RAVE 10-Q Quarterly Report Sept. 25, 2016

RAVE RESTAURANT GROUP, INC.

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10-Q 1 rave10q092516.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 25, 2016

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

Commission File Number: 0-12919

RAVE RESTAURANT GROUP, INC.

(Exact name of registrant as specified in its charter)

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

3551 Plano Parkway

The Colony, Texas 75056

(Address of principal executive offices)

(469) 384-5000

(Registrant's telephone number,
including area code)

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

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

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

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

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

As of November 3, 2016, 10,656,551 shares of the issuer's common stock were outstanding.

RAVE RESTAURANT GROUP, INC.

Index

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements	Page

	Condensed Consolidated Statements of Operations for the three months ended September 25, 2016 and September 27, 2015 (unaudited)	4

	Condensed Consolidated Balance Sheets at September 25, 2016 (unaudited) and June 26, 2016	5

	Condensed Consolidated Statements of Cash Flows for the three months ended September 25, 2016 and September 27, 2015 (unaudited)	6

	Supplemental Disclosure of Cash Flow Information for the three months ended September 25, 2016 and September 27, 2015 (unaudited)	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18

Item 4.	Controls and Procedures	18

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Mine Safety Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	20

Signatures		21

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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



	Three Months Ended
	September 25,			September 27,
	2016			2015


REVENUES:	$	15,456		$	14,536

COSTS AND EXPENSES:
Cost of sales		13,882			12,350
General and administrative expenses		1,903			1,569
Franchise expenses		852			859
Pre-opening expenses		19			432
Loss on sale of assets		43			-
Other lease charges		169			-
Bad debt		53			103
Interest expense		-			1
Total costs and expenses		16,921			15,314

LOSS FROM CONTINUING OPERATIONS BEFORE TAXES		(1,465	)		(778	)
Income tax expense (benefit)		14			(258	)
LOSS FROM CONTINUING OPERATIONS		(1,479	)		(520	)

Loss from discontinued operations, net of taxes		(17	)		(37	)
NET LOSS	$	(1,496	)	$	(557	)

LOSS PER SHARE OF COMMON STOCK - BASIC:
Loss from continuing operations	$	(0.14	)	$	(0.05	)
Loss from discontinued operations		-			-
Net loss	$	(0.14	)	$	(0.05	)

LOSS PER SHARE OF COMMON STOCK - DILUTED:

Loss from continuing operations	$	(0.14	)	$	(0.05	)
Loss from discontinued operations		-			-
Net loss	$	(0.14	)	$	(0.05	)

Weighted average common shares outstanding - basic		10,469			10,342

Weighted average common and
potential dilutive common shares outstanding		10,569			10,954

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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

	September 25,			June 26,
ASSETS	2016 (unaudited)			2016

CURRENT ASSETS
Cash and cash equivalents	$	285			1,104
Accounts receivable, less allowance for bad debts
accounts of $252 and $198, respectively		2,714			2,780
Notes receivable		143			167
Inventories		192			197
Income tax receivable		194			194
Prepaid expenses and other		471			430
Total current assets		3,999			4,872

LONG-TERM ASSETS
Property, plant and equipment, net		12,306			12,979
Long-term notes receivable		353			382
Deposits and other		279			272
Total assets	$	16,937		$	18,505

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade	$	3,239			3,815
Accrued expenses		1,012			1,220
Deferred rent		152			160
Deferred revenues		258			304
Total current liabilities		4,661			5,499

LONG-TERM LIABILITIES
Deferred rent, net of current portion		1,564			1,710
Deferred revenues, net of current portion		1,475			1,440
Other long-term liabilities		479			453
Total liabilities		8,179			9,102

COMMITMENTS AND CONTINGENCIES (See Note 2)

SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 26,000,000
shares; issued 17,775,951 and 17,460,951 shares, respectively;
outstanding 10,656,551 and 10,341,551 shares, respectively		178			175
Additional paid-in capital		26,626			25,778
Retained earnings		6,590			8,086
Treasury stock at cost
7,119,400 shares		(24,636	)		(24,636	)
Total shareholders' equity		8,758			9,403
Total liabilities and shareholders' equity	$	16,937		$	18,505

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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

	Three Months Ended
	September 25,			September 27,
	2016			2015

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss	$	(1,496	)	$	(557	)
Adjustments to reconcile net loss to
Cash provided by (used in) operating activities:
Depreciation and amortization		790			517
Stock compensation expense		45			45
Deferred income taxes		-			(281	)
Loss on sale of assets		43			-
Provision for bad debt		53			103
Changes in operating assets and liabilities:
Notes and accounts receivable		66			258
Inventories		5			(33	)
Accounts payable - trade		(577	)		414
Accrued expenses		(182	)		151
Deferred rent		(154	)		-
Deferred revenue		(11	)		116
Prepaid expenses and other		(50	)		10
Cash (used in) provided by operating activities		(1,468	)		743

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets		5			-
Capital expenditures		(162	)		(3,564	)
Cash used in investing activities		(157	)		(3,564	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock		-			779
Proceeds from stock options		806			-
Cash provided by financing activities		806			779

Net decrease in cash and cash equivalents		(819	)		(2,042	)
Cash and cash equivalents, beginning of period		1,104			5,958
Cash and cash equivalents, end of period	$	285		$	3,916



SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION


CASH PAYMENTS FOR:

Interest	$	-		$	1
Income taxes - net	$	25		$	5

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

RAVE RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements of Rave Restaurant Group, Inc. (the "Company") have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in the financial statements have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 26, 2016.

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

(1)	Summary of Significant Accounting Policies

Principles of Consolidation

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

Cash and Cash Equivalents

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

Fiscal Quarters

The three month periods ended September 25, 2016 and September 27, 2015, each contained 13 weeks.

Revenue Recognition

The Company recognizes revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. The Company's Norco division sells food and supplies to franchisees on trade accounts under terms common in the industry. Food and supply sales revenues, including shipping and handling costs, are recognized upon delivery of the product. Revenue from restaurant sales is recognized when food and beverage products are sold. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities.

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

Stock-Based Compensation

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

Restricted Stock Units

Compensation cost 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.

Use of Management Estimates

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

Reclassification

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

(2)	Commitments and Contingencies

On April 22, 2009 the Company's board of directors amended the 2007 Stock Purchase Plan first adopted on May 23, 2007 and previously amended on June 2, 2008, to increase the number of shares of common stock the Company may repurchase shares to a total of 3,016,000 shares. The 2007 Stock Purchase Plan does not have an expiration date. There were no stock repurchases in the first quarter of fiscal 2017. As of September 25, 2016, up to an additional 848,425 shares could be repurchased under the 2007 Stock Purchase Plan.

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

(3)	Stock-Based Compensation

Stock Options:

For the three months ended September 25, 2016, and September 27, 2015, the Company recognized stock-based compensation expense related to stock options of $25 thousand and $45 thousand, respectively. As of September 25, 2016, unamortized stock-based compensation expense related to stock options was $0.1 million.

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

<BTB>	Three Months Ended
<BTB>	September 25, 2016			September 27, 2015

Outstanding at beginning of year		847,556			871,798

Granted		50,000			42,786
Exercised		(315,000	)		-
Forfeited/Canceled/Expired		(80,000	)		-

Outstanding at end of period		502,556			914,584

Exercisable at end of period		365,406			443,028

Restricted Stock Units:

For the three months ended September 25, 2016, and September 27, 2015, the Company recognized stock-based compensation expense related to restricted stock units in the amount of $20 thousand and $0. As of September 25, 2016, unamortized stock-based compensation expense related to restricted stock units was $0.2 million.

A summary of the status of restricted stock units as of September 25, 2016, and changes during the fiscal quarter then ended is presented below:

Number of Restricted Stock Units

Unvested at June 26, 2016	79,620
Granted	-
Vested	-
Forfeited	(43,750	)
Unvested at September 25, 2016	35,870

(4)	Earnings per Share (EPS)

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

	Three Months Ended
	September 25,			September 27,
	2016			2015
Loss from continuing operations	$	(1,479	)	$	(520	)
Loss from discontinued operations		(17	)		(37	)
Net loss available to common stockholders	$	(1,496	)	$	(557	)

BASIC:
Weighted average common shares		10,469			10,342

Loss from continuing operations per common share	$	(0.14	)	$	(0.05	)
Loss from discontinued operations per common share		-			-
Net loss per common share	$	(0.14	)	$	(0.05	)

DILUTED:
Weighted average common shares		10,469			10,342
Stock options		100			612
Weighted average common shares outstanding		10,569			10,954


Loss from continuing operations per common share	$	(0.14	)	$	(0.05	)
Loss from discontinued operations per common share		-			-
Net loss per common share	$	(0.14	)	$	(0.05	)

For the three months ended September 25, 2016, options to purchase 236,250 shares of common stock at an exercise prices ranging from $3.95 to $13.11 were excluded from the computation of diluted EPS because the options' exercise price exceeded the average market price of the common shares for the period.

(5) Closed restaurants and discontinued operations

In April, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which modifies the definition of discontinued operations to include only disposals of an entity that represent strategic shifts that have or will have a major effect on an entity's operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. The standard was effective prospectively for annual and interim periods beginning after December 15, 2014, with early adoption permitted. This pronouncement did not have a material impact on our condensed 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 from leased buildings associated with Company-owned restaurants closed in prior years.

(6) Income Taxes

For the three months ended September 25, 2016, income tax expense represents an income tax benefit of $510 thousand calculated at a rate consistent with the 34% statutory U.S. federal rate offset by an income tax expense of $515 thousand related to a valuation allowance for deferred tax assets of $510 thousand and state taxes of $5 thousand. For the three months ended September 27, 2015, income tax expense was $.03 million.

The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. The Company continues to record a full valuation allowance against its net deferred tax assets. The Company assessed whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, using a "more likely than not" standard. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of deferred tax assets. In making such assessment, more weight was given to evidence that could be objectively verified, including recent cumulative losses. Future sources of taxable income were also considered in determining the amount of the recorded valuation allowance. Based on the Company's review of this evidence at September 25, 2016, management determined that a valuation allowance against all of the Company's deferred tax assets accruing during the first quarter of fiscal 2017 was appropriate. There was approximately $5.4 million of deferred tax assets at September 25, 2016.

(7) Related Party Transactions

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

(8)	Segment Reporting

Summarized in the following tables are net sales and operating revenues, operating income and geographic information (revenues) for the Company's reportable segments for the three month periods ended September 25, 2016 and September 27, 2015 (in thousands). Operating income reported below excludes income tax provision and discontinued operations.

	Three Months Ended
<BTB>	September 25,			September 27,
	2016			2015
Net sales and operating revenues:
Franchising and food and supply distribution	$	10,557		$	9,912
Company-owned restaurants (1)		4,899			4,624
Consolidated revenues	$	15,456		$	14,536

Depreciation and amortization:
Franchising and food and supply distribution	$	6		$	6
Company-owned restaurants (1)		687			443
Combined		693			449
Corporate administration and other		97			68
Depreciation and amortization	$	790		$	517

Income (loss) from continuing operations before taxes:
Franchising and food and supply distribution (2)	$	876		$	633
Company-owned restaurants (1) (2)		(1,566	)		(663	)
Combined		(690	)		(30	)
Corporate administration and other (2)		(775	)		(748	)
Loss from continuing operations before taxes	$	(1,465	)	$	(778	)

Geographic information (revenues):
United States	$	15,261		$	14,335
Foreign countries		195			201
Consolidated total	$	15,456		$	14,536


(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.

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

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended June 26, 2016, and may contain certain forward-looking statements that are based on current management expectations. Generally, verbs in the future tense and the words "believe," "expect," "anticipate," "estimate," "intends," "opinion," "potential" and similar expressions identify forward-looking statements. Forward-looking statements in this report include, without limitation, statements relating to our business objectives, our customers and franchisees, our liquidity and capital resources, and the impact of our historical and potential business strategies on our business, financial condition, and operating results. Our actual results could differ materially from our expectations. Further information concerning our business, including additional factors that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, are set forth in our Annual Report on Form 10-K for the year ended June 26, 2016. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Results of Operations

Overview

Rave Restaurant Group, Inc., through its subsidiaries (collectively, the "Company" or "we,", "us" or "our") operates and franchises pizza buffet ("Buffet Units"), delivery/carry-out ("Delco Units") and express ("Express Units") restaurants domestically and internationally under the trademark "Pizza Inn" and operates domestic fast casual pizza restaurants ("Pie Five Units") under the trademarks "Pie Five Pizza Company" or "Pie Five". We provide or facilitate food, equipment and supply distribution to our domestic and international system of restaurants through our Norco Restaurant Services Company ("Norco") division and through agreements with third party distributors. The following chart presents information concerning Company-owned and franchised restaurants as of and for the three months ended September 25, 2016:

Three Months Ended September 25, 2016
(in thousands, except unit data)
	Pizza Inn				Pie Five				All Concepts
	Ending		Retail		Ending		Retail		Ending		Retail
	Units		Sales		Units		Sales		Units		Sales

Company-Owned		1	$	192		30	$	4,707		31		4,899
Domestic Franchised		161		21,911		62		10,340		223		32,251
Total Domestic Units		162	$	22,103		92	$	15,047		254	$	37,150

International Franchised		60								60

Domestic restaurants are located in 25 states predominantly situated in the southern half of the United States. International restaurants are located in seven foreign countries.

Basic and diluted income per common share declined $0.09 per share to a loss of $0.14 per share for the three month period ended September 25, 2016, compared to a loss of $0.05 per share in the comparable period in the prior fiscal year. The Company had a net loss of $1.5 million for the three month period ended September 25, 2016, and net loss of $0.6 million in the comparable period in the prior fiscal year, on revenues of $15.5 million for the three month period ended September 25, 2016 compared to $14.5 million in the comparable period in the prior fiscal year. The increase in net loss from prior year was primarily due to closed store expenses, lease termination costs and weaker sales and financial performance by Company-owned Pie Five stores.

Adjusted EBITDA for the fiscal quarter ended September 25, 2016, declined by $0.4 million compared to the prior fiscal year. The following table sets forth a reconciliation of net income to Adjusted EBITDA for the periods shown (in thousands):

	Three Months Ended
	September 25,			September 27,
	2016			2015
Net loss	$	(1,496	)	$	(557	)
Interest expense		-			1
Income Taxes		14			(258	)
Income Taxes--Discontinued Operations		(9	)		(19	)
Depreciation and amortization		790			517
EBITDA	$	(701	)	$	(316	)
Stock compensation expense		45			45
Pre-opening costs		19			432
Loss on sale of assets		43			-
Impairment charges, non-operating store costs and discontinued operations		410			67
Adjusted EBITDA	$	(184	)	$	228

Pie Five Brand Summary

The following tables summarize certain key indicators for the Pie Five franchised and Company-owned restaurants that management believes are useful in evaluating performance.

	Three Months Ended
	September 25,		September 27,
	2016		2015
	(in thousands, except unit data)
Pie Five Retail Sales - Total Stores
Domestic - Franchised	$	10,340	$	6,712
Domestic - Company-owned		4,707		4,393
Total domestic retail sales	$	15,047	$	11,105

Pie Five Comparable Store Retail Sales - Total	$	5,077	$	5,954

Pie Five Average Units Open in Period
Domestic - Franchised		59		32
Domestic - Company-owned		31		25
Total domestic Units		90		57

Pie Five system-wide retail sales increased $3.9 million, or 35.5%, for the three month period ended September 25, 2016 when compared to the same period of the prior year. Compared to the same fiscal quarter of the prior year, average units open in the period increased from 57 to 90. Comparable store retail sales decreased by $0.9 million, or 14.7%, during the first quarter of fiscal 2017 compared to the same period of the prior year.

The following chart summarizes Pie Five restaurant activity for the three month period ended September 25, 2016:

	Three Months Ended September 25, 2016
	Beginning						Ending
	Units		Opened		Closed		Units

Domestic - Franchised		57		6		1		62
Domestic - Company-owned		31		-		1		30
Total domestic Units		88		6		2		92

We believe that the net addition of four Pie Five Units during the first quarter of fiscal 2017 reflects continued growth in the opening of Pie Five Units as franchised stores begin to open pursuant to previously executed franchise development agreements and the Company continues to develop its own stores in the Dallas-Fort Worth, Houston, and other metropolitan areas.

Pie Five - Company-Owned Restaurants	Three Months Ended
(in thousands, except store weeks and average data)	September 25,			September 27,
	2016			2015
Store weeks		400			327
Average weekly sales		11,764			13,297
Average number of units		31			25

Restaurant sales (excluding partial weeks)		4,705			4,348
Restaurant sales		4,707			4,393

Restaurant operating cash flow		36			627
Allocated marketing and advertising expenses		(234	)		(220	)
Depreciation/amortization expense		(676	)		(430	)
Pre-opening costs		(19	)		(424	)
Operations management and extraordinary expenses		(227	)		(164	)
Impairment, other lease charges and non-operating store costs		(385	)		-
Loss from continuing operations before taxes		(1,505	)		(611	)

Average weekly sales for Company-owned Pie Five restaurants decreased $1,533, or 11.5%, to $11,764 for the three month period ended September 25, 2016 compared to $13,297 for the same period of prior year. Company-owned Pie Five restaurant operating cash flow decreased $0.6 million, or 94.3%, during the first quarter of fiscal 2017 compared to the same period of prior year. Loss from continuing operations before taxes for Company-owned Pie Five stores increased $0.9 million for the three months ended September 25, 2016 compared to the same period of the prior year. For the Pie Five Company-owned restaurants, the increase in sales was due to an increase in store count.

Pizza Inn Brand Summary

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

	Three Months Ended
	September 25,		September 27,
	2016		2015
Pizza Inn Retail Sales - Total Domestic Stores	(in thousands, except unit data)
Domestic Units
Buffet - Franchised	$	20,207	$	20,269
Delco/Express - Franchised		1,704		1,959
Buffet - Company-owned		192		231
Total domestic retail sales	$	22,103	$	22,459

Pizza Inn Comparable Store Retail Sales - Total Domestic	$	21,230	$	21,194

Pizza Inn Average Units Open in Period
Domestic Units
Buffet - Franchised		94		98
Delco/Express - Franchised		63		71
Buffet - Company-owned		1		1
Total domestic Units		158		170

Total Pizza Inn domestic retail sales decreased $0.4 million, or 1.6%, for the three months ended September 25, 2016 when compared to the same period of the prior year. Pizza Inn domestic comparable store retail sales increased 0.2%, for the three months ended September 25, 2016 when compared to the same period of the prior year. Loss from continuing operations before taxes for Pizza Inn Company-owned restaurants was $61 thousand for the three months ended September 25, 2016 and $52 thousand for the three months ended September 27, 2015.

The following chart summarizes Pizza Inn restaurant activity for the three month period ended September 25, 2016:

	Three Months Ended September 25, 2016
	Beginning						Ending
	Units		Opened		Closed		Units
Domestic Units
Buffet - Franchised		95		1		-		96
Delco/Express - Franchised		66		-		1		65
Buffet - Company-owned		1		-		-		1
Total domestic Units		162		1		1		162

International Units (all types)		60		-		-		60

Total Units		222		1		1		222

There was no change in the total domestic Pizza Inn units during the three months ended September 25, 2016. The number of international Pizza Inn units continues to remain steady.

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.

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

·	"EBITDA" represents earnings before interest, taxes, depreciation and amortization.

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

·	"Retail sales" represents the restaurant sales reported by our franchisees and Company-owned restaurants, which may be segmented by brand or domestic/international locations.

·	"System-wide retail sales" represents combined retail sales for franchisee and Company-owned restaurants for a specified brand.

"Comparable store retail sales" includes the retail sales for restaurants that have been open for at least 18 months as of the end of the reporting period. The sales results for a restaurant that was closed temporarily for remodeling or relocation within the same trade area are included in the calculation only for the days that the restaurant was open in both periods being compared.

·	"Store weeks" represent the total number of full weeks that specified restaurants were open during the period.

·	"Average units open" reflects the number of restaurants open during a reporting period weighted by the percentage of the weeks in a reporting period that each restaurant was open.

·	"Average weekly sales" for a specified period is calculated as total retail sales (excluding partial weeks) divided by store weeks in the period.

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

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

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

Financial Results

Revenues:

Revenues are derived from (1) sales of food, paper products and supplies from Norco to franchisees, (2) franchise royalties and franchise fees, and (3) Company-owned restaurant operations. Financial results are dependent in large part upon the volume, pricing and cost of the products and supplies sold to franchisees. The volume of products sold by Norco to franchisees is dependent on the level of franchisee system-wide retail sales, which are impacted by changes in comparable store sales and restaurant count, as well as the products sold to franchisees through Norco rather than through third-party food distributors.

Total revenues for the three month period ended September 25, 2016 and for the same period in the prior fiscal year were $15.5 million and $14.5 million, respectively. Revenue consisted of the following:

	Three Months Ended
	September 25,		September 27,
	2016		2015
Food and supply sales	$	9,144	$	8,639
Franchise revenue		1,413		1,273
Restaurant sales		4,899		4,624
Total revenue	$	15,456	$	14,536

Food and Supply Sales

Food and supply sales by Norco include food and paper products and other distribution revenues. For the three month period ended September 25, 2016, food and supply sales increased to $9.1 million compared to $8.6 million the same period in the prior fiscal year due primarily to a $3.3 million, or 11.4%, increase in total domestic franchisee retail sales driven by an increase in the number of Pie Five franchisee stores.

Franchise Revenue

Franchise revenue, which includes income from domestic and international royalties and license fees, increased by $0.1 million for the three month period ended September 25, 2016 compared to the same period in the prior fiscal year. This increase was primarily the result of higher royalties resulting from increased Pie Five franchisee retail sales.

Restaurant Sales

Restaurant sales, which consist of revenue generated by Company-owned restaurants, increased 5.9%, or $0.3 million, to $4.9 million for the three month period ended September 25, 2016, compared to $4.6 million for the comparable period in the prior year, primarily as a result of an increase store count.

Costs and Expenses:

Cost of Sales

Cost of sales, which primarily includes food and supply costs, distribution fees, and labor and general and administrative expenses directly related to restaurant sales, increased to $13.9 million for the three month periods ended September 25, 2016 compared to $12.4 million in September 27, 2015. The increase in cost of sales was primarily the result of the addition of new Company-owned restaurants and increased food and supply sales by Norco.

General and Administrative Expenses

General and administrative expenses increased to $1.9 million for the three month period ended September 25, 2016 compared to $1.6 million for the quarter ended September 27, 2015.

Franchise Expenses

Franchise expenses include selling, general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. These expenses remained consistent at $0.9 million for the three month periods ended September 25, 2016 and September 27, 2015.

Pre-Opening Expenses

Pre-opening expenses decreased to $19 thousand for the first quarter of fiscal 2017 compared to $0.4 million for the same quarter of fiscal 2016 due primarily to a decrease in the number of Company-owned Pie Five stores under development.

Bad Debt Expense

The Company monitors franchisee retail sales and receivable balances and adjusts credit terms when necessary to minimize the Company's exposure to high risk accounts receivable. Bad debt expense decreased $50 thousand for the three month period ended September 25, 2016 as compared to the comparable period in the prior fiscal year.

Interest Expense

Interest expense decreased to zero for the three month period ended September 25, 2016 as compared to $1 thousand in the comparable period in the prior fiscal year as a result of the payoff of the Company's bank credit facilities in the first quarter of fiscal 2016.

Provision for Income Tax

For the three months ended September 25, 2016, income tax expense represents an income tax benefit of $510 thousand calculated at a rate consistent with the 34% statutory U.S. federal rate offset by an income tax expense of $515 thousand related to recording a valuation allowance for deferred tax assets of $510 thousand and state taxes of $5 thousand. For the three months ended September 27, 2015, income tax expense was $.03 million.

Discontinued Operations

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

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities and proceeds from the sale of common stock.

Cash flows from operating activities generally reflect net income adjusted for certain non-cash items including depreciation and amortization, changes in deferred tax assets, share based compensation, and changes in working capital. Cash used by operating activities increased $2.2 million to cash used of $1.5 million for the period ended September 25, 2016 compared to cash provided of $0.7 million for the three months ended September 27, 2015. This was partially the result of an increased net loss.

Cash flows from investing activities primarily reflect capital expenditures for the purchase of Company assets. The Company used cash of $0.2 million for the three month period ended September 25, 2016, primarily for new computer upgrades. This compares to cash used by investing activities of $3.6 million during the same period in the prior fiscal year attributable to Company-owned Pie Five restaurants that were under development during the period.

Cash flows from financing activities generally reflect changes in the Company's stock activity during the period. Net cash provided by financing activities was $0.8 million for the three month periods ended September 25, 2016 and September 27, 2015.

On May 20, 2013, the Company entered into an At-the-Market Issuance Sales Agreement with MLV & Co. LLC ("MLV") pursuant to which the Company could offer and sell shares of its common stock having an aggregate offering price of up to $3,000,000 from time to time through MLV, acting as agent (the "2013 ATM Offering"). The 2013 ATM Offering was undertaken pursuant to Rule 415 and a shelf Registration Statement on Form S-3 which was declared effective by the SEC on May 13, 2013. On November 20, 2013, the Company and MLV amended the At-the-Market Issuance Sales Agreement and the SEC declared effective a new shelf Registration Statement on Form S-3 to increase the 2013 ATM Offering by $5,000,000. The Company ultimately sold an aggregate of 1,257,609 shares in the 2013 ATM Offering, realizing aggregate gross proceeds of $8.0 million.

On October 1, 2014, the Company entered into a new At Market Issuance Sales Agreement with MLV pursuant to which the Company could initially offer and sell shares of its common stock having an aggregate offering price of up to $5,000,000 from time to time through MLV, acting as agent (the "2014 ATM Offering"). On February 13, 2015, the aggregate offering amount of the 2014 ATM Offering was increased to $10,000,000. The 2014 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 August 8, 2014. Through September 25, 2016, the Company had sold an aggregate of 825,763 shares in the 2014 ATM Offering, realizing aggregate gross proceeds of $8.1 million.

Management believes the cash on hand combined with cash from operations and proceeds from the 2014 ATM Offering will be sufficient to fund operations for the next 12 months.

Critical Accounting Policies and Estimates

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

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

Accounts receivable consist primarily of receivables generated from food and supply sales to franchisees and franchise royalties. 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.

Under the Company's distribution arrangements, third party distributors are responsible for maintaining system-wide distribution inventory. As a result, inventory consists primarily of food, paper products and supplies stored in and used by Company restaurants and is stated at lower of first-in, first-out ("FIFO") or market. The valuation of such restaurant inventory requires us to estimate the amount of obsolete and excess inventory based on estimates of future retail sales by Company-owned restaurants. Overestimating retail sales by Company-owned restaurants could result in the write-down of inventory which would have a negative impact on the gross margin of such Company-owned restaurants.

The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to their carrying value. If impairment is recognized, the carrying value of an impaired asset is reduced to its fair value, based on discounted estimated future cash flows.

The Company recognizes food and supply revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Franchise revenue consists of income from license fees, royalties, and area development and foreign master license sales. License fees are recognized as income when there has been substantial performance of the agreement by both the franchisee and the Company, generally at the time the restaurant is opened. Royalties are recognized as income when earned.

The Company continually reviews the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In the second quarter of fiscal year 2016, the Company recorded a $3.5 million valuation allowance against its net deferred tax assets. The valuation allowance was increased by $0.5 million in the third quarter of fiscal year 2016 to $4.0 million and again in the fourth quarter by $0.9 million to $4.9 million. The Company assessed whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, using a "more likely than not" standard. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of deferred tax assets. In making such assessment, more weight was given to evidence that could be objectively verified, including recent cumulative losses. Future sources of taxable income were also considered in determining the amount of the recorded valuation allowance. Based on the Company's review of this evidence, management determined that a full valuation allowance against all of the Company's deferred tax assets was appropriate. Accordingly, management determined that a $0.5 million valuation allowance against the Company's deferred tax assets accruing during the first quarter of fiscal 2017 was appropriate. There was approximately $5.4 million of deferred tax assets at September 25, 2016.

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 September 25, 2016 and September 27, 2015, the Company had no uncertain tax positions.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

Item 4. Controls and Procedures

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not required for a smaller reporting company.

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

On May 23, 2007, the Company's board of directors approved a stock purchase plan (the "2007 Stock Purchase Plan") authorizing the purchase on our behalf of up to 1,016,000 shares of our common stock in the open market or in privately negotiated transactions. On June 2, 2008, the Company's board of directors amended the 2007 Stock Purchase Plan to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares. On April 22, 2009 the Company's board of directors amended the 2007 Stock Purchase Plan again to increase the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 3,016,000 shares. The 2007 Stock Purchase Plan does not have an expiration date. There were no stock repurchases in the fiscal quarter ended September 25, 2016.

The Company's ability to repurchase shares of our common stock is subject to various laws, regulations and policies as well as the rules and regulations of the Securities and Exchange Commission. Subsequent to September 25, 2016, the Company has not repurchased any outstanding shares but may make further repurchases under the 2007 Stock Purchase Plan. The Company may also repurchase shares of our common stock other than pursuant to the 2007 Stock Purchase Plan or other publicly announced plans or programs.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

3.1

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

3.2

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

31.1

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

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

32.1	Section 1350 Certification of Principal Executive Officer.

32.2	Section 1350 Certification of Principal Financial Officer.

101

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

SIGNATURES

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

RAVE RESTAURANT GROUP, INC.

(Registrant)

By: /s/ Clinton J. Coleman

Clinton J. Coleman

Interim President and Chief Executive Officer

(Principal Executive Officer)

By: /s/ Timothy E. Mullany

Timothy E. Mullany

Chief Financial Officer

(Principal Financial Officer)

Dated: November 9, 2016

TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and The Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

RAVE 10-Q Quarter ended Sept. 25, 2016