  Report  on  Form  10-K  for  the  fiscal  year  ended  June  30,  2019,  and  filed  with  the  Securities  and
Exchange Commission on the date hereof (the “Form 10-K”) fully complies with the requirements of Section 13(a) or 15(d), as
applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of the Company.

Date: September 30, 2019

By:

/s/  Robert W. Bafundo
President
(Principal Executive Officer)

 
Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned officer of Rave Restaurant Group, Inc. (the “Company”), does hereby certify, to such officer’s knowledge,
that  the  accompanying  Annual  Report  on  Form  10-K  for  the  fiscal  year  ended  June  30,  2019,  and  filed  with  the  Securities  and
Exchange Commission on the date hereof (the “Form 10-K”) fully complies with the requirements of Section 13(a) or 15(d), as
applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of the Company.

Date: September 30, 2019

By:

/s/ Mark E. Schwarz
Mark E. Schwarz
Director and Chairman of the Board
(Principal Financial Officer)