Pizza Inn Holdings, Inc. Form 10-Q Summary
Filing identity: The supplied filing is for Pizza Inn Holdings, Inc., not Rave Restaurant Group, Inc. It covers the quarterly and six-month periods ended December 29, 2013, compared with periods ended December 23, 2012. The financial statements are unaudited, and each period contained 13 weeks for the quarter and 26 weeks for the six-month period.
Business Context and Reporting Period
The company operates and franchises Pizza Inn buffet, delivery/carry-out and express restaurants, and operates and franchises Pie Five fast-casual pizza restaurants. It also distributes food, paper products and supplies to franchisees through its Norco division.
- At December 29, 2013, the system had 286 units: 16 company-owned and 270 franchised.
- Company-owned units included 13 Pie Five restaurants and three Pizza Inn restaurants.
- The company had 184 domestic franchised units and 86 international franchised units.
Financial Metrics
| Metric | Three Months 2013 | Three Months 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Revenue | $10.157 million | $10.548 million | $20.369 million | $20.986 million |
| Loss from continuing operations | $(0.385) million | $(0.108) million | $(0.723) million | $(0.151) million |
| Net loss | $(0.397) million | $(0.120) million | $(0.748) million | $(0.178) million |
| Basic loss per share | $(0.05) | $(0.01) | $(0.09) | $(0.02) |
| Adjusted EBITDA | $(0.229) million | $0.177 million | $(0.333) million | $0.517 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $0.187 million | $0.235 million |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $1.873 million | $1.324 million |
Revenue declined approximately 3.7% for the quarter and 2.9% for the six-month period. Net loss margins were approximately 3.9% and 3.7%, respectively, compared with approximately 1.1% and 0.8% in the prior-year periods. The filing does not present a conventional gross margin measure.
Revenue and Operating Performance
- Quarterly food and supply sales decreased to $6.903 million from $7.701 million; six-month sales decreased to $13.864 million from $15.411 million.
- Quarterly franchise revenue was $0.861 million versus $0.890 million; six-month franchise revenue was $1.699 million versus $1.792 million.
- Quarterly company-owned restaurant sales increased 22.3% to $2.393 million; six-month sales increased 27.0% to $4.806 million, primarily from new company-owned restaurants.
- Franchise expenses increased $0.2 million for the quarter and $0.4 million for six months, primarily due to employee costs and marketing related to Pie Five franchising.
- Pie Five development costs increased approximately $0.3 million in the quarter.
- Pie Five company-owned comparable-store sales declined 0.3% year over year, although management stated that sales increased 2.5% excluding four days of icy weather in the Dallas-Fort Worth market.
Material Changes Versus the Prior Comparable Period
- Domestic franchisee retail sales declined 7.0% for the quarter and 8.4% for six months. International franchisee retail sales declined 13.2% and 12.1%, respectively.
- Domestic comparable-store franchisee sales decreased 4.1% for the quarter and 4.0% for six months; international comparable-store sales decreased 17.3% and 12.9%, respectively.
- The company’s total unit count increased to 286 from 290 at the comparable prior-year quarter-end, reflecting 12 openings and seven closures in the current quarter versus three openings and 11 closures in the prior-year quarter.
- Adjusted EBITDA deteriorated from positive $0.177 million to negative $0.229 million for the quarter and from positive $0.517 million to negative $0.333 million for six months.
- Accounts receivable increased to $3.663 million from $3.139 million at June 30, 2013, while the allowance for bad debts increased to $0.338 million from $0.228 million.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $0.879 million at December 29, 2013, compared with $0.919 million at June 30, 2013.
- Six-month operating cash flow was $0.187 million, compared with $0.235 million in the prior-year period.
- Investing activities used $1.833 million, primarily for new company-owned restaurants in the Dallas-Fort Worth area.
- Financing activities provided $1.606 million, including $2.625 million of stock-sale proceeds and $1.019 million of bank-debt repayments.
- Total bank debt was approximately $1.506 million at quarter-end: $0.250 million current and $1.256 million long term. The debt footnote separately identifies approximately $1.1 million on the initial term loan and $0.4 million on the advancing term loan.
- The revolving credit facility had no balance, although a $0.2 million letter of credit was outstanding.
- The company sold 570,714 shares through its at-the-market offering through December 29, 2013, generating aggregate net proceeds of $3.7 million.
- Management stated that cash on hand, operating cash flow and available credit facilities were sufficient to fund operations for the next 12 months.
Outlook, Commentary, Risks and Unusual Items
- Management described the domestic Pizza Inn closure trend as improving and viewed three new international Pizza Inn units as continued gradual growth.
- Management expects an accelerated pace of Pie Five openings as previously signed franchise development agreements produce openings and the company develops additional company-owned stores in Dallas-Fort Worth and Houston.
- The F&M credit agreement is secured by substantially all company assets and contains financial and operational covenants. The company reported compliance with all covenants at December 29, 2013.
- The revolving facility and additional term-loan availability run through August 28, 2014, creating a refinancing and liquidity consideration beyond that date.
- Management expects to realize the $1.4 million net deferred tax asset through future taxable income and reversal of temporary differences; continued losses could challenge that expectation.
- Discontinued operations generated a $0.025 million loss for six months, relating primarily to a leased property associated with a former Texas company-owned restaurant. Management has not reserved additional lease costs because it expects to sublease the property at or above contracted rates.
- The company is subject to ordinary-course legal claims, which management believes are insured or unlikely to have a material adverse effect.
- Forward-looking statements are subject to risks involving franchisee performance, restaurant openings, liquidity, comparable-store sales, operating costs and the company’s ability to execute its Pie Five strategy.
Most Important Facts for Investors to Verify
- Confirm the correct issuer: the supplied filing identifies Pizza Inn Holdings, Inc., while the request identifies Rave Restaurant Group, Inc.
- Assess whether the Pie Five expansion strategy can produce positive restaurant-level cash flow after development, pre-opening, depreciation and corporate costs.
- Review the decline in domestic and international franchisee sales and its effect on food-and-supply distribution revenue and royalties.
- Verify the availability, covenant requirements and maturity or refinancing plan for the F&M credit facilities after August 28, 2014.
- Evaluate reliance on the at-the-market equity offering to fund capital expenditures and the resulting share dilution.
- Assess the recoverability of the $1.4 million deferred tax asset and the collectibility of franchisee receivables.
- Review the company’s ability to fund planned restaurant openings while operating cash flow remains modest and Adjusted EBITDA is negative.