Business Context and Reporting Period
This unaudited Form 10-Q is for Pizza Inn Holdings, Inc., although the request metadata identifies Rave Restaurant Group, Inc. The filing covers the 13-week quarter and 26-week year-to-date period ended December 23, 2012, compared with December 25, 2011. The company operated and franchised Pizza Inn restaurants, supplied food and products to franchisees through Norco, and operated company-owned Pie Five restaurants.
At quarter-end, the system comprised 290 restaurants: 12 company-owned units, 198 domestic franchised units, and 80 international franchised units. Company-owned units included eight Pie Five and four Pizza Inn restaurants.
Financial Results and Key Metrics
| Metric | Three months ended Dec. 23, 2012 | Three months ended Dec. 25, 2011 | Six months ended Dec. 23, 2012 | Six months ended Dec. 25, 2011 |
|---|---|---|---|---|
| Revenue | $10.548 million | $10.336 million | $20.986 million | $21.483 million |
| Loss from continuing operations | $0.108 million | Income of $0.071 million | $0.151 million loss | Income of $0.400 million |
| Net loss / income | $0.120 million loss | $0.056 million income | $0.178 million loss | $0.369 million income |
| EBITDA | $0.138 million | $0.318 million | $0.440 million | $1.008 million |
| Basic EPS | $(0.01) | $0.01 | $(0.02) | $0.05 |
- Quarterly revenue increased 2.1%, but six-month revenue decreased 2.3%.
- Quarterly net margin was approximately negative 1.1%; six-month net margin was approximately negative 0.8%. The filing does not present a separately defined gross margin.
- Quarterly EBITDA declined 56.6%, and six-month EBITDA declined 56.3%.
- Quarterly revenue consisted of $7.701 million of food and supply sales, $0.890 million of franchise revenue, and $1.957 million of restaurant sales. Six-month amounts were $15.411 million, $1.792 million, and $3.783 million, respectively.
- Cash provided by operating activities was $0.235 million for the six months, compared with $0.185 million in the prior-year period.
- Capital expenditures were $1.324 million, primarily for new company-owned restaurants, a phone system, and upgrades to existing stores.
- Cash used in investing activities was $1.324 million, while financing activities provided $1.033 million. Cash decreased from $0.590 million at June 24, 2012 to $0.534 million at December 23, 2012.
- At quarter-end, total assets were $13.154 million, total liabilities were $6.934 million, and shareholders’ equity was $6.220 million.
- Total bank debt was $2.775 million, comprising $0.556 million current debt and $2.219 million long-term debt.
- Accounts receivable were $3.303 million, net of a $0.252 million bad-debt allowance. Management increased bad-debt accruals because of greater collection risk among franchisees experiencing lower retail sales.
Material Changes Versus the Prior Comparable Period
- Domestic franchisee retail sales declined 8.7% in the quarter and 9.1% year to date, driven by fewer domestic stores and lower same-store sales. Domestic same-store sales declined 4.5% for the quarter and 5.6% year to date.
- International franchisee retail sales increased 37.5% in the quarter and 29.6% year to date, although international same-store sales increased 6.5% for the quarter and decreased 1.3% year to date.
- Food and supply sales declined 5.4% in the quarter and 9.6% year to date. Franchise revenue declined 5.6% in the quarter and 5.3% year to date.
- Restaurant sales increased 55.8% in the quarter and 48.5% year to date, primarily because of five company-owned restaurants opened in fiscal 2012 and two additional openings during the current six-month period.
- General and administrative expense increased $0.255 million in the quarter and $0.365 million year to date, reflecting Pie Five operating costs and recruiting fees for senior personnel.
- Franchise expense increased $0.045 million in the quarter and $0.094 million year to date, primarily from Pie Five franchising efforts and menu development.
- Interest expense increased to $0.035 million in the quarter and $0.139 million year to date, reflecting higher borrowings and the write-off of capitalized loan-origination costs associated with refinancing.
- The company opened three restaurants and closed 11 during the quarter; year to date it opened nine and closed 17, ending with 290 units versus 299 at the end of the comparable prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No specific revenue, earnings, or unit-development guidance is provided. Management states that cash on hand, operating cash flow, and available credit facilities are expected to fund operations for the next 12 months.
- On August 28, 2012, the company replaced its Amegy facilities with an F&M Bank agreement consisting of a $2.0 million revolving facility, a $2.0 million funded term loan, and up to $6.0 million of advancing term loans. Outstanding borrowings were $2.8 million at December 23, 2012.
- Additional availability was $1.8 million under the revolving facility and $5.1 million under the advancing term-loan facility, subject to borrowing-base and other agreement conditions. Substantially all assets secure the facilities, which include financial covenants and default provisions.
- Management’s strategy continued to emphasize development of company-owned and potentially franchised Pie Five restaurants. Pie Five company-owned restaurants generated $1.152 million of quarterly sales and $0.095 million of restaurant operating cash flow, but reported a $0.198 million pretax loss after depreciation, pre-opening, and allocated corporate costs.
- Losses from discontinued operations were $0.012 million for the quarter and $0.027 million year to date, related to a former Houston restaurant closed in 2007. The related property was being marketed for sublease, and management had not reserved additional lease costs.
- Management believes the $1.1 million net deferred tax asset is realizable through future taxable income and reversal of temporary differences; realization depends on future operating performance.
- The company is subject to ordinary-course legal claims and believes they are insured or not material. The filing does not identify a material pending legal contingency.
- Forward-looking results remain exposed to franchisee financial health, domestic same-store sales, restaurant openings and closures, collection of franchisee receivables, inventory demand, impairment, credit-facility covenants, and the execution risk of the Pie Five expansion strategy.
Important Facts for Investors to Verify
- Confirm the registrant identity: the supplied filing is for Pizza Inn Holdings, Inc., not Rave Restaurant Group, Inc.
- Assess whether Pie Five unit growth can achieve positive store-level and consolidated profitability, given continued pretax losses and increased corporate investment.
- Review F&M loan covenants, borrowing-base requirements, maturity schedules, collateral terms, and actual availability before relying on stated liquidity.
- Monitor domestic franchisee closures, same-store sales, franchisee receivable aging, and the adequacy of the $0.252 million bad-debt allowance.
- Evaluate the recoverability of the $1.1 million deferred tax asset and the potential for future impairment or lease-related charges.
- Reconcile non-GAAP EBITDA with GAAP results and consider the effect of higher depreciation, interest, pre-opening costs, and stock compensation.