10-Q 1 pzza10q033014.htm PIZZA INN HOLDINGS, pzza10q033014.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.  20549

FORM 10-Q
(Mark One)

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

For the quarterly period ended March 30, 2014

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

Commission File Number:   0-12919

PIZZA INN HOLDINGS, 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 þ  No  o

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 þ  No  o


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 o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
 
 
 
 

 

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

As of May 13, 2014 8,767,944 shares of the issuer’s common stock were outstanding.
 
 
 
2

 



PIZZA INN HOLDINGS, INC.

Index

PART I.    FINANCIAL INFORMATION
     
Item 1.
Financial Statements
Page
     
 
Condensed Consolidated Statements of Operations for the three months and nine months ended March 30, 2014 and March 24, 2013 (unaudited)
4
     
 
Condensed Consolidated Balance Sheets at March 30, 2014 (unaudited) and June 30, 2013
5
     
 
Condensed Consolidated Statements of Cash Flows for the nine months ended March 30, 2014 and March 24, 2013 (unaudited)
6
     
 
Supplemental Disclosure of Cash Flow Information for the nine months ended March 30, 2014 and March 24, 2013 (unaudited)
6
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
7
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
12
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
20
     
Item 4.
Controls and Procedures
20

PART II.   OTHER INFORMATION

Item 1.
Legal Proceedings
21
Item 1A.
Risk Factors
21
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
21
Item 3.
Defaults Upon Senior Securities
21
Item 4.
Mine Safety Disclosures
21
Item 5.
Other Information
21
Item 6.
Exhibits
22
     
 
Signatures
23
 
 
 
 
3

 
 
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

PIZZA INN HOLDINGS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(In thousands, except share and per share amounts)
 
(Unaudited)
 
                         
                         
                         
   
Three Months Ended
   
Nine Months Ended
 
   
March 30,
   
March 24,
   
March 30,
   
March 24,
 
   
2014
   
2013
   
2014
   
2013
 
                         
                         
REVENUES:
  $ 10,912     $ 9,781     $ 31,281     $ 30,767  
                                 
COSTS AND EXPENSES:
                               
Cost of sales
    9,570       8,460       27,028       26,127  
General and administrative expenses
    1,130       840       3,314       2,995  
Franchise expenses
    677       608       2,150       1,675  
Pre-opening expenses
    4       82       160       249  
Bad debt
    93       45       203       135  
Interest expense
    34       58       113       197  
      11,508       10,093       32,968       31,378  
                                 
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES
    (596 )     (312 )     (1,687 )     (611 )
Income tax benefit
    (159 )     (22 )     (527 )     (170 )
LOSS FROM CONTINUING OPERATIONS
    (437 )     (290 )     (1,160 )     (441 )
                                 
Loss from discontinued operations, net of taxes
    (14 )     (100 )     (39 )     (127 )
NET LOSS
  $ (451 )   $ (390 )   $ (1,199 )   $ (568 )
                                 
EARNINGS PER SHARE OF COMMON STOCK - BASIC:
                               
Loss from continuing operations
  $ (0.05 )   $ (0.04 )   $ (0.14 )   $ (0.05 )
Loss from discontinued operations
    -       (0.01 )     -       (0.02 )
Net loss
  $ (0.05 )   $ (0.05 )   $ (0.14 )   $ (0.07 )
                                 
EARNINGS PER SHARE OF COMMON STOCK - DILUTED:
                               
                                 
Loss from continuing operations
  $ (0.05 )   $ (0.04 )   $ (0.13 )   $ (0.05 )
Loss from discontinued operations
    -       (0.01 )     -       (0.02 )
Net loss
  $ (0.05 )   $ (0.05 )   $ (0.13 )   $ (0.07 )
                                 
Weighted average common shares outstanding - basic
    8,771       8,021       8,566       8,021  
                                 
Weighted average common and
                               
potential dilutive common shares outstanding
    9,290       8,267       9,109       8,198  
 
 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
 
4

 
 
PIZZA INN HOLDINGS, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share amounts)
 
             
   
March 30,
   
June 30,
 
ASSETS
 
2014 (unaudited)
   
2013
 
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 365     $ 919  
Accounts receivable, less allowance for bad debts
               
of $417 and $228, respectively
    3,679       3,139  
Notes receivable
    123       292  
Inventories
    1,601       1,615  
Income tax receivable
    343       343  
Deferred income tax assets
    943       882  
Prepaid expenses and other
    336       307  
Total current assets
    7,390       7,497  
                 
LONG-TERM ASSETS
               
Property, plant and equipment, net
    5,652       4,711  
Long-term notes receivable
    14       40  
Long-term deferred tax asset
    657       168  
Deposits and other
    430       119  
Total assets
  $ 14,143     $ 12,535  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Accounts payable - trade
  $ 2,178     $ 1,572  
Accrued expenses
    1,611       1,749  
Deferred revenues
    154       169  
Bank debt
    375       669  
Total current liabilities
    4,318       4,159  
                 
LONG-TERM LIABILITIES
               
Bank debt, net of current portion
    750       1,856  
Deferred revenues, net of current portion
    680       370  
Deferred gain on sale of property
    40       59  
Other long-term liabilities
    70       22  
Total liabilities
    5,858       6,466  
                 
COMMITMENTS AND CONTINGENCIES  (See Note 3)
               
                 
SHAREHOLDERS' EQUITY
               
Common stock, $.01 par value; authorized 26,000,000
               
shares; issued 15,849,615 and 15,312,680 shares, respectively;
               
outstanding 8,730,215 and 8,193,280 shares, respectively
    158       153  
Additional paid-in capital
    13,584       10,174  
Retained earnings
    19,179       20,378  
Treasury stock at cost
               
Shares in treasury: 7,119,400
    (24,636 )     (24,636 )
Total shareholders' equity
    8,285       6,069  
    $ 14,143     $ 12,535  
 
 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
 
5

 
 
PIZZA INN HOLDINGS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In thousands)
 
(Unaudited)
 
             
   
Nine Months Ended
 
   
March 30,
   
March 24
 
   
2014
   
2013
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
             
Net loss    (1,199    (568
Adjustments to reconcile net loss to
               
cash (used) provided by operating activities:
               
Depreciation and amortization
    1,056       958  
(Gain) loss on sale of assets
    (40 )     129  
Stock compensation expense
    45       135  
Deferred taxes
    (551 )     (243 )
Provision for bad debts
    203       44  
Changes in operating assets and liabilities:
               
Notes and accounts receivable
    (548 )     (172 )
Inventories
    14       330  
Accounts payable - trade
    606       (21 )
Accrued expenses
    (90 )     129  
Deferred revenue
    276       61  
Prepaid expenses and other
    (367 )     (102 )
Cash (used) provided by operating activities
    (595 )     680  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sale of assets
    58       184  
Capital expenditures
    (1,987 )     (1,547 )
Cash used for investing activities
    (1,929 )     (1,363 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from sale of stock
    3,288       -  
Proceeds from stock options
    82       -  
Borrowings of bank debt
    -       3,160  
Repayments of bank debt
    (1,400 )     (2,252 )
Cash provided by financing activities
    1,970       908  
                 
Net increase (decrease) in cash and cash equivalents
    (554 )     225  
Cash and cash equivalents, beginning of period
    919       590  
Cash and cash equivalents, end of period
  $ 365     $ 815  
                 
                 
 
               
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
                 
                 
CASH PAYMENTS FOR:
               
                 
Interest    113      248  
Income taxes - net
  $ 1     $ (84 )
 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
 
6

 
 
PIZZA INN HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements of Pizza Inn Holdings, 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 30, 2013.

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 March 30, 2014 and March 24, 2013, each contained 13 weeks.  The nine month periods ended March 30, 2014 and March 24, 2013, each contained 39 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.

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.
 
 
 
7

 

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

(2)
Long-Term Debt

On August 28, 2012, the Company entered into a Loan and Security Agreement (the “F&M Loan Agreement”) with The F&M Bank & Trust Company (“F&M”) providing for a $2.0 million revolving credit facility (with a $500 thousand letter of credit subfacility), a $2.0 million fully funded term loan facility and a $6.0 million advancing term loan facility.  An origination fee of 0.5% of the total credit facilities was paid at closing.  At closing, F&M funded a $2.0 million term loan payable in 48 equal monthly installments of principal plus accrued interest at a fixed rate of 4.574% per annum.  Amounts repaid under this fully funded term loan may not be reborrowed.  Initial proceeds from the F&M Loan Agreement were used to repay amounts borrowed under a previous credit facility that subsequently was canceled.

On June 13, 2013 the Company entered into a First Amendment to the F&M Loan Agreement that revised certain financial covenants to address proceeds from the Company’s at-the-market offering of common stock.  On September 10, 2013 the Company entered into a Second Amendment to the F&M Loan Agreement that specified the application of prepayments to the loan amortization schedule and revised certain definitions.

The Company may borrow, repay and reborrow under the revolving credit facility through August 28, 2014, at which time all amounts outstanding under the revolving credit facility mature. The Company has not drawn borrowings on the revolving credit facility during fiscal year 2014.  Availability under the revolving credit facility is limited by advance rates on eligible inventory and accounts receivable.  Per annum interest on indebtedness from time to time outstanding under the revolving credit facility is computed at the Wall Street Journal prime rate plus 1.00% and is payable monthly.  An unused commitment fee of 0.50% per annum is payable quarterly on the average unused portion of the revolving credit facility.

Through August 28, 2014, F&M has agreed to make up to $6.0 million in additional term loans to the Company.  After such date any outstanding term loans continue to amortize according to each loan’s specified payment schedule.  Advances for such additional term loans are limited by a percentage of the costs of equipment, leasehold improvements and other opening costs for new Company-owned Pie Five Units and may not be reborrowed after repayment.  Interest only is payable monthly on all additional term loan advances during an annual borrowing period.  At the end of each annual borrowing period, all additional term loan advances during such borrowing period become payable in 48 equal monthly installments of principal plus accrued interest. Interest on each term loan accrues at the Wall Street Journal prime rate plus 1.00% or, at the Company’s option, a fixed rate equal to the Bloomberg 4-year LIBOR swap rate plus 3.90%.

As security for the credit facilities, the Company has pledged substantially all of its assets including, but not limited to, accounts receivable, inventory and equipment.  The F&M Loan Agreement contains various affirmative covenants which, among other things, require the Company to provide F&M with certain financial statements, compliance statements, reports and other information. The F&M Loan Agreement also contains various negative covenants which, among other things, require the Company to maintain certain financial ratios and restrict the ability of the Company to engage in certain activities.  If an event of default occurs under the F&M Loan Agreement and any cure periods have expired, F&M may terminate all commitments under the credit facilities and declare all unpaid principal, interest and other amounts owing under the credit facilities to be immediately due and payable.

The Company was in compliance with all covenants under the F&M Loan Agreement as of March 30, 2014. As of March 30, 2014, the balance on the initial term loan facility was $1.1 million with an interest rate of 4.574% and scheduled monthly principle payments through September 1 2016.  The balance on the advancing term loan facility was zero with an interest rate of 4.25%, the balance on the revolving credit facility was zero with an interest rate of 4.25% and the Company had an outstanding letter of credit of $0.2 million.
 
 
 
8

 

(3)
Commitments and Contingencies

On April 22, 2009, the Company’s board of directors amended the 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 to a total of 3,016,000 shares.  As of March 30, 2014, up to an additional 848,425 shares could be purchased under the plan.

The Company is subject to various 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.

(4)           Stock-Based Compensation

For the three months and nine months ended March 30, 2014, the Company recognized stock-based compensation expense of $15,000 and $45,000, respectively.  As of March 30, 2014, unamortized stock-based compensation expense was $0.2 million.

The following table summarizes the number of shares of the Company’s common stock subject to outstanding stock options:
 
 
 
 
Nine Months Ended
 
 
 
 
March 30, 2014
   
March 24, 2013
 
               
 
Outstanding at beginning of year
    851,306       486,506  
                   
 
Granted
    85,392       464,800  
 
Exercised
    (39,144 )     -  
 
Forfeited/Canceled/Expired
    (38,856 )     -  
                   
 
Outstanding at end of period
    858,698       951,306  
                   
 
Exercisable at end of period
    473,659       391,939  
 
 
 
 
9

 

(5)
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
   
Nine Months Ended
 
     
March 30,
   
March 24,
   
March 30,
   
March 24,
 
     
2014
   
2013
   
2014
   
2013
 
 
Loss from continuing operations
  $ (437 )   $ (290 )   $ (1,160 )   $ (441 )
 
Discontinued operations
    (14 )     (100 )     (39 )     (127 )
 
Net loss available to common stockholders
  $ (451 )   $ (390 )   $ (1,199 )   $ (568 )
                                   
 
BASIC:
                               
 
Weighted average common shares
    8,771       8,021       8,566       8,021  
                                   
 
Loss from continuing operations per share
  $ (0.05 )   $ (0.04 )   $ (0.14 )   $ (0.05 )
 
Discontinued operations per common share
    -       (0.01 )     -       (0.02 )
 
Net loss per common share
  $ (0.05 )   $ (0.05 )   $ (0.14 )   $ (0.07 )
                                   
 
DILUTED:
                               
 
Weighted average common shares
    8,771       8,021       8,566       8,021  
 
Dilutive stock options
    519       246       543       177  
 
Weighted average common shares outstanding
    9,290       8,267       9,109       8,198  
                                   
                                   
 
Loss from continuing operations per share
  $ (0.05 )   $ (0.04 )   $ (0.13 )   $ (0.05 )
 
Discontinued operations per common share
    -       (0.01 )     -       (0.02 )
 
Loss per common share
  $ (0.05 )   $ (0.05 )   $ (0.13 )   $ (0.07 )
 
 
For the three months and nine months ended March 30, 2014, options to purchase 15,000 shares of common stock were excluded from the computation of diluted EPS because the options’ exercise prices exceeded the average market price of the common shares for the period.

(6)           Closed restaurants and discontinued operations

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 the 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.

Loss from discontinued operations reflects costs associated with a former Company-owned restaurant in Texas that was closed during the quarter ended September 23, 2007. This property is on the market for sub-lease. Because we believe that the property will sub-lease at or above the contracted lease rates, we have not reserved any additional costs related to our obligations under this non-cancelable lease.

(7)           Income Taxes

For the three and nine month period ended March 30, 2014, income tax benefit of  $0.2 million and $0.5 million, respectively, was calculated on an effective income tax rate that is consistent with the statutory U.S. federal income tax rate of 34% adjusted for state income tax effects and permanent difference items. Management believes that future operations will generate sufficient taxable income, along with the reversal of temporary differences, to fully realize the net deferred tax asset of $1.6 million.
 
 
 
 
10

 
 
(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 and nine month periods ended March 30, 2014 and March 24, 2013 (in thousands).  Operating income reported below excludes income tax provision and discontinued operations.
 
 
       
Three Months Ended
   
Nine Months Ended
 
 
 
 
March 30,
   
March 24,
   
March 30,
   
March 24,
 
       
2014
   
2013
   
2014
   
2013
 
 
 Net sales and operating revenues:
                       
 
 Franchising and food and supply distribution
  $ 8,104     $ 7,719     $ 23,667     $ 24,922  
 
 Company-owned restaurants (1)
    2,808       2,062       7,614       5,845  
   
 Consolidated revenues
  $ 10,912     $ 9,781     $ 31,281     $ 30,767  
                                     
 
 Depreciation and amortization:
                               
 
 Franchising and food and supply distribution
  $ -     $ -     $ 7     $ -  
 
 Company-owned restaurants (1)
    329       279       921       762  
   
 Combined
    329       279       928       762  
 
 Corporate administration and other
    41       61       128       205  
   
 Depreciation and amortization
  $ 370     $ 340     $ 1,056     $ 967  
                                     
 
 Income (loss) from continuing operations before taxes:
                               
 
 Franchising and food and supply distribution (2)
  $ (74 )   $ 245     $ 546     $ 1,526  
 
 Company-owned restaurants (1) (2)
    (259 )     (357 )     (1,062 )     (956 )
   
 Combined
    (333 )     (112 )     (516 )     570  
 
 Corporate administration and other (2)
    (263 )     (200 )     (1,171 )     (1,181 )
   
 Operating loss
  $ (596 )   $ (312 )   $ (1,687 )   $ (611 )
                                     
 
 Geographic information (revenues):
                               
 
 United States
  $ 10,666     $ 9,509     $ 30,561     $ 29,939  
 
 Foreign countries
    246       272       720       828  
   
 Consolidated total
  $ 10,912     $ 9,781     $ 31,281     $ 30,767  
 
 
                               
 
   (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.
                 

 
11

 

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 30, 2013, 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,” “intend,” “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 30, 2013.  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

The Company 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 and franchises 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. At March 30, 2014, Company and franchised restaurants consisted of the following:

   
Buffet Units
   
Delco Units
   
Express Units
   
Pie Five Units
   
Total Units
 
 Company Owned
    3       -       -       13       16  
                                         
 Domestic Franchise
    104       25       52       6       187  
 International Franchise
    19       44       8       -       71  
 Total Franchise
    123       69       60       6       258  
                                         
 Total Units
    126       69       60       19       274  

Domestic restaurants are located predominantly in the southern half of the United States, with Texas, North Carolina, Arkansas and Mississippi accounting for approximately 34%, 15%, 11% and 6%, respectively, of the total number of domestic restaurants.  International restaurants are located in seven foreign countries.

           Basic and diluted loss per common share remained consistent at $0.05 for the three month periods ended March 30, 2014 and March 24, 2013.  The Company had a net loss for the three month period ended March 30, 2014 of $0.5 million compared to a net loss of $0.4 million for the comparable period in the prior fiscal year, on revenues of $10.9 million for the three month period ended March 30, 2014 compared to $9.8 million in the comparable period in the prior fiscal year.  Earnings before interest, taxes, depreciation, amortization, and stock compensation expense (“Adjusted EBITDA”) for the three month period ended March 30, 2014 decreased $0.2 million to a loss of $0.2 million compared to breakeven for the comparable period in the prior fiscal year.

The increase in net loss from prior year was primarily due to higher general and administrative expenses, franchise costs and bad debt.  Recruiting fees, increased marketing expenses and a legal settlement related to patent litigation contributed to the increased costs.
 
Management believes that key performance indicators in evaluating financial results include domestic and international franchisee retail sales and the number and type of operating restaurants. The following tables summarize these key performance indicators for all franchise locations. All amounts are in thousands except the average number of units.
 
 
 
12

 
 
Franchise Stores - Total Stores
 
Three Months Ended
   
Nine Months Ended
 
(in thousands, except average data)
 
March 30,
   
March 24,
   
March 30,
   
March 24,
 
   
2014
   
2013
   
2014
   
2013
 
Domestic retail sales of Buffet Units
  $ 20,249     $ 20,809     $ 60,631     $ 65,087  
Domestic retail sales of Delco Units
    1,292       1,573       3,971       4,830  
Domestic retail sales of Express Units
    811       675       2,130       2,428  
Domestic retail sales of Pie Five Units
    899       -       1,688       -  
Total domestic retail sales
  $ 23,251     $ 23,057     $ 68,420     $ 72,345  
                                 
Average number of domestic Buffet Units
    104       114       106       121  
Average number of domestic Delco Units
    25       31       26       29  
Average number of domestic Express Units
    51       42       46       45  
Average number of domestic Pie Five Units
    6       -       4       -  
      186       187       182       195  
                                 
                                 
   
Three Months Ended
   
Nine Months Ended
 
   
March 30,
   
March 24,
   
March 30,
   
March 24,
 
      2014       2013       2014       2013  
International retail sales of Buffet Units
  $ 1,663     $ 2,154     $ 5,167     $ 4,653  
International retail sales of Delco Units
    2,269       2,992       7,066       10,545  
International retail sales of Express Units
    489       261       1,510       818  
Total International retail sales
  $ 4,421     $ 5,407     $ 13,743     $ 16,016  
                                 
Average number of International Buffet Units
    21       20       22       20  
Average number of International Delco Units
    44       48       47       49  
Average number of International Express Units
    7       8       7       8  
      72       76       76       77  

Total domestic chain-wide franchisee retail sales increased $0.2 million, or 0.8%, and international chain-wide retail sales decreased $1.0 million, or 18.2%, for the three months ended March 30, 2014 when compared to the same period of the prior year.  Total domestic chain-wide franchisee retail sales decreased $3.9 million, or 5.4%, and international chain-wide retail sales decreased $2.3 million, or 14.2%, for the nine months ended March 30, 2014 when compared to the same period of the prior year.

Management also believes that a comparison of period-to-period retail sales by restaurants open throughout both periods is an important performance measure in evaluating financial results. The calculation of “comparable store sales” includes the sales results for restaurants which 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.  The following tables summarize franchisee comparable store retail sales for the periods presented:

Franchise Stores - Comparable Stores
 
Three Months Ended
   
Nine Months Ended
 
(in thousands)
 
March 30,
   
March 24,
   
March 30,
   
March 24,
 
   
2014
   
2013
   
2014
   
2013
 
 Domestic retail sales of same store Buffet Units
  $ 19,053     $ 18,771     $ 56,003     $ 56,750  
 Domestic retail sales of same store Delco Units
    986       1,069       3,029       3,364  
 Domestic retail sales of same store Express Units
    531       569       1,617       1,753  
             Total domestic same store retail sales
  $ 20,570     $ 20,409     $ 60,649     $ 61,867  
                                 
 International retail sales of same store Buffet Units
  $ 1,395     $ 1,711     $ 3,536     $ 4,381  
 International retail sales of same store Delco Units
    2,237       2,571       6,587       7,590  
 International retail sales of same store Express Units
    336       346       1,195       860  
             Total International same store retail sales
  $ 3,968     $ 4,628     $ 11,318     $ 12,831  

Domestic comparable store franchisee retail sales increased $0.2 million, or 0.8%, for the three months ended March 30, 2014 when compared to the same period of the prior year.  International same store franchisee retail sales decreased $0.7 million, or 14.3%, for the three months ended March 30, 2014 when compared to the same period of the prior year.  Domestic comparable store franchisee retail sales decreased $1.2 million, or 2.0%, for the nine months ended March 30, 2014 when compared to the same period of the prior year.  International same store franchisee retail sales decreased $1.5 million, or 11.8%, for the nine months ended March 30, 2014 when compared to the same period of the prior year.

 
 
 
13

 
 
The following table summarizes the results and key performance indicators for the Pie Five and Pizza Inn Company-owned restaurants. We believe this information is useful to management and investors to measure the performance of the Company-owned restaurants. These indicators provide performance trend information as well as the cash flow of the restaurants before pre-opening costs and allocated corporate administration and other expenses. This information is important in evaluating the effectiveness of our business strategies and for planning and budgeting purposes. These non-GAAP financial measures should not be viewed as an alternative or substitute for our reported GAAP results. All amounts are in thousands except the store weeks, average weekly sales and the average number of units.

Pie Five - Company-Owned Restaurants
 
Three Months Ended
   
Nine Months Ended
 
 (in thousands, except store weeks and average data)
 
March 30,
   
March 24,
   
March 30,
   
March 24,
 
   
2014
   
2013
   
2014
   
2013
 
 Store weeks
    169       113       465       296  
 Average weekly per store sales
    13,189       11,283       12,327       11,449  
 Average number of units
    13       9       12       8  
                                 
 Restaurant sales
    2,229       1,275       5,732       3,389  
                                 
 Restaurant operating cash flow
    205       121       355       278  
 Depreciation/amortization expense
    (280 )     (176 )     (773 )     (455 )
 Pre-opening expenses
    (4 )     (82 )     (160 )     (246 )
 Allocated corporate administration and other expenses
    (59 )     (47 )     (159 )     (124 )
 Deferred rent adjustment net of store closure/relocation costs
    -       -       3       -  
 Loss from continuing operations before taxes
    (138 )     (184 )     (734 )     (547 )
                                 
                                 
Pizza Inn - Company-Owned Restaurants
 
Three Months Ended
   
Nine Months Ended
 
 (in thousands, except store weeks and average data)
 
March 30,
   
March 24,
   
March 30,
   
March 24,
 
      2014       2013       2014       2013  
 Store weeks
    39       52       133       156  
 Average weekly per store sales
    14,846       15,145       14,150       15,746  
 Average number of units
    3       4       3       4  
                                 
 Restaurant sales
    579       787       1,882       2,456  
                                 
 Restaurant operating cash flow
    (36 )     (29 )     (174 )     8  
 Depreciation/amortization expense
    (49 )     (103 )     (148 )     (307 )
 Pre-opening expenses
    -       -       -       -  
 Allocated corporate administration and other expenses
    (36 )     (41 )     (95 )     (110 )
 Deferred rent adjustment net of store closure/relocation costs
    -       -       89       -  
 Loss from continuing operations before taxes
    (121 )     (173 )     (328 )     (409 )

Store weeks represent the total number of weeks Company-owned restaurants were open during the period. Average weekly per store sales represents the average weekly revenues earned by the Company-owned restaurants that were open during the period. Restaurant operating cash flow represents the income earned by Company-owned restaurants adjusted for (1) depreciation and amortization, (2) pre-opening expenses, (3) allocated corporate administration and other expenses and (4) deferred rent adjustment net of other costs related to store closures and relocations. Pre-opening expenses consist primarily of certain costs incurred prior to the opening of a restaurant, including: (a) marketing and promotional expenses, (b) accrued rent, and (c) manager salaries, employee payroll and related training costs.

For Pie Five Company-owned restaurants, the year over year increase in average weekly per store sales in the quarter ended March 30, 2014 was primarily a result of the opening of five new restaurants in the prior twelve months that collectively generated higher average weekly per store sales than the existing restaurants.  In addition, a 4.4% increase in Pie Five Company-owned comparable store sales as compared to the same quarter in the prior fiscal year also contributed to the increase in average weekly per store sales.
 
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 chain-wide retail sales, which are impacted by changes in comparable store sales and restaurant count, and the products sold to franchisees through Norco rather than through third-party food distributors.
 
 
 
14

 

Total revenues for the three month period ended March 30, 2014 and for the same period in the prior fiscal year were $10.9 million and $9.8 million, respectively.  Total revenues for the nine month period ended March 30, 2014 and for the same period in the prior fiscal year were $31.3 million and $30.8 million, respectively.  Revenue consisted of the following:
 
   
Three Months Ended
   
Nine Months Ended
 
   
March 30,
   
March 24,
   
March 30,
   
March 24,
 
   
2014
   
2013
   
2014
   
2013
 
Food and supply sales
  $ 7,274     $ 6,893     $ 21,138     $ 22,304  
Franchise revenue
    830       826       2,529       2,618  
Restaurant sales
    2,808       2,062       7,614       5,845  
Total revenue
  $ 10,912     $ 9,781     $ 31,281     $ 30,767  
 
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 March 30, 2014, food and supply sales increased to $7.3 million compared to $6.9 million the same period in the prior fiscal year due primarily to an increase in sales to franchisees as a result of increased domestic franchisee retail sales and higher food commodity costs passed through in price.  For the nine month period ended March 30, 2014, food and supply sales decreased to $21.1 million compared to $22.3 million due primarily to a decline in domestic franchisee retail sales in the first half of fiscal 2014.

Franchise Revenue

Franchise revenue, which includes income from domestic and international royalties and license fees, had a slight increase for the three month period ended March 30, 2014 compared to the same period in the prior fiscal year.  Decreased international royalties resulting from lower Pizza Inn franchisee retail sales were offset primarily by increased franchise fees from new Pie Five franchisees.  Franchise revenue decreased by $0.1 million for the nine month period ended March 30, 2014 compared to the same period in the prior fiscal year for primarily the same reasons.
 
Restaurant Sales

Restaurant sales, which consist of revenue generated by Company-owned restaurants, increased 36.2%, or $0.7 million, to $2.8 million for the three month period ended March 30, 2014, compared to $2.1 million for the comparable period in the prior year.  This increase was primarily due to the opening of two new Company-owned restaurants in the second half of fiscal 2013 and four new Company-owned restaurants in fiscal 2014 (one of which was a relocation of an existing restaurant), partially offset by the closing of one Company-owned restaurant in fiscal 2014.  Similarly, restaurant sales increased 30.3%, or $1.8 million, to $7.6 million for the nine month period ended March 30, 2014, compared to $5.8 million for the comparable period in the prior year.

Costs and Expenses

Cost of Sales

Cost of sales, which primarily includes food and supply costs, distribution fees, and labor, occupancy and general and administrative expenses directly related to restaurant sales, increased $1.1 million, or 13.1%, for the three month period ended March 30, 2014 compared to the comparable period in the prior fiscal year.  The increase in costs was primarily the result of higher food and supply sales.  Cost of sales increased 3.4%, or $0.9 million, for the nine month period ended March 30, 2014 compared to the comparable period in the prior year.  The nine month period ended March 30, 2014 included a net reduction to cost of sales of $0.1 million related to the net impact of adjustments to deferred rent net of costs related to the closure of one Company-owned Pizza Inn restaurant and the relocation of one Company-owned Pie Five restaurant.

General and Administrative Expenses

General and administrative expenses increased $0.3 million for the three month period ended March 30, 2014.  Additional operating expenses associated with new Company-owned Pie Five Units and a legal settlement related to patent litigation was partially offset by reduced stock compensation expense.  General and administrative expenses increased $0.3 million for the nine month period ended March 30, 2014 for substantially the same reasons.
 
 
 
15

 


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 increased $0.1 million for the three month period ended March 30, 2014 compared to the comparable period in the prior fiscal year primarily due to higher employee costs and franchise marketing expenses associated with the Company’s Pie Five franchising efforts.  Franchise expenses increased $0.5 million for the nine month period ended March 30, 2014 compared to the comparable period in the prior year for substantially the same reasons.

Pre-Opening Expenses

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. Pre-opening expenses for the three and nine month periods ended March 30, 2014 decreased $0.1 million compared to the similar periods of the prior year due to the timing of store openings.

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 increased marginally for the three month period ended March 30, 2014 as compared to the comparable period in the prior fiscal year.  Bad debt expense increased $0.1 million for the nine month period ended March 30, 2014 as compared to the comparable period in the prior fiscal year.

Interest Expense

Interest expense remained relatively flat for the three month period ended March 30, 2014 as compared to the comparable period in the prior fiscal year.  Interest expense decreased slightly for the nine month period ended March 30, 2013 as compared to the comparable period in the prior fiscal year due to a lower average debt balance.

Provision for Income Tax

For the three month period ended March 30, 2014, an income tax benefit of $0.2 million was calculated on an effective income tax rate that is consistent with the statutory U.S. federal income tax rate of 34% adjusted for state income tax effects and permanent difference items.  Management believes that future operations will generate sufficient taxable income, along with the reversal of temporary differences, to fully realize the net deferred tax asset of $1.6 million.

Discontinued Operations

Discontinued operations include losses from a leased building associated with a Company-owned restaurant in Texas that was closed during fiscal 2008.

Restaurant Openings and Closings

The following charts summarize restaurant activity for the three month and nine month periods ended March 30, 2014 and March 24, 2013:
 
 
 
16

 

 Three months ended March 30, 2014
                       
                         
   
Beginning
               
End of
 
   
of Period
   
Opened
   
Closed
   
Period
 
 Pizza Inn Domestic:
                       
 Buffet Units
    109       -       2       107  
 Delco Units
    27       -       2       25  
 Express Units
    46       7       1       52  
 Pizza International Units
    71       -       -       71  
                                 
 Pie Five Units
    18       1       -       19  
                                 
 Total
    271       8       5       274  
                                 
 Three months ended March 24, 2013
                               
                                 
   
Beginning
                   
End of
 
   
of Period
   
Opened
   
Closed
   
Period
 
 Domestic:
                               
 Buffet Units
    126       -       6       120  
 Delco Units
    31       2       1       32  
 Express Units
    45       -       4       41  
 International Units
    65       -       -       65  
                                 
 Pie Five Units
    8       1       -       9  
                                 
 Total
    275       3       11       267  
                                 
                                 
Nine months ended March 30, 2014
                         
                                 
   
Beginning
                   
End of
 
   
of Period
   
Opened
   
Closed
   
Period
 
 Domestic:
                               
 Buffet Units
    114       1       8       107  
 Delco Units
    27       1       3       25  
 Express Units
    43       13       4       52  
 International Units
    66       5       -       71  
                                 
 Pie Five Units
    11       8       -       19  
                                 
 Total
    261       28       15       274  
                                 
                                 
 Nine months ended March 24, 2013
                               
                                 
   
Beginning
                   
End of
 
   
of Period
   
Opened
   
Closed
   
Period
 
 Domestic:
                               
 Buffet Units
    135       -       15       120  
 Delco Units
    29       4       1       32  
 Express Units
    47       -       6       41  
 International Units
    81       5       21       65  
                                 
 Pie Five Units
    6       3       -       9  
                                 
 Total
    298       12       43       267  

 
17

 
 
We believe that the net increase of two domestic Pizza Inn units during the third quarter of fiscal 2014 reflects a return to an improving trend in net domestic store closures that was interrupted by the expiration of an abnormally high number of domestic franchise agreements in fiscal 2013.  We believe that the opening of 28 new domestic stores during the last nine months of fiscal 2014 reflects the beginning of an accelerated pace of growth in store openings, particularly for the Pie Five concept and Pizza Inn Express concept.

Non-GAAP Financial Measures

We report and discuss our operating results using financial measures consistent with GAAP. From time to time we disclose certain non-GAAP financial measures such as Adjusted EBITDA. We believe Adjusted EBITDA is useful to investors as a measure of operating performance without regard to items that can vary substantially depending upon financing and accounting methods, book value of assets, capital structures and methods by which assets have been acquired. In addition, our management uses Adjusted EBITDA in evaluating the effectiveness of our business strategies and for planning and budgeting purposes. However, this non-GAAP financial measure should not be viewed as an alternative or substitute for our reported GAAP results.

The following table sets forth a reconciliation of net income to Adjusted EBITDA for the periods shown (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
March 30,
   
March 24,
   
March 30,
   
March 24,
 
   
2014
   
2013
   
2014
   
2013
 
 Net loss
  $ (451 )   $ (390 )   $ (1,199 )   $ (568 )
 Interest expense
    34       58       113       197  
 Income Taxes - Continuing Operations
    (159 )     (22 )     (527 )     (170 )
 Income Taxes - Discontinued Operations
    (7 )     (8 )     (20 )     (66 )
 Stock compensation expense
    15       45       45       135  
 Depreciation and amortization
    370       340       1,056       958  
 Adjusted EBITDA
  $ (198 )   $ 23     $ (532 )   $ 486  
 
Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, borrowings under our credit facilities and, beginning in the fourth quarter of fiscal 2013, 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 $1.3 million for the nine months ended March 30, 2014 compared to the nine months ended March 24, 2013 largely due to the decrease in net income net of deferred taxes.

Cash flows from investing activities generally reflect capital expenditures for the purchase of Company assets.  The Company used cash of $1.9 million for the nine month period ended March 30, 2014, primarily for new Company-owned restaurants that opened or will open in the Dallas/Fort Worth, Texas area.  This compares to cash used by investing activities of $1.4 million during the same period in the prior fiscal year attributable to Company-owned restaurants that opened in the Dallas/Fort Worth, Texas area.

Cash flows from financing activities generally reflect changes in the Company's borrowings and stock activity during the period.  Net cash provided by financing activities was $2.0 million for the nine month period ended March 30, 2014, which reflected proceeds from the sale of stock partially offset by the repayment of bank debt. Net cash provided of $0.9 million for the comparable period in the prior fiscal year reflected a net increase in borrowing.

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 “ATM Offering”). The 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 ATM Offering by $5,000,000.  Through March 30, 2014, the Company had sold an aggregate of 670,152 shares in the ATM Offering, realizing aggregate net proceeds of $4.2 million.
 
 
 
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On August 28, 2012, the Company entered into a Loan and Security Agreement (the “F&M Loan Agreement”) with The F&M Bank & Trust Company (“F&M”) providing for a $2.0 million revolving credit facility (with a $500 thousand letter of credit subfacility), a $2.0 million fully funded term loan facility and a $6.0 million advancing term loan facility.  An origination fee of 0.5% of the total credit facilities was paid at closing.  At closing, F&M funded a $2.0 million term loan payable in 48 equal monthly installments of principal plus accrued interest at a fixed rate of 4.574% per annum.  Amounts repaid under this fully funded term loan may not be reborrowed.  Initial proceeds from the F&M Loan Agreement were used to repay amounts borrowed under a previous credit facility that subsequently was canceled.

On June 13, 2013 the Company entered into a First Amendment to the F&M Loan Agreement that revised certain financial covenants to address proceeds from the Company’s at-the-market offering of common stock.  On September 10, 2013 the Company entered into a Second Amendment to the F&M Loan Agreement that specified the application of prepayments to the loan amortization schedule and revised certain definitions.

The Company may borrow, repay and reborrow under the revolving credit facility through August 28, 2014, at which time all amounts outstanding under the revolving credit facility mature. The Company has not drawn borrowings on the revolving credit facility during fiscal 2014.  Availability under the revolving credit facility is limited by advance rates on eligible inventory and accounts receivable.  Per annum interest on indebtedness from time to time outstanding under the revolving credit facility is computed at the Wall Street Journal prime rate plus 1.00% and is payable monthly.  An unused commitment fee of 0.50% per annum is payable quarterly on the average unused portion of the revolving credit facility.

Through August 28, 2014, F&M has agreed to make up to $6.0 million in additional term loans to the Company.  After such date any outstanding term loans continue to amortize according to each loan’s specified payment schedule.  Advances for such additional term loans are limited by a percentage of the costs of equipment, leasehold improvements and other opening costs for new Company-owned Pie Five Units and may not be reborrowed after repayment.  Interest only is payable monthly on all additional term loan advances during an annual borrowing period.  At the end of each annual borrowing period, all additional term loan advances during such borrowing period become payable in 48 equal monthly installments of principal plus accrued interest. Interest on each term loan accrues at the Wall Street Journal prime rate plus 1.00% or, at the Company’s option, a fixed rate equal to the Bloomberg 4-year LIBOR swap rate plus 3.90%.

As security for the credit facilities, the Company has pledged substantially all of its assets including, but not limited to, accounts receivable, inventory and equipment.  The F&M Loan Agreement contains various affirmative covenants which, among other things, require the Company to provide F&M with certain financial statements, compliance statements, reports and other information. The F&M Loan Agreement also contains various negative covenants which, among other things, require the Company to maintain certain financial ratios and restrict the ability of the Company to engage in certain activities.  If an event of default occurs under the F&M Loan Agreement and any cure periods have expired, F&M may terminate all commitments under the credit facilities and declare all unpaid principal, interest and other amounts owing under the credit facilities to be immediately due and payable.

The Company was in compliance with all covenants under the F&M Loan Agreement as of March 30, 2014. As of March 30, 2014, the balance on the initial term loan facility was $1.1 million with an interest rate of 4.574% and scheduled monthly principle payments through September 1, 2016.  The balance on the advancing term loan facility was zero with an interest rate of 4.25%, the balance on the revolving credit facility was zero with an interest rate of 4.25% and the Company had an outstanding letter of credit of $0.2 million.

Management believes the cash on hand combined with cash from operations and available credit facilities is 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.
 
 
 
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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.

Inventory, which consists primarily of food, paper products and supplies primarily warehoused by the Company’s third-party distributors, is stated at lower of cost or market, with cost determined according to the weighted average cost method.  The valuation of inventory requires us to estimate the amount of obsolete and excess inventory.  The determination of obsolete and excess inventory requires us to estimate the future demand for the Company’s products within specific time horizons, generally six months or less.  If the Company’s demand forecast for specific products is greater than actual demand and the Company fails to reduce purchasing accordingly, the Company could be required to write down inventory, which would have a negative impact on the Company’s gross margin.

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 its carrying value. If impairment is recognized, the carrying value of the impaired asset is reduced to its fair value, based on discounted estimated future cash flows. During fiscal year 2013, the Company tested its long-lived assets for impairment and recognized pre-tax, non-cash impairment charges of $0.8 million related to the carrying value of two Company-owned Buffet Units in Texas and one Company-owned Pie Five Unit in Texas that has been relocated in fiscal 2014.

The Company periodically evaluates the realizability of its deferred tax assets based upon the Company’s analysis of existing tax credits by jurisdiction and expectations of the Company’s ability to utilize these tax assets through a review of estimated future taxable income and establishment of tax strategies.  These estimates could be materially impacted by changes in future taxable income, the results of tax strategies or changes in tax law.

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 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 March 30, 2014 and March 24, 2013, 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.
 
 
 
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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 board of directors of the Company approved a stock purchase plan (the “2007 Stock Purchase Plan”) authorizing the purchase of up to 1,016,000 shares of the Company’s 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 the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares.  On April 22, 2009, the board of directors further amended the 2007 Stock Purchase Plan by increasing the aggregate number of shares the Company may repurchase by 1,000,000 shares to a total of 3,016,000 shares.  The 2007 Stock Purchase Plan does not have an expiration date.  There were no stock purchases in the three or nine month periods ending March 30, 2014.  As of March 30, 2014, up to an additional 848,425 shares could be purchased under the 2007 Stock Purchase Plan.


Item 3. Defaults upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.


Item 5.  Other Information

Not applicable.
 
 
 
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Item 6.  Exhibits
 
 
3.1
Articles of Incorporation (filed as Exhibit 3.1 to Form 8-K filed on September 23, 2011 and incorporated herein by reference).

 
3.2
By-laws (filed as Exhibit 3.1 to Form 8-K filed on September 23, 2011 and incorporated herein by reference).
 
 
10.1
Amendment No. 1 to At-the-Market Issuance Sales Agreement between Pizza Inn Holdings, Inc. and MLV & Co. LLC dated November 20, 2013 (filed as Exhibit 1.1 to Form 8-K filed on November 20, 2013 and incorporated herein by reference).

 
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



 
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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.
 
 
 
PIZZA INN HOLDINGS, INC.
(Registrant)




By: /s/ Randall E. Gier
Randall E. Gier
President and Chief Executive Officer




By: /s/ Donna Lee
Donna Lee
Controller

Dated:  May 14, 2014


 
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