Adjusted EBITDA for the fiscal quarter ended December 29, 2019, decreased $0.1 million compared to the same period of the prior fiscal year. Year-to-date adjusted EBITDA decreased to $0.4 million compared to $1.0 million
in the prior fiscal year. The following table sets forth a reconciliation of net income to Adjusted EBITDA for the periods shown (in thousands):
Total Pizza Inn domestic retail sales decreased $0.4 million, or 1.7%, for the three months ended December 29, 2019 when compared to the same period of the prior year. Pizza Inn domestic comparable
store retail sales increased by $0.5 million, or 2.4%, for the three months ended December 29, 2019 when compared to the same period of the prior year.
Total Pizza Inn domestic retail sales decreased $0.5 million, or 1.1%, for the six months ended December 29, 2019 when compared to the same period of the prior year. Pizza Inn domestic comparable
store retail sales increased by $1.1 million, or 2.7%, for the six months ended December 29, 2019 when compared to the same period of the prior year.
The following chart summarizes Pizza Inn unit activity for the three and six months ended December 29, 2019:
There was a net increase of one domestic Pizza Inn units during the three months ended December 29, 2019. We believe that the domestic unit count will increase modestly in future periods. The number
of international Pizza Inn units remained unchanged, but we also expect international units to increase modestly in future periods.
There was a net decrease of two units in the total domestic Pizza Inn unit count during the six months ended December 29, 2019, primarily driven by franchised buffet units. The number of
international Pizza Inn units decreased by fourteen in the six months ended December 29, 2019 due to closure of underperforming units in the Middle East.
Pie Five Brand Summary
The following tables summarize certain key indicators for the Pie Five franchised and Company-owned restaurants that management believes are useful in evaluating performance.
Pie Five system-wide retail sales decreased $2.7 million, or 26.8%, for the three months ended December 29, 2019 when compared to the same period of the prior year. Compared to the same fiscal
quarter of the prior year, average units open in the period decreased from 69 to 54. Comparable store retail sales decreased by $0.7 million, or 11.0%, during the second quarter of fiscal 2020 compared to the same period of the prior year.
Pie Five system-wide retail sales decreased $5.5 million, or 25.4%, for the six month period ended December 29, 2019 when compared to the same period of the prior year. Year-to-date fiscal 2020
compared to the year-to-date of the prior year, average units open in the period decreased from 71 to 56. Comparable store retail sales decreased by $1.5 million, or 10.8%, during the six month period ended December 29, 2019 compared to the same
period of the prior fiscal year.
The following chart summarizes Pie Five Unit activity for the three and six months ended December 29, 2019:
The net decreases of Pie Five units during the three and six months ended December 29, 2019 were primarily the result of the closure of poor-performing stores. We believe the net closure of Pie Five
units will continue to be moderate in the near term and eventually reverse in future periods.
Average weekly sales for Company-owned Pie Five Units decreased $692, or 8.6%, to $7,385 for the three months ended December 29, 2019 compared to $8,077 for the same period of the prior fiscal year.
Company-owned Pie Five restaurant operating cash flow decreased $4 thousand during the first quarter of fiscal 2020 compared to the same period of prior year. Loss before taxes for Company-owned Pie Five stores decreased $59 thousand for the three
months ended December 29, 2019 compared to the same period of the prior year. The decreased loss was primarily related to cost of sales and depreciation expense offset by increase of impairments of long-lived assets and other lease charges.
Average weekly sales for Company-owned Pie Five Units decreased $577, or 6.9%, to $7,846 for the six months ended December 29, 2019 compared to $8,423 for the same period of the prior fiscal year.
Company-owned Pie Five restaurant operating cash flow improved $17 thousand during the six month period ended December 29, 2019 compared to the same period of prior year. Loss before taxes for Company-owned Pie Five stores increased $15 thousand for
the six months ended December 29, 2019 compared to the same period of the prior year. The increased loss was primarily related impairments of long-lived assets and other lease charges offset by cost of sales and depreciation expense.
Non-GAAP Financial Measures and Other Terms
The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”). However, the Company also presents and discusses certain non-GAAP
financial measures that it believes are useful to investors as measures of operating performance. Management may also use such non-GAAP financial measures in evaluating the effectiveness of business strategies and for planning and budgeting purposes.
However, these non-GAAP financial measures should not be viewed as an alternative or substitute for the results reflected in the Company’s GAAP financial statements.
We consider EBITDA and Adjusted EBITDA to be important supplemental measures of operating performance that are commonly used by securities analysts, investors and other parties interested in our
industry. We believe that EBITDA is helpful to investors in evaluating our results of operations without the impact of expenses affected by financing methods, accounting methods and the tax environment. We believe that Adjusted EBITDA provides
additional useful information to investors by excluding non-operational or non-recurring expenses to provide a measure of operating performance that is more comparable from period to period. We believe that restaurant operating cash flow is a useful
metric to investors in evaluating the ongoing operating performance of Company-owned restaurants and comparing such store operating performance from period to period. Management also uses these non-GAAP financial measures for evaluating operating
performance, assessing the effectiveness of business strategies, projecting future capital needs, budgeting and other planning purposes.
The following key performance indicators presented herein, some of which represent non-GAAP financial measures, have the meaning and are calculated as follows:
Financial Results
The Company defines its operating segments as Pizza Inn Franchising, Pie Five Franchising and Company-Owned Restaurants. The following is additional business segment information for the three and six
months ended December 29, 2019 and December 23, 2018 (in thousands):
Revenues:
Revenues are derived from franchise royalties, franchise fees, supplier incentives, advertising funds and convention funds, and sales by Company-owned restaurants. The volume of supplier incentive
revenues is dependent on the level of chain-wide retail sales, which are impacted by changes in comparable store sales and restaurant count, and the products sold to franchisees through third-party food distributors.
Total revenues for the three month period ended December 29, 2019 and for the same period in the prior fiscal year were $2.8 million and $3.2 million, respectively. The decrease in total revenues was
driven by a reduction in Pie Five franchise and license revenues due to fewer domestic franchise units open during the three month period ended December 29, 2019 as compared to the same period of the prior year.
Total revenues for the six month period ended December 29, 2019 and for the same period in the prior fiscal year were $5.7 million and $6.2 million, respectively. The decrease in total revenues was
driven by a reduction in Pie Five franchise and license revenues due to fewer domestic franchise units open during the six month period ended December 29, 2019 as compared to the same period of the prior year.
Pizza Inn Franchise Revenues
Pizza Inn franchise revenues decreased by $0.2 million to $1.6 million for the three month period ended December 29, 2019. Pizza Inn franchise revenues decreased to $3.5 million for the six month
period ended December 29, 2019 from $3.7 million for the same period of the prior fiscal year. The decrease in both the three and six month periods was primarily the result of lower number of average units.
Pie Five Franchise Revenues
Pie Five franchise revenues decreased by $0.3 million to $1.0 million for the three month period ended December 29, 2019. The decrease was primarily driven by decreases in supplier incentives,
domestic royalties and brand fund revenues due to fewer retail stores. Pie Five franchise revenues decreased to $1.9 million for the six month period ended December 29, 2019 compared to $2.2 million for the same period in the prior fiscal year
primarily driven by decreased franchised store counts.
Restaurant Sales
Restaurant sales, which consist of revenue generated by Company-owned restaurants remained relatively stable at $0.1 million for the three month periods ended December 29, 2019 and December 23, 2018.
The $9 thousand decrease in sales were primarily the result of lower average weekly sales. In the six month period ended December 29, 2019, restaurant sales remained relatively stable, with a decrease of $15 thousand from the $0.2 million in sales
for the same period of the prior fiscal year.
Costs and Expenses:
Cost of Sales - Total
Total cost of sales, which primarily includes food and supply costs, labor, and general and administrative expenses directly related to Company-owned restaurant sales, decreased $59 thousand for the
three month period ended December 29, 2019 from the $0.2 million in the three month period ended December 23, 2018. For the six month period ended December 29, 2019, total cost of sales decreased $84 thousand from the $0.3 million in the same period
of the prior fiscal year. The decreases in costs in both three and six month periods were primarily the result of decrease food and labor expense.
General and Administrative Expenses
Total general and administrative expenses decreased $75 thousand to $1.6 million for the three month period ended December 29, 2019. Total general and administrative expenses decreased $126 thousand
to $2.9 million for the six month period ended December 29, 2019. In both the three and six month periods, the decrease was primarily the result of reduced corporate overhead.
Franchise Expenses
Franchise expenses include general and administrative expenses directly related to the continuing service of domestic and international franchises. Franchise expenses decreased by $54 thousand to a
total of $0.8 million for the three month period ended December 29, 2019 compared to $0.9 million for the same period of the prior year. The decrease was primarily related to a reduction in employees supporting Pizza Inn and Pie Five franchising.
Total Franchise expenses decreased to $1.7 million for the six month period ended December 29, 2019 compared to $2.0 million for the six month period ended December 23, 2018 for the same reason.
Impairment of Long-lived Assets and Other Lease Charges
Impairment of long-lived assets and other lease charges were $193 thousand for the three month period ended December 29, 2019 compared to $155 thousand for the same period in the prior fiscal year.
Impairment of long-lived assets and other lease charges were $0.3 million for the six month period ended December 29, 2019 compared to $0.2 million for the same period of the prior fiscal year. For the three and six month periods ended December 29,
2019, these charges related to lease termination expenses.
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 for the three and six
month period ended December 29, 2019, decreased $135 thousand and $167 thousand, respectively, as compared to the comparable periods in the prior fiscal year.
Interest Expense
Interest expense remained stable in the three and six month period ended December 29, 2019 compared to the same fiscal periods of the prior year.
Provision for Income Tax
For the six months ended December 29, 2019, the Company recorded an income tax expense of $69 thousand calculated at a rate consistent with the 21% statutory U.S. federal rate. Income tax expense
consisted of $9 thousand in current state taxes, $53 thousand in deferred federal taxes and $7 thousand in deferred state taxes. The Company expects to utilize net operating loss carryforwards to offset any federal taxes.
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 assessing the need for the valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of deferred tax assets. Future sources of taxable income are also
considered in determining the amount of the recorded valuation allowance.
As of December 29, 2019, the Company reflects $6.4 million of deferred tax assets and a valuation allowance of $2.4 million. The Company determined it is not necessary to adjust the valuation
allowance. However, the Company will continue to review the need for an adjustment to the valuation allowance.
Liquidity and Capital Resources
During the six month period ended December 29, 2019, our primary source of liquidity was cash flows from operating activities.
Cash flows from operating activities generally reflect net income or losses 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 was $0.4 million for the six month period ended December 29, 2019 compared to cash provided of $0.4 million for the six month
period ended December 23, 2018. The primary driver of decreased cash flows during the six month period ended December 29, 2019 was lease termination payments of $0.7 million related to closed Pie Five stores.
Cash flows from investing activities reflect net proceeds from the sale of assets and capital expenditures for the purchase of Company assets. Cash provided by investing activities of $61 thousand
during the six month period ended December 29, 2019 was primarily attributable to $108 thousand in payments received on notes receivable partially offset by capital expenditures of $47 thousand. Cash provided by investing activities during the six
month period ended December 23, 2018 of $94 thousand was primarily attributed $140 thousand from the sale of assets offset by capital expenditures of $46 thousand.
Cash flows from financing activities generally reflect changes in the Company's stock and debt activity during the period. Net cash flow by financing activities was negative $1 thousand for the six
month period ended December 29, 2019 compared to $33 thousand net cash provided for the six month period ended December 23, 2018. Cash flows from financing activities for the six months ended December 29, 2019 were related to expenses from equity
issuance. Cash flows from financing activities for the six months ended December 23, 2018 were primarily attributable to at-the-market sales of common stock.
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 December 29, 2019, the Company had sold an aggregate of 191,478 shares in the 2017 ATM Offering, realizing aggregate gross proceeds of $0.3 million.
Management believes the cash on hand combined with cash from operations and proceeds from at-the-market sales of common stock under its shelf registration will be sufficient to fund operations for
the next 12 months.
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.
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.
During the six month period ended December 29, 2019, $64 thousand in par value of the Notes were converted to common shares. As of December 29, 2019, $1.6 million in par value of the Notes were
outstanding, offset by $0.1 million of unamortized debt issue costs and unamortized debt discounts.
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 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.
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.
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 December 29, 2019 and December 23, 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.
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
On January 6, 2020, the Company’s former Chief Executive Officer, Scott Crane, filed suit in the United States District Court for the Eastern District of Texas alleging various claims in connection
with the Company’s termination of his employment. In general, the suit asserts that the Company terminated Mr. Crane for the purpose of depriving him of certain equity compensation that would otherwise have become due to him. The suit primarily
seeks the issuance to Mr. Crane of 928,000 shares of the Company’s common stock and $300,000 of severance, as well as unspecified attorney’s fees and court costs. In the alternative, the suit seeks $2.4 million in actual damages plus unspecified
exemplary damages, interest, attorney’s fees and court costs. The Company’s answer to the lawsuit is due March 9, 2020. The Company believes that all of the claims are without merit and intends to vigorously defend the lawsuit.
The Company is subject to other 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.
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 December 29, 2019.
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 SEC. Subsequent to December 29, 2019,
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.
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.