Delaware
|
|
27-2349094
|
(State or Other Jurisdiction of Incorporation or Organization)
|
|
(IRS Employer Identification No.)
|
8000 NE Parkway Drive, Suite 350, Vancouver, WA
|
|
98662
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(360) 260-7272
|
||
(Registrant’s telephone number, including area code)
|
Securities registered pursuant to Section 12(b) of the Act:
|
||
Common Stock, $0.01 par value
|
|
NASDAQ Global Select Market
|
(Title of Each Class)
|
|
(Name of Each Exchange on Which Registered)
|
Securities registered pursuant to Section 12(g) of the Act:
|
||
NONE
|
Large accelerated filer [ ]
|
|
Accelerated filer [X]
|
Non-accelerated filer [ ]
|
|
Smaller reporting company [ ]
|
|
|
Emerging growth company [X]
|
|
|
|
PART I
|
||
|
|
|
Item 1.
|
Business
|
|
Item 1A.
|
Risk Factors
|
|
Item 1B.
|
Unresolved Staff Comments
|
|
Item 2.
|
Properties
|
|
Item 3.
|
Legal Proceedings
|
|
Item 4.
|
Mine Safety Disclosures
|
|
|
|
|
PART II
|
||
|
|
|
Item 5.
|
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
|
Item 6.
|
Selected Financial Data
|
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
|
Item 7A.
|
Quantitative and Qualitative Disclosures about Market Risk
|
|
Item 8.
|
Financial Statements and Supplementary Data
|
|
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
|
Item 9A.
|
Controls and Procedures
|
|
Item 9B.
|
Other Information
|
|
|
|
|
|
PART III
|
|
|
|
|
Item 10.
|
Directors, Executive Officers and Corporate Governance
|
|
Item 11.
|
Executive Compensation
|
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
|
Item 13.
|
Certain Relationships and Related Transactions, and Director Independence
|
|
Item 14.
|
Principal Accountant Fees and Services
|
|
|
|
|
PART IV
|
||
|
|
|
Item 15.
|
Exhibits and Financial Statement Schedules
|
|
|
|
|
SIGNATURES
|
General
|
Our Concept
|
•
|
CREATE their fresh, personally customized pizza with high-quality ingredients;
|
•
|
TAKE their fresh pizza home; and
|
•
|
BAKE their pizza fresh in their ovens, at their convenience, for a home-cooked meal served hot.
|
•
|
Great Quality: We have continually focused on quality since our founding and we believe customers can taste the difference. Unlike some of our competitors, we do not use pre-shredded, pre-packaged, or frozen cheese and our dough is made from scratch daily, never frozen.
|
•
|
Great Value: We offer a high-quality pizza at a value price point.
|
•
|
Great Customer Service: We train our store crews to greet each customer, to promote the latest new products and to assist each customer in choosing the combination of fresh made pizzas and side items to complete the customer’s meal.
|
•
|
We make our dough fresh in each store daily, starting with flour, water, and yeast;
|
•
|
We grate our cheese daily from blocks of 100% whole-milk mozzarella cheese;
|
•
|
We slice fresh, never-frozen vegetables by hand;
|
•
|
We feature specialty, premium ingredients;
|
•
|
We use only high-quality meats with no added fillers; and
|
•
|
We provide a convenient, easy, meal-time solution.
|
▪
|
Signature pizzas: classic combinations with broad appeal;
|
▪
|
Gourmet Delite pizzas: our artisan thin crust with premium, specialty toppings;
|
▪
|
Stuffed pizzas: two-layer, four-pound pizzas with meats and vegetables stuffed between two layers of dough;
|
▪
|
Fresh Pan pizzas: signature recipes with a thick, buttery crust; and
|
▪
|
“C.Y.O.” or Create Your Own pizzas: customer choice of crust, sauce, and any combination of our cheese, meat, and vegetable toppings.
|
•
|
Focus on creating fresh pizzas for carry out reducing operational complexity for franchise owners and their employees;
|
•
|
Maintain shorter operating hours (typically 11:00 a.m. to 9:00 p.m.) that are attractive to franchise owners and their employees;
|
•
|
Require fewer employees each shift compared to other restaurant concepts, resulting in lower labor costs;
|
•
|
Accept
electronic benefit transfer (“
EBT
”) payment systems
(food stamps);
|
•
|
Benefit from local cooperative marketing and consistent creative marketing assets for use in a variety of media channels;
|
•
|
Utilize a centrally-managed, locally customizable, integrated e-commerce platform; and
|
•
|
Receive strong franchisor support through training, operating standards, supply-chain management, and development assistance.
|
Our Strategy
|
•
|
E-commerce and Online Ordering.
We continue to improve our e-commerce platform to provide a consistent and convenient online ordering experience to consumers. To remain relevant, we must design systems that have the flexibility to advertise and promote special products or promotions as well as provide convenience to the consumer through ease of ordering and payment. We believe our e-commerce platform will enable owners to realize greater efficiencies in store labor costs and provide an easy consumer experience through multiple ordering platforms and integration with third party delivery services.
|
•
|
Expansion of Delivery.
Online ordering addresses only half of the convenience cycle. In 2018, we plan to continue expansion of delivery through the use of various third party delivery options as they become available in the
|
•
|
Increased Digital Marketing.
We continue to learn which value offers drive traffic by testing a broad range of messages through a variety of media channels including social media, text, and email. Through this dynamic, strategic shift in media mix, we have begun to capture consumer ordering and shopping trends in a rapidly changing marketplace. The insights gained from this data enable us to rapidly adapt to changes in consumer preferences and develop increasingly effective digital marketing campaigns.
|
•
|
Loyalty Program.
We are in the early stages of developing a loyalty program on a digital platform intended to increase the frequency of purchases.
|
•
|
Improved Messaging.
To better communicate the brand’s benefits and differentiation, we are refining our consumer messaging to reach a broader audience across all communication points. Emphasis will be placed on empowering the consumer and providing them with control over ingredients, quality, and timing.
|
•
|
Targeted Communication.
In order to increase the effectiveness of our messaging, we will focus on reaching customers through targeted communications and offers.
|
•
|
Franchisee Relations.
Developing and maintaining strong relations with franchise owners are crucial components to our business strategy. With
1,483
stores across the United States and
489
domestic franchise owners as of
January 1, 2018
, we have a diverse base of owners who can help cultivate ingenuity, entrepreneurship, and community connections that are key to successful store-level operations. Engaging with franchise owners from a perspective of cooperation will allow the brand to learn best practices for ensuring quality, value, and service, as well as help all franchise owners execute our strategy locally on a consistent basis.
|
•
|
Field Support
. To help our franchise owners operate a profitable business and to protect our brand standards, we deploy teams located across the country to provide support in operations, store technology, and marketing. These teams assist franchise owners by coaching them on strategies for reaching new audiences, operating their stores with maximum efficiency, and building brand awareness and community engagement locally through offering employment opportunities, providing a high quality convenient meal, and partnering with local organizations to give back to the community.
|
•
|
Spending Optimization.
We intend to optimize and prioritize our spending to deliver improved store-level financial results. We are prioritizing initiatives that focus on the areas of store operations, growth channels, business reviews, advertising relevance, and real-time sales analytics with the intended result of stabilizing comparable store sales figures and improving profitability.
|
•
|
Consumer Experience.
We believe a consistent, high-quality consumer experience in product, service, and advertising is key to building a strong brand. In addition, providing franchise owners with access to real-time store performance metrics will allow them to quickly optimize their store operations, identify trends in customer patterns, and improve overall store economics.
|
Our Industry and Competition
|
Suppliers and Distribution
|
Intellectual Property and Trademarks
|
Management Information/Technology Systems
|
Franchising Overview
|
Employees
|
Seasonality
|
Government Regulation
|
Risks Relating to Our Business and Industry
|
▪
|
declining economic conditions, including downturns in the housing market, increases in unemployment rates, reductions in consumer disposable income, adverse credit market conditions, increases in fuel prices, drops in consumer confidence, and other events or factors that adversely affect consumer spending in the markets that we serve;
|
▪
|
increased competition in the restaurant industry, particularly in the pizza, casual, and fast-casual dining segments, and from grocery stores, convenience stores, and online meal kit delivery services;
|
▪
|
changes in consumer tastes and preferences;
|
▪
|
demographic trends;
|
▪
|
customers’ budgeting constraints;
|
▪
|
customers’ willingness to accept menu price increases;
|
▪
|
adverse weather conditions;
|
▪
|
our reputation and consumer perception of our concepts’ offerings in terms of quality, price, value, ambiance, and service; and
|
▪
|
customers’ experiences in our stores.
|
▪
|
food costs, particularly for mozzarella cheese and other raw materials, many of which we do not or cannot effectively hedge;
|
▪
|
labor costs, including wages, which are affected by minimum wage requirements, workers’ compensation, health care, and other benefits expenses;
|
▪
|
rent expenses and construction, remodeling, maintenance, and other costs under leases for our new and existing stores;
|
▪
|
compliance costs as a result of changes in legal, regulatory, or industry standards;
|
▪
|
energy, water, and other utility costs;
|
▪
|
insurance costs;
|
▪
|
information technology and other logistics costs; and
|
▪
|
litigation expenses.
|
▪
|
requires us to utilize a substantial portion of our cash flow from operations to make payments on our indebtedness, reducing the availability of our cash flow to fund working capital, capital expenditures, development activity, and other general corporate purposes;
|
▪
|
increases our vulnerability to adverse general economic or industry conditions;
|
▪
|
limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;
|
▪
|
makes us more vulnerable to increases in interest rates, as borrowings under our new senior secured credit facilities are made at variable rates;
|
▪
|
limits our ability to obtain additional financing in the future for working capital or other purposes; and
|
▪
|
places us at a competitive disadvantage compared to our competitors that have less indebtedness.
|
▪
|
pay dividends on, redeem or repurchase our stock, or make other distributions;
|
▪
|
incur or guarantee additional indebtedness;
|
▪
|
sell stock in our subsidiaries;
|
▪
|
create or incur liens;
|
▪
|
make acquisitions or investments;
|
▪
|
transfer or sell certain assets or merge or consolidate with or into other companies;
|
▪
|
make certain payments or prepayments of indebtedness subordinated to our obligations under our new senior secured credit facilities; and
|
▪
|
enter into certain transactions with our affiliates.
|
•
|
Franchise owner independence.
Franchise owners are independent operators, and their employees are not our employees. Accordingly, their actions are outside of our control. Although we have developed criteria to evaluate and screen prospective franchise owners, we cannot be certain that our franchise owners will have the business acumen or financial resources necessary to operate successful franchises in their locations and state franchise laws may limit our ability to terminate or modify these franchise agreements. Moreover, despite our training, support, and monitoring, franchise owners may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and adequately train qualified managers and other store personnel. The failure of our franchise owners to operate their franchises successfully, and actions taken by their employees, could each have a material and adverse effect on our reputation, brand, ability to attract prospective franchise owners, business, financial condition, or results of operations.
|
•
|
Franchise agreement termination or non-renewal.
Each franchise agreement is subject to termination by us as the franchisor in the event of a default, generally after expiration of applicable cure periods, although in certain circumstances a franchise agreement may be terminated by us upon notice without an opportunity to cure. The default provisions under the franchise agreements are drafted broadly and include, among other things, any failure to meet operating standards and actions that may threaten our licensed intellectual property.
|
•
|
Franchise owner insurance.
The franchise agreements require each franchise owner to maintain certain insurance types and levels. Certain extraordinary hazards, however, may not be covered, and insurance may not be available (or may be available only at prohibitively expensive rates) with respect to many other risks. Moreover, any loss incurred could exceed policy limits and any policy payments made to franchise owners may not be made on a timely basis. Any such loss or delay in payment could have a material and adverse effect on a franchise owner’s ability to satisfy obligations under the franchise agreement, including the ability to make royalty payments and perform indemnity obligations. Further, the franchise owner may fail to obtain or maintain the required insurance types and levels, and we may not be aware of that failure until a loss is incurred.
|
•
|
Product liability exposure.
We require franchise owners to maintain general liability insurance coverage to protect against the risk of product liability and other risks and demand strict franchise owner compliance with health and safety regulations. However, franchise owners may receive or produce defective food or beverage products, which may materially and adversely affect our brand’s goodwill and our business. Further, a franchise owner’s failure to comply with health and safety regulations, including requirements relating to food quality or preparation and the sourcing of food from vendors, could subject the franchise owner, and possibly us, to litigation. Any litigation, including the imposition of fines or damage awards, could adversely affect the ability of a franchise owner to make royalty payments, or could generate negative publicity, or otherwise adversely affect us.
|
•
|
Franchise owners’ participation in our strategy.
Our franchise owners are an integral part of our business. We may be unable to successfully implement our strategy if our franchise owners do not actively participate in such implementation. From time to time, franchise owners have disagreed with or resisted elements of our strategy, including new product initiatives and investments in their stores such as remodeling, migrating to a new e-commerce platform, and adopting third party delivery. Franchise owners may also fail to participate in our marketing initiatives, with respect to financial contributions, time spent on initiatives and the content of marketing messaging, and implementation of recommended promotions, which could materially and adversely affect their sales trends, average weekly sales (“
AWS
”), and results of operations. In addition, the failure of our franchise owners to focus on the fundamentals of restaurant operations, such as quality, service, and cleanliness, would have a negative effect on our business. It also may be difficult for us to monitor our international franchise owners’ implementation of our strategy due to our lack of personnel in the markets served by such franchise owners.
|
•
|
Franchise owner litigation and conflicts with franchise owners.
Franchise owners are subject to a variety of litigation risks, including customer claims, personal-injury claims, environmental claims, employee claims, intellectual property claims, and claims related to violations of the Americans with Disabilities Act, religious freedom, the Fair Labor Standards Act (“
FLSA
”), the Employee Retirement Income Security Act of 1974, as amended, and advertising laws. Each of these claims may increase costs and limit the funds available to make royalty payments and reduce entries into new franchise agreements. We also may be named in lawsuits against our franchise owners.
|
•
|
Access to credit.
Our franchise owners typically finance new operations and new store openings with loans or other forms of credit. If our franchise owners are unable to access credit or obtain sufficient credit, if interest rates on loans that our franchise owners use to finance operations of current stores or to open new stores increase or if franchise owners are unable to service their debt, our franchise owners may have difficulty operating their stores or opening new stores, which could materially and adversely affect our results of operations as well as our ability to expand our franchise system.
|
•
|
Franchise owner bankruptcy.
The bankruptcy of a multi-unit franchise owner could negatively affect our ability to collect payments due under such franchise owner’s franchise agreement. In a franchise owner bankruptcy, the
|
•
|
recessionary or expansive trends in international markets;
|
•
|
changing labor conditions and difficulties in staffing and managing our foreign operations;
|
•
|
increases in the taxes we pay and other changes in applicable tax laws;
|
•
|
legal and regulatory changes, and the burdens and costs of our compliance with a variety of foreign laws;
|
•
|
changes in inflation rates;
|
•
|
changes in exchange rates and the imposition of restrictions on currency conversion or the transfer of funds;
|
•
|
difficulty in protecting our brand, reputation and intellectual property;
|
•
|
difficulty in collecting our royalties and longer payment cycles;
|
•
|
expropriation of private enterprises;
|
•
|
anti-American sentiment and the identification of the Papa Murphy’s brand as an American brand;
|
•
|
restrictions on immigration and international travel;
|
•
|
political and economic instability and civil unrest; and
|
•
|
other external factors.
|
▪
|
the preparation, sale, and labeling of food;
|
▪
|
building and zoning requirements;
|
▪
|
environmental laws;
|
▪
|
compliance with securities laws and NASDAQ listed company rules;
|
▪
|
working and safety conditions;
|
▪
|
sales taxes or other transaction taxes;
|
▪
|
compliance with the Payment Card Industry Data Security Standards and similar requirements; and
|
▪
|
compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules promulgated thereunder.
|
Risks Relating to Our Company and Our Ownership Structure
|
▪
|
authorize our
Board
to issue, without further action by the stockholders, up to 15,000,000 shares of undesignated preferred stock;
|
▪
|
require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
|
▪
|
specify that special meetings of our stockholders can be called only by or at the direction of our
Board
or, at the request of
Lee Equity
or its transferee that has privately acquired from
Lee Equity
at least 10% of our outstanding common stock, so long as
Lee Equity
or its transferee owns at least 10% of our outstanding common stock;
|
▪
|
establish an advance notice procedure for stockholder proposals to be brought before an annual or special meeting, including proposed nominations of persons for election to our
Board
;
|
▪
|
establish that our
Board
is divided into three classes, with each class serving three-year staggered terms;
|
▪
|
prohibit cumulative voting in the election of directors;
|
▪
|
provide that our directors may be removed only for cause by a majority of the remaining members of our
Board
or the holders of at least 66 2/3% of our outstanding voting stock
|
▪
|
empower our
Board
to cancel, postpone, or reschedule an annual meeting of stockholders, at any time before the holding of the annual meeting and for any reason; and
|
▪
|
require comprehensive disclosures and affirmations from any individual who has been proposed by a stockholder as a nominee for election to our
Board
.
|
|
Domestic Franchised
Stores
|
|
Company-
Owned
Stores
|
|
Total
|
|||
Alabama
|
32
|
|
|
—
|
|
|
32
|
|
Alaska
|
12
|
|
|
—
|
|
|
12
|
|
Arizona
|
55
|
|
|
—
|
|
|
55
|
|
Arkansas
|
6
|
|
|
5
|
|
|
11
|
|
California
|
169
|
|
|
—
|
|
|
169
|
|
Colorado
|
70
|
|
|
21
|
|
|
91
|
|
Florida
|
13
|
|
|
12
|
|
|
25
|
|
Georgia
|
4
|
|
|
—
|
|
|
4
|
|
Hawaii
|
2
|
|
|
—
|
|
|
2
|
|
Idaho
|
25
|
|
|
9
|
|
|
34
|
|
Illinois
|
25
|
|
|
—
|
|
|
25
|
|
Indiana
|
36
|
|
|
—
|
|
|
36
|
|
Iowa
|
34
|
|
|
—
|
|
|
34
|
|
Kansas
|
37
|
|
|
—
|
|
|
37
|
|
Kentucky
|
16
|
|
|
—
|
|
|
16
|
|
Louisiana
|
2
|
|
|
—
|
|
|
2
|
|
Maryland
|
1
|
|
|
—
|
|
|
1
|
|
Michigan
|
10
|
|
|
10
|
|
|
20
|
|
Minnesota
|
75
|
|
|
25
|
|
|
100
|
|
Mississippi
|
2
|
|
|
2
|
|
|
4
|
|
Missouri
|
50
|
|
|
3
|
|
|
53
|
|
Montana
|
14
|
|
|
—
|
|
|
14
|
|
Nebraska
|
13
|
|
|
—
|
|
|
13
|
|
Nevada
|
25
|
|
|
—
|
|
|
25
|
|
New Mexico
|
13
|
|
|
6
|
|
|
19
|
|
North Carolina
|
26
|
|
|
—
|
|
|
26
|
|
North Dakota
|
13
|
|
|
—
|
|
|
13
|
|
Ohio
|
1
|
|
|
—
|
|
|
1
|
|
Oklahoma
|
23
|
|
|
—
|
|
|
23
|
|
Oregon
|
99
|
|
|
7
|
|
|
106
|
|
South Carolina
|
2
|
|
|
—
|
|
|
2
|
|
South Dakota
|
15
|
|
|
—
|
|
|
15
|
|
Texas
|
85
|
|
|
8
|
|
|
93
|
|
Tennessee
|
28
|
|
|
19
|
|
|
47
|
|
Utah
|
60
|
|
|
—
|
|
|
60
|
|
Virginia
|
4
|
|
|
—
|
|
|
4
|
|
Washington
|
134
|
|
|
16
|
|
|
150
|
|
Wisconsin
|
97
|
|
|
2
|
|
|
99
|
|
Wyoming
|
10
|
|
|
—
|
|
|
10
|
|
Total
|
1,338
|
|
|
145
|
|
|
1,483
|
|
|
High
|
|
Low
|
||||
Fiscal Year 2016
|
|
|
|
||||
First quarter (December 29, 2015 - March 28, 2016)
|
$
|
12.15
|
|
|
$
|
8.45
|
|
Second quarter (March 29, 2016 - June 27, 2016)
|
$
|
12.96
|
|
|
$
|
6.48
|
|
Third quarter (June 28, 2016 - September 26, 2016)
|
$
|
7.80
|
|
|
$
|
5.15
|
|
Fourth quarter (September 27, 2016 - January 2, 2017)
|
$
|
6.88
|
|
|
$
|
3.56
|
|
Fiscal Year 2017
|
|
|
|
||||
First quarter (January 3, 2017 - April 3, 2017)
|
$
|
5.33
|
|
|
$
|
3.88
|
|
Second quarter (April 4, 2017 - July 3, 2017)
|
$
|
6.80
|
|
|
$
|
3.92
|
|
Third quarter (July 4, 2017 - October 2, 2017)
|
$
|
6.21
|
|
|
$
|
3.50
|
|
Fourth quarter (October 3, 2017 - January 1, 2018)
|
$
|
6.50
|
|
|
$
|
5.30
|
|
Dividends
|
Performance Graph
|
|
FISCAL YEAR
|
||||||||||||||||||
(in thousands, except share and per share data)
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
||||||||||
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
||||||||||
Revenues
|
|
|
|
|
|
|
|
|
|
||||||||||
Franchise royalties
|
$
|
37,552
|
|
|
$
|
39,851
|
|
|
$
|
40,243
|
|
|
$
|
39,305
|
|
|
$
|
36,897
|
|
Franchise and development fees
|
2,220
|
|
|
2,912
|
|
|
4,222
|
|
|
4,531
|
|
|
4,330
|
|
|||||
Company-owned store sales
|
76,868
|
|
|
82,080
|
|
|
74,300
|
|
|
50,598
|
|
|
39,148
|
|
|||||
Other
|
2,021
|
|
|
2,040
|
|
|
1,444
|
|
|
2,965
|
|
|
120
|
|
|||||
Total revenues
|
118,661
|
|
|
126,883
|
|
|
120,209
|
|
|
97,399
|
|
|
80,495
|
|
|||||
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
||||||||||
Store operating costs:
|
|
|
|
|
|
|
|
|
|
||||||||||
Cost of food and packaging
|
25,958
|
|
|
28,347
|
|
|
26,603
|
|
|
19,686
|
|
|
14,700
|
|
|||||
Compensation and benefits
|
23,603
|
|
|
23,746
|
|
|
19,858
|
|
|
12,673
|
|
|
10,687
|
|
|||||
Advertising
|
8,221
|
|
|
8,203
|
|
|
7,888
|
|
|
5,041
|
|
|
3,820
|
|
|||||
Occupancy
|
7,043
|
|
|
6,226
|
|
|
4,750
|
|
|
2,873
|
|
|
2,365
|
|
|||||
Other store operating costs
|
8,102
|
|
|
10,268
|
|
|
7,517
|
|
|
4,434
|
|
|
3,988
|
|
|||||
Selling, general, and administrative
|
33,870
|
|
|
28,108
|
|
|
28,207
|
|
|
29,263
|
|
|
24,180
|
|
|||||
Depreciation and amortization
|
10,452
|
|
|
12,236
|
|
|
10,002
|
|
|
8,052
|
|
|
6,973
|
|
|||||
Loss (gain) on disposal or impairment of property and equipment
|
15,680
|
|
|
101
|
|
|
(251
|
)
|
|
72
|
|
|
847
|
|
|||||
Total costs and expenses
|
132,929
|
|
|
117,235
|
|
|
104,574
|
|
|
82,094
|
|
|
67,560
|
|
|||||
Operating (Loss) Income
|
(14,268
|
)
|
|
9,648
|
|
|
15,635
|
|
|
15,305
|
|
|
12,935
|
|
|||||
Interest expense, net
|
5,078
|
|
|
4,868
|
|
|
4,523
|
|
|
8,025
|
|
|
10,429
|
|
|||||
Loss on early retirement of debt
|
—
|
|
|
—
|
|
|
—
|
|
|
4,619
|
|
|
4,029
|
|
|||||
Loss on impairment of investments
|
—
|
|
|
—
|
|
|
4,500
|
|
|
—
|
|
|
—
|
|
|||||
Other expense, net
|
204
|
|
|
188
|
|
|
133
|
|
|
178
|
|
|
44
|
|
|||||
(Loss) Income Before Income Taxes
|
(19,550
|
)
|
|
4,592
|
|
|
6,479
|
|
|
2,483
|
|
|
(1,567
|
)
|
|||||
(Benefit from) provision for income taxes
|
(19,543
|
)
|
|
1,943
|
|
|
2,068
|
|
|
1,235
|
|
|
1,024
|
|
|||||
Net Income (Loss)
|
(7
|
)
|
|
2,649
|
|
|
4,411
|
|
|
1,248
|
|
|
(2,591
|
)
|
|||||
Net loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
500
|
|
|
—
|
|
|
19
|
|
|||||
Net Income (Loss) Attributable to Papa Murphy’s
|
$
|
(7
|
)
|
|
$
|
2,649
|
|
|
$
|
4,911
|
|
|
$
|
1,248
|
|
|
$
|
(2,572
|
)
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
||||||||||
Basic
(1)
|
$
|
—
|
|
|
$
|
0.16
|
|
|
$
|
0.29
|
|
|
$
|
(0.07
|
)
|
|
$
|
(2.34
|
)
|
Diluted
(1)
|
—
|
|
|
0.16
|
|
|
0.29
|
|
|
(0.07
|
)
|
|
(2.34
|
)
|
|||||
Weighted average common stock outstanding:
|
|
|
|
|
|
|
|
|
|
||||||||||
Basic
|
16,870,013
|
|
|
16,743,285
|
|
|
16,653,127
|
|
|
12,101,236
|
|
|
3,847,861
|
|
|||||
Diluted
|
16,870,013
|
|
|
16,773,493
|
|
|
16,870,693
|
|
|
12,101,236
|
|
|
3,847,861
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR
|
||||||||||||||||||
(in thousands, except share and per share data)
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
||||||||||
Consolidated Statement of Cash Flows:
|
|
|
|
|
|
|
|
|
|
||||||||||
Net cash provided by operating activities
|
$
|
15,537
|
|
|
$
|
16,804
|
|
|
$
|
23,743
|
|
|
$
|
15,509
|
|
|
$
|
9,874
|
|
Net cash used in investing activities
|
(1,648
|
)
|
|
(19,390
|
)
|
|
(19,554
|
)
|
|
(9,527
|
)
|
|
(15,249
|
)
|
|||||
Net cash (used in) provided by financing activities
|
(13,784
|
)
|
|
(2,212
|
)
|
|
(2,378
|
)
|
|
(4,631
|
)
|
|
6,613
|
|
(in thousands, except selected operating data, unless otherwise noted)
|
FISCAL YEAR
|
||||||||||||||||||
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|||||||||||
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
||||||||||
Capital expenditures
(4)
|
3,987
|
|
|
18,010
|
|
|
10,430
|
|
|
4,067
|
|
|
3,037
|
|
|||||
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
||||||||||
Number of stores at end of period
|
|
|
|
|
|
|
|
|
|
||||||||||
Domestic franchised
|
1,338
|
|
|
1,369
|
|
|
1,369
|
|
|
1,342
|
|
|
1,327
|
|
|||||
Domestic Company-owned
|
145
|
|
|
168
|
|
|
127
|
|
|
91
|
|
|
69
|
|
|||||
International
|
40
|
|
|
40
|
|
|
40
|
|
|
28
|
|
|
22
|
|
|||||
Total
|
1,523
|
|
|
1,577
|
|
|
1,536
|
|
|
1,461
|
|
|
1,418
|
|
|||||
|
|
|
|
|
|
|
|
|
|
||||||||||
Number of comparable stores at end of period
(5)
|
|
|
|
|
|
|
|
|
|
||||||||||
Domestic franchised
|
1,298
|
|
|
1,298
|
|
|
1,279
|
|
|
1,247
|
|
|
1,226
|
|
|||||
Domestic Company-owned
|
145
|
|
|
136
|
|
|
110
|
|
|
88
|
|
|
68
|
|
|||||
International
|
35
|
|
|
35
|
|
|
28
|
|
|
20
|
|
|
17
|
|
|||||
Total
|
1,478
|
|
|
1,469
|
|
|
1,417
|
|
|
1,355
|
|
|
1,311
|
|
|||||
AWS
per store (whole dollars)
(6)
|
$
|
10,589
|
|
|
$
|
10,958
|
|
|
$
|
11,651
|
|
|
$
|
11,480
|
|
|
$
|
11,099
|
|
Comparable store sales growth (decline)
(7)
|
(4.0
|
)%
|
|
(5.2
|
)%
|
|
1.9
|
%
|
|
4.5
|
%
|
|
2.8
|
%
|
|||||
System-wide sales
(8)
|
$
|
846,864
|
|
|
$
|
898,709
|
|
|
$
|
892,249
|
|
|
$
|
849,682
|
|
|
$
|
785,630
|
|
System-wide sales growth (decline)
(9)
|
(5.8
|
)%
|
|
0.7
|
%
|
|
13.6
|
%
|
|
8.2
|
%
|
|
6.3
|
%
|
(1)
|
Basic and Diluted EPS is a loss for 2014 as a result of cumulative dividends to preferred stockholders prior to our IPO.
|
(2)
|
Represents total outstanding indebtedness, including current portion and excluding unamortized deferred financing costs.
|
(3)
|
Represents total current assets less total current liabilities.
|
(4)
|
Represents cash paid for long-lived asset capital expenditures related to the acquisition of property and equipment and excludes expenditures relating to acquisitions of businesses and the acquisition of property and equipment in accounts payable.
|
(5)
|
A comparable store is a store that has been open for at least 52 weeks from the comparable date, which is the Tuesday following the opening date.
|
(6)
|
AWS
consists of the average weekly sales of domestic franchised and Company-owned stores over a specified period of time.
AWS
is calculated by dividing the total net sales of our system-wide stores for the relevant time period by the number of weeks these same stores were open in such time period.
|
(7)
|
System-wide comparable store sales growth (decline) represents year-over-year sales comparisons for comparable domestic stores.
|
(8)
|
System-wide sales include net sales by all of our system-wide stores.
|
(9)
|
System-wide sales growth represents year-over-year sales comparisons for system-wide sales.
|
Overview
|
2017 Review
|
|
Fiscal Year
|
|||||||
|
2017
|
|
2016
|
|
2015
|
|||
Domestic Franchise
|
(3.8
|
)%
|
|
(5.0
|
)%
|
|
1.9
|
%
|
Domestic Company Stores
|
(5.5
|
)%
|
|
(7.3
|
)%
|
|
1.8
|
%
|
Total domestic stores
|
(4.0
|
)%
|
|
(5.2
|
)%
|
|
1.9
|
%
|
Our Segments
|
|
Fiscal Year
|
||||||||||
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Revenues
|
|
|
|
|
|
||||||
Domestic Franchise
|
$
|
41,421
|
|
|
$
|
44,434
|
|
|
$
|
45,579
|
|
Domestic Company Stores
|
76,868
|
|
|
82,080
|
|
|
74,300
|
|
|||
International
|
372
|
|
|
369
|
|
|
330
|
|
|||
Total
|
$
|
118,661
|
|
|
$
|
126,883
|
|
|
$
|
120,209
|
|
Segment Adjusted EBITDA
|
|
|
|
|
|
||||||
Domestic Franchise
|
$
|
24,195
|
|
|
$
|
23,772
|
|
|
$
|
26,142
|
|
Domestic Company Stores
|
2,751
|
|
|
2,808
|
|
|
5,943
|
|
|||
International
|
315
|
|
|
300
|
|
|
268
|
|
|||
Total reportable segments adjusted EBITDA
|
27,261
|
|
|
26,880
|
|
|
32,353
|
|
|||
Corporate and unallocated
|
(7,417
|
)
|
|
(5,184
|
)
|
|
(6,678
|
)
|
|||
Depreciation and amortization
|
(10,452
|
)
|
|
(12,236
|
)
|
|
(10,002
|
)
|
|||
Interest expense, net
|
(5,078
|
)
|
|
(4,868
|
)
|
|
(4,524
|
)
|
|||
Secondary offering costs
(1)
|
—
|
|
|
—
|
|
|
(345
|
)
|
|||
Loss on Project Pie impairment and disposal
(2)
|
—
|
|
|
—
|
|
|
(4,325
|
)
|
|||
CEO transition and restructuring
(3)
|
(2,614
|
)
|
|
—
|
|
|
—
|
|
|||
E-commerce impairment
(4)
|
(9,085
|
)
|
|
—
|
|
|
—
|
|
|||
Store closures and impairments
(5)
|
(7,712
|
)
|
|
—
|
|
|
—
|
|
|||
Litigation settlements
(6)
|
(4,453
|
)
|
|
—
|
|
|
—
|
|
|||
(Loss) Income Before Income Taxes
|
$
|
(19,550
|
)
|
|
$
|
4,592
|
|
|
$
|
6,479
|
|
Depreciation and amortization
|
|
|
|
|
|
||||||
Domestic Franchise
|
$
|
5,891
|
|
|
$
|
6,606
|
|
|
$
|
5,392
|
|
Domestic Company Stores
|
4,530
|
|
|
5,599
|
|
|
4,579
|
|
|||
International
|
31
|
|
|
31
|
|
|
31
|
|
|||
Total
|
$
|
10,452
|
|
|
$
|
12,236
|
|
|
$
|
10,002
|
|
(1)
|
Represents costs related to the secondary offering of the Company’s common stock.
|
(2)
|
Represents a $4 million loss recognized upon impairment of Project Pie, LLC, a cost-method investment, and its subsequent disposal, and the write-off as bad debt receivables totaling $325,000.
|
(3)
|
Represents non-recurring management transition and restructuring costs in connection with the departure of our former Chief Executive Officer and other executives and the recruitment of a new Chief Executive Officer and other executive positions.
|
(4)
|
Represents impairment of our e-commerce platform based on the decision to move to a third party developed and hosted solution.
|
(5)
|
Represents non-cash charges associated with the disposal or impairment of store assets upon the determination that the book value of certain stores was higher than the fair value of those stores, plus lease buyouts and reserves for the residual contractual lease obligations on closed stores.
|
(6)
|
Payments and accruals made toward franchisee settlements and litigation reserves.
|
Key Operating Metrics
|
|
2017
|
|
2016
|
|
2015
|
||||||
Domestic store average weekly sales (AWS)
|
$
|
10,589
|
|
|
$
|
10,958
|
|
|
$
|
11,651
|
|
Domestic comparable store sales growth (decline)
|
(4.0
|
)%
|
|
(5.2
|
)%
|
|
1.9
|
%
|
|||
Domestic comparable stores
|
1,443
|
|
|
1,434
|
|
|
1,389
|
|
|||
System-wide sales (in thousands)
|
$
|
846,864
|
|
|
$
|
898,709
|
|
|
$
|
892,249
|
|
Number of system-wide stores at period end
|
1,523
|
|
|
1,577
|
|
|
1,536
|
|
|||
Adjusted EBITDA (in thousands)
|
$
|
19,844
|
|
|
$
|
21,696
|
|
|
$
|
26,174
|
|
|
Domestic Company Stores
|
|
Domestic Franchise
|
|
Total Domestic
|
|
International
|
|
Total
|
|||||
Store count at 12/29/2014
|
91
|
|
|
1,342
|
|
|
1,433
|
|
|
28
|
|
|
1,461
|
|
Openings
|
18
|
|
|
81
|
|
|
99
|
|
|
12
|
|
|
111
|
|
Closings
|
(1
|
)
|
|
(35
|
)
|
|
(36
|
)
|
|
—
|
|
|
(36
|
)
|
Net transfers
|
19
|
|
|
(19
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Store count at 12/28/2015
|
127
|
|
|
1,369
|
|
|
1,496
|
|
|
40
|
|
|
1,536
|
|
Openings
|
35
|
|
|
69
|
|
|
104
|
|
|
5
|
|
|
109
|
|
Closings
|
(1
|
)
|
|
(62
|
)
|
|
(63
|
)
|
|
(5
|
)
|
|
(68
|
)
|
Net transfers
|
7
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Store count at 1/2/2017
|
168
|
|
|
1,369
|
|
|
1,537
|
|
|
40
|
|
|
1,577
|
|
Openings
|
—
|
|
|
31
|
|
|
31
|
|
|
4
|
|
|
35
|
|
Closings
|
(16
|
)
|
|
(69
|
)
|
|
(85
|
)
|
|
(4
|
)
|
|
(89
|
)
|
Net transfers
|
(7
|
)
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Store count at January 1, 2018
|
145
|
|
|
1,338
|
|
|
1,483
|
|
|
40
|
|
|
1,523
|
|
▪
|
in comparing our operating performance on a consistent basis;
|
▪
|
to calculate incentive compensation for our employees;
|
▪
|
for planning purposes, including the preparation of our internal annual operating budget; and
|
▪
|
to evaluate the performance and effectiveness of our operational strategies.
|
▪
|
Adjusted EBITDA
does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
|
▪
|
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and
Adjusted EBITDA
does not reflect the cash requirements for such replacements; and
|
▪
|
Adjusted EBITDA
does not reflect our tax expense or the cash requirements to pay our taxes.
|
|
Fiscal Year
|
||||||||||
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Net (Loss) Income
|
$
|
(7
|
)
|
|
$
|
2,649
|
|
|
$
|
4,411
|
|
Net loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
500
|
|
|||
Net (Loss) Income Attributable to Papa Murphy’s
|
(7
|
)
|
|
2,649
|
|
|
4,911
|
|
|||
Depreciation and amortization
|
10,452
|
|
|
12,236
|
|
|
10,002
|
|
|||
Income tax (benefit) provision
|
(19,543
|
)
|
|
1,943
|
|
|
2,068
|
|
|||
Interest expense, net
|
5,078
|
|
|
4,868
|
|
|
4,523
|
|
|||
EBITDA
|
(4,020
|
)
|
|
21,696
|
|
|
21,504
|
|
|||
Secondary offering costs
(1)
|
—
|
|
|
—
|
|
|
345
|
|
|||
Loss on Project Pie impairment and disposal
(2)
|
—
|
|
|
—
|
|
|
4,325
|
|
|||
CEO transition and restructuring
(3)
|
2,614
|
|
|
—
|
|
|
—
|
|
|||
E-commerce impairment
(4)
|
9,085
|
|
|
—
|
|
|
—
|
|
|||
Store closures and impairments
(5)
|
7,712
|
|
|
—
|
|
|
—
|
|
|||
Litigation settlements
(6)
|
4,453
|
|
|
—
|
|
|
—
|
|
|||
Adjusted EBITDA
|
$
|
19,844
|
|
|
$
|
21,696
|
|
|
$
|
26,174
|
|
(1)
|
Represents costs related to the secondary offering of the Company’s common stock.
|
(2)
|
Represents a $4 million loss recognized upon impairment of Project Pie, LLC, a cost-method investment, and its subsequent disposal, and the write-off as bad debt receivables totaling $325,000.
|
(3)
|
Represents non-recurring management transition and restructuring costs plus costs associated with recruitment of a new Chief Executive Officer and Chief Financial Officer.
|
(4)
|
Represents impairment of our e-commerce platform based on the decision to move to a third party developed and hosted solution.
|
(5)
|
Represents non-cash charges associated with the disposal or impairment of store assets upon the determination that the book value of certain stores was higher than the fair value of those stores, plus lease buyouts and reserves for the residual contractual lease obligations on closed stores.
|
(6)
|
Payments and accruals made toward franchisee settlements and litigation reserves.
|
Key Financial Definitions
|
Results of Operations
|
|
Fiscal Year
|
|||||||||||||||||||
|
2017
|
|
2016
|
|
2015
|
|||||||||||||||
(dollars in thousands)
|
$
|
|
Total
% of Revenues |
|
$
|
|
Total
% of Revenues |
|
$
|
|
Total
% of Revenues |
|||||||||
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Franchise royalties
|
$
|
37,552
|
|
|
31.6
|
%
|
|
$
|
39,851
|
|
|
31.4
|
%
|
|
$
|
40,243
|
|
|
33.5
|
%
|
Franchise and development fees
|
2,220
|
|
|
1.9
|
%
|
|
2,912
|
|
|
2.3
|
%
|
|
4,222
|
|
|
3.5
|
%
|
|||
Company-owned store sales
|
76,868
|
|
|
64.8
|
%
|
|
82,080
|
|
|
64.7
|
%
|
|
74,300
|
|
|
61.8
|
%
|
|||
Other
|
2,021
|
|
|
1.7
|
%
|
|
2,040
|
|
|
1.6
|
%
|
|
1,444
|
|
|
1.2
|
%
|
|||
Total revenues
|
118,661
|
|
|
100.0
|
%
|
|
126,883
|
|
|
100.0
|
%
|
|
120,209
|
|
|
100.0
|
%
|
|||
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Store operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Cost of food and packaging
(1)
|
25,958
|
|
|
22.0
|
%
|
|
28,347
|
|
|
22.3
|
%
|
|
26,603
|
|
|
22.0
|
%
|
|||
Compensation and benefits
(1)
|
23,603
|
|
|
19.9
|
%
|
|
23,746
|
|
|
18.7
|
%
|
|
19,858
|
|
|
16.5
|
%
|
|||
Advertising
(1)
|
8,221
|
|
|
6.9
|
%
|
|
8,203
|
|
|
6.5
|
%
|
|
7,888
|
|
|
6.6
|
%
|
|||
Occupancy
(1)
|
7,043
|
|
|
5.9
|
%
|
|
6,226
|
|
|
4.9
|
%
|
|
4,750
|
|
|
4.0
|
%
|
|||
Other store operating costs
(1)
|
8,102
|
|
|
6.8
|
%
|
|
10,268
|
|
|
8.1
|
%
|
|
7,517
|
|
|
6.3
|
%
|
|||
Selling, general, and administrative
|
33,870
|
|
|
28.5
|
%
|
|
28,108
|
|
|
22.2
|
%
|
|
28,207
|
|
|
23.5
|
%
|
|||
Depreciation and amortization
|
10,452
|
|
|
8.8
|
%
|
|
12,236
|
|
|
9.6
|
%
|
|
10,002
|
|
|
8.3
|
%
|
|||
Loss (gain) on disposal or impairment of property and equipment
|
15,680
|
|
|
13.2
|
%
|
|
101
|
|
|
0.1
|
%
|
|
(251
|
)
|
|
(0.2
|
)%
|
|||
Total costs and expenses
|
132,929
|
|
|
112.0
|
%
|
|
117,235
|
|
|
92.4
|
%
|
|
104,574
|
|
|
87.0
|
%
|
|||
Operating (Loss) Income
(1)
|
(14,268
|
)
|
|
(12.0
|
)%
|
|
9,648
|
|
|
7.6
|
%
|
|
15,635
|
|
|
13.0
|
%
|
|||
Interest expense, net
|
5,078
|
|
|
4.3
|
%
|
|
4,868
|
|
|
3.9
|
%
|
|
4,523
|
|
|
3.8
|
%
|
|||
Loss on early retirement of debt
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|||
Loss on impairment of investments
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
4,500
|
|
|
3.7
|
%
|
|||
Other expense, net
|
204
|
|
|
0.2
|
%
|
|
188
|
|
|
0.1
|
%
|
|
133
|
|
|
0.1
|
%
|
|||
(Loss) Income Before Income Taxes
|
(19,550
|
)
|
|
(16.5
|
)%
|
|
4,592
|
|
|
3.6
|
%
|
|
6,479
|
|
|
5.4
|
%
|
|||
(Benefit from) provision for income taxes
|
(19,543
|
)
|
|
(16.5
|
)%
|
|
1,943
|
|
|
1.5
|
%
|
|
2,068
|
|
|
1.7
|
%
|
|||
Net (Loss) Income
|
$
|
(7
|
)
|
|
—
|
%
|
|
$
|
2,649
|
|
|
2.1
|
%
|
|
4,411
|
|
|
3.7
|
%
|
|
Net loss attributable to noncontrolling interests
|
—
|
|
|
—
|
%
|
|
—
|
|
|
0.0
|
%
|
|
500
|
|
|
0.4
|
%
|
|||
Net (Loss) Income Attributable to Papa Murphy’s
|
$
|
(7
|
)
|
|
—
|
%
|
|
$
|
2,649
|
|
|
2.1
|
%
|
|
$
|
4,911
|
|
|
4.1
|
%
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
||||||||
Franchise royalties
|
$
|
37,552
|
|
|
(5.8
|
)%
|
|
$
|
39,851
|
|
|
(1.0
|
)%
|
|
$
|
40,243
|
|
Percentage of total revenues
|
31.6
|
%
|
|
|
|
31.4
|
%
|
|
|
|
33.5
|
%
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
||||||||
Franchise and development fees
|
$
|
2,220
|
|
|
(23.8
|
)%
|
|
$
|
2,912
|
|
|
(31.0
|
)%
|
|
$
|
4,222
|
|
Percentage of total revenues
|
1.9
|
%
|
|
|
|
2.3
|
%
|
|
|
|
3.5
|
%
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
||||||||
Company-owned store sales
|
$
|
76,868
|
|
|
(6.3
|
)%
|
|
$
|
82,080
|
|
|
10.5
|
%
|
|
$
|
74,300
|
|
Percentage of total revenues
|
64.8
|
%
|
|
|
|
64.7
|
%
|
|
|
|
61.8
|
%
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
||||||||
Store operating costs
|
$
|
72,927
|
|
|
(5.0
|
)%
|
|
$
|
76,790
|
|
|
15.3
|
%
|
|
$
|
66,616
|
|
Percentage of total revenues
|
61.5
|
%
|
|
|
|
60.5
|
%
|
|
|
|
55.4
|
%
|
|
Fiscal Year
|
|||||||
|
2017
|
|
2016
|
|
2015
|
|||
As a % of Company-owned store sales:
|
|
|
|
|
|
|||
Cost of food and packaging
|
33.8
|
%
|
|
34.5
|
%
|
|
35.8
|
%
|
Compensation and benefits
|
30.7
|
%
|
|
28.9
|
%
|
|
26.7
|
%
|
Advertising
|
10.7
|
%
|
|
10.0
|
%
|
|
10.6
|
%
|
Occupancy
|
9.2
|
%
|
|
7.6
|
%
|
|
6.4
|
%
|
Other store operating costs
|
10.5
|
%
|
|
12.6
|
%
|
|
10.2
|
%
|
Total store operating costs
|
94.9
|
%
|
|
93.6
|
%
|
|
89.7
|
%
|
•
|
Occupancy.
The increase in occupancy costs as a percentage of Company-owned store sales is primarily a result of lease buyouts or reserves for contractual lease obligations associated with store closures.
|
•
|
Compensation and benefits.
Compensation and benefits as a percentage of Company-owned store sales increased primarily due to fixed labor costs such as store manager salaries representing a larger portion of compensation in lower volume stores. In addition, increases in the minimum wage have negatively affected several of our established markets.
|
•
|
Other store operating costs.
Other store operating costs as a percentage of Company-owned store sales increased in 2016 as a result of pre-opening costs associated with the opening of 35 Company-owned stores in 2016, compared with 18 openings in 2015 and no openings in 2017.
|
▪
|
Advertising.
The increase in advertising as a percentage of Company-owned store sales in
2017
compared to
2016
was driven primarily by increased spending on print advertising and Company-owned store contributions to our national advertising campaign. The decrease in advertising as a percentage of Company-owned store sales in
2016
compared to
2015
was driven by a reduction in spending on print advertising.
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
||||||||
Selling, general, and administrative
|
$
|
33,870
|
|
|
20.5
|
%
|
|
$
|
28,108
|
|
|
(0.4
|
)%
|
|
$
|
28,207
|
|
Percentage of total revenues
|
28.5
|
%
|
|
|
|
22.2
|
%
|
|
|
|
23.5
|
%
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
||||||||
Depreciation and amortization
|
$
|
10,452
|
|
|
(14.6
|
)%
|
|
$
|
12,236
|
|
|
22.3
|
%
|
|
$
|
10,002
|
|
Percentage of total revenues
|
8.8
|
%
|
|
|
|
9.6
|
%
|
|
|
|
8.3
|
%
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
||||||
Loss (gain) on disposal or impairment of property and equipment
|
$
|
15,680
|
|
|
N/M
|
|
$
|
101
|
|
|
N/M
|
|
$
|
(251
|
)
|
Percentage of total revenues
|
13.2
|
%
|
|
|
|
0.1
|
%
|
|
|
|
(0.2
|
)%
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
||||||||
Interest expense, net
|
$
|
5,078
|
|
|
4.3
|
%
|
|
$
|
4,868
|
|
|
7.6
|
%
|
|
$
|
4,523
|
|
Percentage of total revenues
|
4.3
|
%
|
|
|
|
3.9
|
%
|
|
|
|
3.8
|
%
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
|||||||
(Benefit from) provision for income taxes
|
$
|
(19,543
|
)
|
|
N/M
|
|
$
|
1,943
|
|
|
(6.0
|
)%
|
|
$
|
2,068
|
|
Percentage of total revenues
|
(16.5
|
)%
|
|
|
|
1.5
|
%
|
|
|
|
1.7
|
%
|
||||
Effective tax rate
|
N/M
|
|
|
|
42.3
|
%
|
|
|
|
31.9%
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
||||||||
Total revenues
|
$
|
41,421
|
|
|
(6.8
|
)%
|
|
$
|
44,434
|
|
|
(2.5
|
)%
|
|
$
|
45,579
|
|
Percentage of total revenues
|
34.9
|
%
|
|
|
|
35.0
|
%
|
|
|
|
37.9
|
%
|
|||||
Adjusted EBITDA
|
24,195
|
|
|
1.8
|
%
|
|
23,772
|
|
|
(9.1
|
)%
|
|
26,142
|
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
||||||||
Total revenues
|
$
|
76,868
|
|
|
(6.3
|
)%
|
|
$
|
82,080
|
|
|
10.5
|
%
|
|
$
|
74,300
|
|
Percentage of total revenues
|
64.8
|
%
|
|
|
|
64.7
|
%
|
|
|
|
61.8
|
%
|
|||||
Adjusted EBITDA
|
2,751
|
|
|
(2.0
|
)%
|
|
2,808
|
|
|
(52.8)%
|
|
5,943
|
|
(dollars in thousands)
|
2017
|
|
Change
|
|
2016
|
|
Change
|
|
2015
|
||||||||
Total revenues
|
$
|
372
|
|
|
0.8
|
%
|
|
$
|
369
|
|
|
11.8
|
%
|
|
$
|
330
|
|
Percentage of total revenues
|
0.3
|
%
|
|
|
|
0.3
|
%
|
|
|
|
0.3
|
%
|
|||||
Adjusted EBITDA
|
315
|
|
|
5.0
|
%
|
|
300
|
|
|
11.9%
|
|
268
|
|
Liquidity and Capital Resources
|
|
Twelve Months Ended
|
||||||||||
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Net cash provided by operating activities
|
$
|
15,537
|
|
|
$
|
16,804
|
|
|
$
|
23,743
|
|
Net cash used in investing activities
|
(1,648
|
)
|
|
(19,390
|
)
|
|
(19,554
|
)
|
|||
Net cash used in financing activities
|
(13,784
|
)
|
|
(2,212
|
)
|
|
(2,378
|
)
|
|||
Total cash flows
|
$
|
105
|
|
|
$
|
(4,798
|
)
|
|
$
|
1,811
|
|
Contractual Obligations
|
|
Payments Due by Period
|
||||||||||||||||||
(in millions)
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5 years
|
||||||||||
Long-term debt obligations
|
$
|
95.9
|
|
|
$
|
8.4
|
|
|
$
|
87.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating lease obligations
|
20.1
|
|
|
5.2
|
|
|
8.2
|
|
|
3.8
|
|
|
2.9
|
|
|||||
Total
(1)
|
$
|
116.0
|
|
|
$
|
13.6
|
|
|
$
|
95.7
|
|
|
$
|
3.8
|
|
|
$
|
2.9
|
|
(1)
|
We have a technology license contract that provides for a purchase commitment which results in our being contingently liable for licenses not purchased by us or our franchise owners. We are contingently liable under this agreement for approximately $0.5 million annually through 2018 and considering various factors including internal forecasts, prior history, and the ability to use or resell any licenses purchased under this commitment in future periods, no accrual was required related to this commitment. This amount is not included in the table above because timing of payment, if any, is uncertain.
|
Off-Balance Sheet Arrangements
|
Critical Accounting Policies
|
Commodity Price Risk
|
Interest Rate Risk
|
Foreign Currency Exchange Rate Risk
|
|
|
Consolidated Statements of Operations for the Fiscal Years ended January 1, 2018, January 2, 2017, and December 28, 2015
|
|
Consolidated Balance Sheets as of January 1, 2018 and January 2, 2017
|
|
Consolidated Statements of Shareholders’ Equity for the Fiscal Years ended January 1, 2018, January 2, 2017, and December 28, 2015
|
|
Consolidated Statements of Cash Flows for the Fiscal Years ended January 1, 2018, January 2, 2017, and December 28, 2015
|
|
Notes to Consolidated Financial Statements
|
|
Report of Independent Registered Public Accounting Firm
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
|
Fiscal Year Ended
|
||||||||||
(In thousands, except share and per share data)
|
January 1,
2018 |
|
January 2,
2017 |
|
December 28,
2015 |
||||||
Revenues
|
|
|
|
|
|
||||||
Franchise royalties
|
$
|
37,552
|
|
|
$
|
39,851
|
|
|
$
|
40,243
|
|
Franchise and development fees
|
2,220
|
|
|
2,912
|
|
|
4,222
|
|
|||
Company-owned store sales
|
76,868
|
|
|
82,080
|
|
|
74,300
|
|
|||
Other
|
2,021
|
|
|
2,040
|
|
|
1,444
|
|
|||
Total revenues
|
118,661
|
|
|
126,883
|
|
|
120,209
|
|
|||
|
|
|
|
|
|
||||||
Costs and Expenses
|
|
|
|
|
|
||||||
Store operating costs:
|
|
|
|
|
|
||||||
Cost of food and packaging
|
25,958
|
|
|
28,347
|
|
|
26,603
|
|
|||
Compensation and benefits
|
23,603
|
|
|
23,746
|
|
|
19,858
|
|
|||
Advertising
|
8,221
|
|
|
8,203
|
|
|
7,888
|
|
|||
Occupancy
|
7,043
|
|
|
6,226
|
|
|
4,750
|
|
|||
Other store operating costs
|
8,102
|
|
|
10,268
|
|
|
7,517
|
|
|||
Selling, general, and administrative
|
33,870
|
|
|
28,108
|
|
|
28,207
|
|
|||
Depreciation and amortization
|
10,452
|
|
|
12,236
|
|
|
10,002
|
|
|||
Loss (gain) on disposal or impairment of property and equipment
|
15,680
|
|
|
101
|
|
|
(251
|
)
|
|||
Total costs and expenses
|
132,929
|
|
|
117,235
|
|
|
104,574
|
|
|||
Operating (Loss) Income
|
(14,268
|
)
|
|
9,648
|
|
|
15,635
|
|
|||
|
|
|
|
|
|
||||||
Interest expense, net
|
5,078
|
|
|
4,868
|
|
|
4,523
|
|
|||
Loss on impairment of investments
|
—
|
|
|
—
|
|
|
4,500
|
|
|||
Other expense, net
|
204
|
|
|
188
|
|
|
133
|
|
|||
(Loss) Income Before Income Taxes
|
(19,550
|
)
|
|
4,592
|
|
|
6,479
|
|
|||
|
|
|
|
|
|
||||||
(Benefit from) provision for income taxes
|
(19,543
|
)
|
|
1,943
|
|
|
2,068
|
|
|||
Net (Loss) Income
|
(7
|
)
|
|
2,649
|
|
|
4,411
|
|
|||
|
|
|
|
|
|
||||||
Net loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
500
|
|
|||
Net (Loss) Income Attributable to Papa Murphy’s
|
$
|
(7
|
)
|
|
$
|
2,649
|
|
|
$
|
4,911
|
|
|
|
|
|
|
|
||||||
Earnings per share of common stock
|
|
|
|
|
|
||||||
Basic
|
$
|
—
|
|
|
$
|
0.16
|
|
|
$
|
0.29
|
|
Diluted
|
$
|
—
|
|
|
$
|
0.16
|
|
|
$
|
0.29
|
|
Weighted average common stock outstanding
|
|
|
|
|
|
||||||
Basic
|
16,870,013
|
|
|
16,743,285
|
|
|
16,653,127
|
|
|||
Diluted
|
16,870,013
|
|
|
16,773,493
|
|
|
16,870,693
|
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
(In thousands, except par value and share data)
|
January 1,
2018 |
|
January 2,
2017 |
||||
ASSETS
|
|
|
|
||||
Current Assets
|
|
|
|
||||
Cash and cash equivalents
|
$
|
2,174
|
|
|
$
|
2,069
|
|
Accounts receivable, net
|
3,788
|
|
|
5,330
|
|
||
Current portion of notes receivable
|
97
|
|
|
92
|
|
||
Inventories
|
719
|
|
|
917
|
|
||
Prepaid expenses and other current assets
|
2,574
|
|
|
4,708
|
|
||
Total current assets
|
9,352
|
|
|
13,116
|
|
||
Property and equipment, net
|
10,064
|
|
|
28,516
|
|
||
Notes receivable, net of current portion
|
—
|
|
|
57
|
|
||
Goodwill
|
107,751
|
|
|
108,470
|
|
||
Trade name and trademarks
|
87,002
|
|
|
87,002
|
|
||
Definite-life intangibles, net
|
31,655
|
|
|
36,313
|
|
||
Other assets
|
350
|
|
|
398
|
|
||
Total assets
|
$
|
246,174
|
|
|
$
|
273,872
|
|
|
|
|
|
||||
LIABILITIES AND EQUITY
|
|
|
|
||||
Current Liabilities
|
|
|
|
||||
Accounts payable
|
$
|
5,389
|
|
|
$
|
6,160
|
|
Accrued expenses and other current liabilities
|
13,139
|
|
|
7,503
|
|
||
Current portion of unearned franchise and development fees
|
918
|
|
|
1,358
|
|
||
Current portion of long-term debt
|
8,400
|
|
|
7,879
|
|
||
Total current liabilities
|
27,846
|
|
|
22,900
|
|
||
Long-term debt, net of current portion
|
86,994
|
|
|
100,965
|
|
||
Unearned franchise and development fees, net of current portion
|
784
|
|
|
410
|
|
||
Deferred tax liability, net
|
24,457
|
|
|
44,179
|
|
||
Other liabilities
|
3,922
|
|
|
3,922
|
|
||
Total liabilities
|
144,003
|
|
|
172,376
|
|
||
Commitments and contingencies (Note 15)
|
|
|
|
|
|
||
Equity
|
|
|
|
||||
Preferred stock ($0.01 par value; 15,000,000 shares authorized; no shares issued or outstanding)
|
—
|
|
|
—
|
|
||
Common stock ($0.01 par value; 200,000,000 shares authorized; 16,971,461 and 16,955,970 shares issued and outstanding, respectively)
|
170
|
|
|
170
|
|
||
Additional paid-in capital
|
120,614
|
|
|
119,932
|
|
||
Accumulated deficit
|
(18,613
|
)
|
|
(18,606
|
)
|
||
Total equity
|
102,171
|
|
|
101,496
|
|
||
Total liabilities and equity
|
$
|
246,174
|
|
|
$
|
273,872
|
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
|
Common Stock
|
|
Additional Paid-In Capital
|
|
Stock
Subscription
Receivable
|
|
Accumulated
Deficit
|
|
Total Papa Murphy’s
Holdings, Inc. Shareholders’ Equity
|
|
Non-Controlling
Interests
|
|
Total
Equity
|
|||||||||||||||||
(In thousands)
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|||||||||||||||||||||
BALANCE, December 29, 2014
|
16,944
|
|
|
$
|
169
|
|
|
$
|
117,354
|
|
|
$
|
(100
|
)
|
|
$
|
(26,125
|
)
|
|
$
|
91,298
|
|
|
$
|
444
|
|
|
$
|
91,742
|
|
Common stock issued
|
42
|
|
|
—
|
|
|
376
|
|
|
—
|
|
|
—
|
|
|
376
|
|
|
—
|
|
|
376
|
|
|||||||
Common stock repurchases
|
(36
|
)
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
|
(10
|
)
|
|||||||
Stock based compensation expense
|
—
|
|
|
—
|
|
|
1,081
|
|
|
—
|
|
|
—
|
|
|
1,081
|
|
|
—
|
|
|
1,081
|
|
|||||||
Noncontrolling interest transactions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
56
|
|
|
56
|
|
|||||||
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,911
|
|
|
4,911
|
|
|
(500
|
)
|
|
4,411
|
|
|||||||
BALANCE, December 28, 2015
|
16,950
|
|
|
$
|
169
|
|
|
$
|
118,801
|
|
|
$
|
(100
|
)
|
|
$
|
(21,214
|
)
|
|
$
|
97,656
|
|
|
$
|
—
|
|
|
$
|
97,656
|
|
Cumulative effect adjustment
|
—
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
(41
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||||
Common stock issued
|
45
|
|
|
1
|
|
|
292
|
|
|
—
|
|
|
—
|
|
|
293
|
|
|
—
|
|
|
293
|
|
|||||||
Common stock repurchases
|
(38
|
)
|
|
—
|
|
|
(84
|
)
|
|
—
|
|
|
—
|
|
|
(84
|
)
|
|
—
|
|
|
(84
|
)
|
|||||||
Stock based compensation expense
|
—
|
|
|
—
|
|
|
882
|
|
|
—
|
|
|
—
|
|
|
882
|
|
|
—
|
|
|
882
|
|
|||||||
Repayment of note receivable issued to fund the purchase of stock
|
—
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
100
|
|
|||||||
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,649
|
|
|
2,649
|
|
|
—
|
|
|
2,649
|
|
|||||||
BALANCE, January 2, 2017
|
16,956
|
|
|
$
|
170
|
|
|
$
|
119,932
|
|
|
$
|
—
|
|
|
$
|
(18,606
|
)
|
|
$
|
101,496
|
|
|
$
|
—
|
|
|
$
|
101,496
|
|
Common stock issued
|
35
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||||
Common stock repurchases
|
(20
|
)
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
|||||||
Stock based compensation expense
|
—
|
|
|
—
|
|
|
687
|
|
|
—
|
|
|
—
|
|
|
687
|
|
|
—
|
|
|
687
|
|
|||||||
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
|
—
|
|
|
(7
|
)
|
|||||||
BALANCE, January 1, 2018
|
16,971
|
|
|
$
|
170
|
|
|
$
|
120,614
|
|
|
$
|
—
|
|
|
$
|
(18,613
|
)
|
|
$
|
102,171
|
|
|
$
|
—
|
|
|
$
|
102,171
|
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
|
Fiscal Year Ended
|
||||||||||
(In thousands)
|
January 1, 2018
|
|
January 2, 2017
|
|
December 28, 2015
|
||||||
Operating Activities
|
|
|
|
|
|
||||||
Net (Loss) Income
|
$
|
(7
|
)
|
|
$
|
2,649
|
|
|
$
|
4,411
|
|
Net loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
500
|
|
|||
Net (Loss) Income Attributable to Papa Murphy’s
|
(7
|
)
|
|
2,649
|
|
|
4,911
|
|
|||
Adjustments to reconcile to cash from operating activities
|
|
|
|
|
|
||||||
Depreciation and amortization
|
10,452
|
|
|
12,236
|
|
|
10,002
|
|
|||
Loss (gain) on disposal or impairment of property and equipment
|
15,680
|
|
|
101
|
|
|
(251
|
)
|
|||
Deferred taxes
|
(19,722
|
)
|
|
1,724
|
|
|
1,707
|
|
|||
Stock-based compensation
|
687
|
|
|
898
|
|
|
1,081
|
|
|||
Loss on impairment of cost-method investment
|
—
|
|
|
—
|
|
|
4,000
|
|
|||
Other non-cash items
|
422
|
|
|
329
|
|
|
646
|
|
|||
Change in operating assets and liabilities
|
|
|
|
|
|
||||||
Accounts receivable
|
1,540
|
|
|
(522
|
)
|
|
641
|
|
|||
Prepaid expenses and other assets
|
1,352
|
|
|
2,197
|
|
|
(1,988
|
)
|
|||
Unearned franchise and development fees
|
(66
|
)
|
|
(567
|
)
|
|
(1,213
|
)
|
|||
Accounts payable
|
(783
|
)
|
|
(1,103
|
)
|
|
3,628
|
|
|||
Accrued expenses and other liabilities
|
5,982
|
|
|
(1,138
|
)
|
|
579
|
|
|||
Net cash provided by operating activities
|
15,537
|
|
|
16,804
|
|
|
23,743
|
|
|||
|
|
|
|
|
|
||||||
Investing Activities
|
|
|
|
|
|
||||||
Acquisition of property and equipment
|
(3,987
|
)
|
|
(18,010
|
)
|
|
(10,430
|
)
|
|||
Acquisition of stores, less cash acquired
|
—
|
|
|
(2,562
|
)
|
|
(9,691
|
)
|
|||
Proceeds from sale of stores
|
2,288
|
|
|
1,110
|
|
|
1,250
|
|
|||
Issuance of notes receivable
|
—
|
|
|
—
|
|
|
(250
|
)
|
|||
Payments received on notes receivable
|
51
|
|
|
72
|
|
|
67
|
|
|||
Investment in cost-method investee
|
—
|
|
|
—
|
|
|
(500
|
)
|
|||
Net cash used in investing activities
|
(1,648
|
)
|
|
(19,390
|
)
|
|
(19,554
|
)
|
|||
|
|
|
|
|
|
||||||
Financing Activities
|
|
|
|
|
|
||||||
Payments on long-term debt
|
(12,979
|
)
|
|
(3,321
|
)
|
|
(2,800
|
)
|
|||
Advances on revolver
|
14,900
|
|
|
16,800
|
|
|
5,900
|
|
|||
Payments on revolver
|
(15,700
|
)
|
|
(16,000
|
)
|
|
(5,900
|
)
|
|||
Repurchases of common stock
|
(5
|
)
|
|
(84
|
)
|
|
(10
|
)
|
|||
Proceeds from exercise of stock options
|
—
|
|
|
293
|
|
|
376
|
|
|||
Payments received on subscription receivables
|
—
|
|
|
100
|
|
|
—
|
|
|||
Investment by noncontrolling interest holders
|
—
|
|
|
—
|
|
|
56
|
|
|||
Net cash used in financing activities
|
(13,784
|
)
|
|
(2,212
|
)
|
|
(2,378
|
)
|
|||
|
|
|
|
|
|
||||||
Net change in cash and cash equivalents
|
105
|
|
|
(4,798
|
)
|
|
1,811
|
|
|||
Cash and Cash Equivalents, beginning of year
|
2,069
|
|
|
6,867
|
|
|
5,056
|
|
|||
Cash and Cash Equivalents, end of period
|
$
|
2,174
|
|
|
$
|
2,069
|
|
|
$
|
6,867
|
|
|
|
|
|
|
|
||||||
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
||||||
Cash paid during the period for interest
|
$
|
4,835
|
|
|
$
|
4,894
|
|
|
$
|
3,624
|
|
Cash (received) paid during the period for income taxes
|
$
|
(185
|
)
|
|
$
|
169
|
|
|
$
|
3,078
|
|
Noncash Supplemental Disclosures of Investing Activities
|
|
|
|
|
|
||||||
Net change in property and equipment in accounts payable
|
$
|
(154
|
)
|
|
$
|
607
|
|
|
$
|
3,098
|
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
Note 1
|
Description of Business
|
|
Note 2
|
Summary of Significant Accounting Policies
|
|
Note 3
|
Acquisitions
|
|
Note 4
|
Prepaid Expenses and Other Current Assets
|
|
Note 5
|
Property and Equipment
|
|
Note 6
|
Divestitures
|
|
Note 7
|
Goodwill
|
|
Note 8
|
Intangible Assets
|
|
Note 9
|
Financing Arrangements
|
|
Note 10
|
Fair Value Measurement
|
|
Note 11
|
Accrued and Other Liabilities
|
|
Note 12
|
Income Taxes
|
|
Note 13
|
Share-based Compensation
|
|
Note 14
|
Earnings per Share (EPS)
|
|
Note 15
|
Commitments and Contingencies
|
|
Note 16
|
Retirement Plans
|
|
Note 17
|
Advertising Fund
|
|
Note 18
|
Segment Information
|
|
Note 19
|
Selected Quarterly Financial Data (unaudited)
|
Note 1 — Description of Business
|
Note 2 — Summary of Significant Accounting Policies
|
Property and Equipment
|
Estimated Useful Life
|
Leasehold improvements
|
Shorter of lease term or estimated useful life, not to exceed 10 years
|
Restaurant equipment and fixtures
|
5 to 7 years
|
Office furniture and equipment
|
3 to 7 years
|
Software
|
3 to 5 years
|
Vehicles
|
5 years
|
|
Fiscal 2017 Income Statement
|
||||||||
(in thousands, except earnings per share)
|
As Reported
|
New Revenue Standard Adjustment
|
As Adjusted
|
||||||
Total revenues
|
$
|
118,661
|
|
$
|
29,847
|
|
$
|
148,508
|
|
Store advertising and other costs
|
16,323
|
|
(1,570
|
)
|
14,753
|
|
|||
Selling, general, and administrative
|
33,870
|
|
30,738
|
|
64,608
|
|
|||
Benefit from income taxes
|
(19,543
|
)
|
168
|
|
(19,375
|
)
|
|||
Net (Loss) Income
|
(7
|
)
|
511
|
|
504
|
|
|||
Diluted earnings per share
|
0.00
|
|
0.03
|
|
0.03
|
|
|
Fiscal 2016 Income Statement
|
||||||||
(in thousands, except earnings per share)
|
As Reported
|
New Revenue Standard Adjustment
|
As Adjusted
|
||||||
Total revenues
|
$
|
126,883
|
|
$
|
24,290
|
|
$
|
151,173
|
|
Store advertising and other costs
|
18,471
|
|
(1,672
|
)
|
16,799
|
|
|||
Selling, general, and administrative
|
28,108
|
|
25,937
|
|
54,045
|
|
|||
Provision for income taxes
|
1,943
|
|
9
|
|
1,952
|
|
|||
Net income
|
2,649
|
|
16
|
|
2,665
|
|
|||
Diluted earnings per share
|
0.16
|
|
0.00
|
|
0.16
|
|
|
Balance Sheet as of January 1, 2018
|
||||||||
(in thousands)
|
As Reported
|
New Revenue Standard Adjustment
|
As Adjusted
|
||||||
Unearned franchise and development fees
|
$
|
1,702
|
|
$
|
9,899
|
|
$
|
11,601
|
|
Accrued expenses and other current liabilities
|
13,139
|
|
(507
|
)
|
12,632
|
|
|||
Deferred tax liability, net
|
24,457
|
|
(3,567
|
)
|
20,890
|
|
|||
Accumulated deficit
|
(18,613
|
)
|
(5,825
|
)
|
(24,438
|
)
|
|
Balance Sheet as of January 2, 2017
|
||||||||
(in thousands)
|
As Reported
|
New Revenue Standard Adjustment
|
As Adjusted
|
||||||
Unearned franchise and development fees
|
$
|
1,768
|
|
$
|
10,586
|
|
$
|
12,354
|
|
Accrued expenses and other current liabilities
|
7,503
|
|
(516
|
)
|
6,987
|
|
|||
Deferred tax liability, net
|
44,179
|
|
(3,734
|
)
|
40,445
|
|
|||
Accumulated deficit
|
(18,606
|
)
|
(6,336
|
)
|
(24,942
|
)
|
Note 3 — Acquisitions
|
Cash and cash equivalents
|
$
|
5
|
|
Inventory
|
26
|
|
|
Prepaid expenses and other current assets
|
27
|
|
|
Property and equipment
|
604
|
|
|
Asset retirement obligations
|
(67
|
)
|
|
Total identifiable net assets acquired
|
595
|
|
|
Goodwill
|
1,964
|
|
|
Total net assets acquired
|
2,559
|
|
|
Dispute settlement
|
500
|
|
|
Total consideration
|
$
|
3,059
|
|
Note 4 — Prepaid Expenses and Other Current Assets
|
(in thousands)
|
2017
|
|
2016
|
||||
Prepaid media development costs
|
$
|
376
|
|
|
$
|
606
|
|
Prepaid software and support
|
223
|
|
|
985
|
|
||
Prepaid rent
|
549
|
|
|
622
|
|
||
Prepaid insurance
|
377
|
|
|
453
|
|
||
Taxes receivable
|
182
|
|
|
547
|
|
||
POS software licenses for resale
|
364
|
|
|
—
|
|
||
Assets held for sale
|
432
|
|
|
1,406
|
|
||
Advertising cooperative assets, restricted
|
4
|
|
|
48
|
|
||
Other
|
67
|
|
|
41
|
|
||
Total prepaid expenses and other current assets
|
$
|
2,574
|
|
|
$
|
4,708
|
|
Note 5 — Property and Equipment
|
(in thousands)
|
2017
|
|
2016
|
||||
Leasehold improvements
|
$
|
7,475
|
|
|
$
|
11,726
|
|
Restaurant equipment and fixtures
|
12,515
|
|
|
15,361
|
|
||
Office furniture and equipment
|
2,978
|
|
|
2,535
|
|
||
Software
|
7,917
|
|
|
14,929
|
|
||
Vehicles
|
6
|
|
|
92
|
|
||
Construction in progress
|
1,059
|
|
|
987
|
|
||
|
31,950
|
|
|
45,630
|
|
||
Accumulated depreciation and amortization
|
(21,886
|
)
|
|
(17,114
|
)
|
||
Property and equipment, net
|
$
|
10,064
|
|
|
$
|
28,516
|
|
Note 6 — Divestitures
|
Leasehold improvements
|
$
|
386
|
|
Restaurant equipment and fixtures
|
438
|
|
|
Property and equipment
|
824
|
|
|
Prepaid expenses and other current assets
|
19
|
|
|
Total assets sold
|
$
|
843
|
|
Note 7 — Goodwill
|
(in thousands)
|
Domestic Company Stores
|
|
Domestic Franchise
|
|
Total
|
||||||
Balance at December 28, 2015
|
$
|
24,960
|
|
|
$
|
81,546
|
|
|
$
|
106,506
|
|
Acquisitions
|
1,964
|
|
|
—
|
|
|
1,964
|
|
|||
Balance at January 2, 2017
|
26,924
|
|
|
81,546
|
|
|
108,470
|
|
|||
Disposition
|
(719
|
)
|
|
—
|
|
|
(719
|
)
|
|||
Balance at January 1, 2018
|
$
|
26,205
|
|
|
$
|
81,546
|
|
|
$
|
107,751
|
|
Note 8 — Intangible Assets
|
|
2017
|
|
|
||||||||||
(in thousands)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Weighted Average Amortization Period
|
||||||
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
||||||
Franchise relationships
|
$
|
56,000
|
|
|
$
|
(26,855
|
)
|
|
$
|
29,145
|
|
|
16.0
|
Reacquired franchise rights
|
5,887
|
|
|
(3,377
|
)
|
|
2,510
|
|
|
6.8
|
|||
Net intangible assets subject to amortization
|
$
|
61,887
|
|
|
$
|
(30,232
|
)
|
|
$
|
31,655
|
|
|
15.1
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
||||||
Trade name and trademarks
|
|
|
|
|
$
|
87,002
|
|
|
|
|
2016
|
|
|
||||||||||
(in thousands)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Weighted Average Amortization Period
|
||||||
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
||||||
Franchise relationships
|
$
|
56,000
|
|
|
$
|
(23,355
|
)
|
|
$
|
32,645
|
|
|
16.0
|
Reacquired franchise rights
|
6,914
|
|
|
(3,246
|
)
|
|
3,668
|
|
|
6.3
|
|||
Net intangible assets subject to amortization
|
$
|
62,914
|
|
|
$
|
(26,601
|
)
|
|
$
|
36,313
|
|
|
14.5
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
||||||
Trade name and trademarks
|
|
|
|
|
$
|
87,002
|
|
|
|
Fiscal year
|
2018
|
$
|
4,316
|
|
|
2019
|
4,070
|
|
|
|
2020
|
3,945
|
|
|
|
2021
|
4,459
|
|
|
|
2022
|
3,803
|
|
|
|
Thereafter
|
11,062
|
|
|
|
|
$
|
31,655
|
|
Note 9 — Financing Arrangements
|
(in thousands)
|
2017
|
|
2016
|
||||
Term loan under 2014 credit facility
|
$
|
92,900
|
|
|
$
|
105,879
|
|
Revolving line of credit under 2014 credit facility
|
—
|
|
|
800
|
|
||
Notes payable
|
3,000
|
|
|
3,000
|
|
||
Total principal amount of long-term debt
|
95,900
|
|
|
109,679
|
|
||
Less unamortized debt issuance costs
|
(506
|
)
|
|
(835
|
)
|
||
Total long-term debt
|
95,394
|
|
|
108,844
|
|
||
Less current portion
|
(8,400
|
)
|
|
(7,879
|
)
|
||
Total long-term debt, net of current portion
|
$
|
86,994
|
|
|
$
|
100,965
|
|
(in thousands)
|
Senior Secured Credit Facility
|
|
Notes Payable
|
|
Total
|
|||||||
Fiscal Years
|
2018
|
$
|
5,400
|
|
|
$
|
3,000
|
|
|
$
|
8,400
|
|
|
2019
|
87,500
|
|
|
—
|
|
|
87,500
|
|
|||
|
|
$
|
92,900
|
|
|
$
|
3,000
|
|
|
$
|
95,900
|
|
Fiscal Years
|
2018
|
$
|
310
|
|
|
2019
|
196
|
|
|
|
|
$
|
506
|
|
Note 10 — Fair Value Measurement
|
▪
|
Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
|
▪
|
Level 2 — Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data
|
▪
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
|
|
2017
|
|
2016
|
|
|
||||||||||||
(in thousands)
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Fair Value Measurements
|
||||||||
Financial assets
|
|
|
|
|
|
|
|
|
|
||||||||
Notes receivable
(1)
|
$
|
97
|
|
|
$
|
88
|
|
|
$
|
149
|
|
|
$
|
150
|
|
|
Level 3
|
(1)
|
The fair value of notes receivable was estimated primarily using a discounted cash flow method based on a discount rate, reflecting the applicable credit spread.
|
Note 11 — Accrued and Other Liabilities
|
(in thousands)
|
2017
|
|
2016
|
||||
Accrued compensation and related costs
|
$
|
3,902
|
|
|
$
|
2,192
|
|
Accrued legal settlement costs
|
3,940
|
|
|
—
|
|
||
Gift cards and certificates payable
|
3,184
|
|
|
3,033
|
|
||
Accrued interest and non-income taxes payable
|
461
|
|
|
524
|
|
||
Convention fund balance
|
841
|
|
|
1,025
|
|
||
Advertising cooperative liabilities
|
60
|
|
|
204
|
|
||
Other
|
751
|
|
|
525
|
|
||
|
$
|
13,139
|
|
|
$
|
7,503
|
|
Note 12 — Income Taxes
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Current tax provision
|
|
|
|
|
|
||||||
Federal
|
$
|
9
|
|
|
$
|
5
|
|
|
$
|
83
|
|
State
|
171
|
|
|
214
|
|
|
278
|
|
|||
|
180
|
|
|
219
|
|
|
361
|
|
|||
Deferred tax (benefit) provision
|
|
|
|
|
|
||||||
Federal
|
(18,877
|
)
|
|
1,508
|
|
|
2,211
|
|
|||
State
|
(846
|
)
|
|
216
|
|
|
(504
|
)
|
|||
|
(19,723
|
)
|
|
1,724
|
|
|
1,707
|
|
|||
Total (benefit from) provision for income taxes
|
$
|
(19,543
|
)
|
|
$
|
1,943
|
|
|
$
|
2,068
|
|
(in thousands)
|
2017
|
|
2016
|
||||
Deferred income tax assets:
|
|
|
|
||||
Unearned franchise and development fees
|
$
|
246
|
|
|
$
|
379
|
|
Convention and Advertising funds balance
|
208
|
|
|
380
|
|
||
Compensation accruals
|
449
|
|
|
102
|
|
||
Gift card accruals
|
348
|
|
|
458
|
|
||
Asset retirement obligation
|
120
|
|
|
201
|
|
||
Deferred rent
|
283
|
|
|
434
|
|
||
Share-based compensation
|
769
|
|
|
1,082
|
|
||
Net operating loss
|
1,013
|
|
|
1,598
|
|
||
Other
|
213
|
|
|
387
|
|
||
Total deferred tax assets
|
3,649
|
|
|
5,021
|
|
||
Valuation allowance
|
(98
|
)
|
|
(61
|
)
|
||
Total deferred tax assets after valuation allowance
|
3,551
|
|
|
4,960
|
|
||
Deferred income tax liabilities:
|
|
|
|
||||
Fixed asset, goodwill, and intangible asset basis differences
|
(27,273
|
)
|
|
(46,836
|
)
|
||
Other
|
(735
|
)
|
|
(2,303
|
)
|
||
Total deferred tax liabilities
|
(28,008
|
)
|
|
(49,139
|
)
|
||
Net deferred tax liability
|
$
|
(24,457
|
)
|
|
$
|
(44,179
|
)
|
Balance as of the end of fiscal 2016
|
$
|
72
|
|
Additions for tax positions of prior years
|
5
|
|
|
Balance as of the end of fiscal 2017
|
$
|
77
|
|
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Federal income tax provision based on statutory rate
|
$
|
(6,647
|
)
|
|
$
|
1,561
|
|
|
$
|
2,203
|
|
State and local income tax effect
|
(445
|
)
|
|
284
|
|
|
314
|
|
|||
Impact of change in tax rates
|
(12,621
|
)
|
|
—
|
|
|
(464
|
)
|
|||
Non-deductible expenses
|
203
|
|
|
255
|
|
|
133
|
|
|||
Tax credits and other
|
(33
|
)
|
|
(157
|
)
|
|
(118
|
)
|
|||
(Benefit from) provision for income taxes
|
$
|
(19,543
|
)
|
|
$
|
1,943
|
|
|
$
|
2,068
|
|
Note 13 — Share-based Compensation
|
|
Number of Shares of
Restricted Common Stock
|
|
|
||||||
|
Time
Vesting
|
|
Market
Condition
|
|
Weighted Average
Award Date
Fair Value per Share
|
||||
Unvested, 2016
|
30,670
|
|
|
148,946
|
|
|
$
|
2.70
|
|
Granted
|
35,333
|
|
|
—
|
|
|
4.65
|
|
|
Vested
|
(29,597
|
)
|
|
(104,820
|
)
|
(1)
|
5.18
|
|
|
Forfeited/Repurchased
|
(1,508
|
)
|
|
(3,772
|
)
|
|
2.93
|
|
|
Unvested, 2017
|
34,898
|
|
|
40,354
|
|
|
$
|
3.44
|
|
(1)
|
As part of the severance agreement with the Company’s former CEO and other executives, the Company accelerated the vesting of certain market condition restricted common stock awards.
|
(in thousands, except per share amounts)
|
2017
|
|
2016
|
|
2015
|
||||||
Weighted average grant date fair value per share
|
$
|
4.65
|
|
|
$
|
7.66
|
|
|
$
|
19.05
|
|
Total fair value of shares issued
|
$
|
164
|
|
|
$
|
138
|
|
|
$
|
150
|
|
Total fair value of shares vested
|
$
|
697
|
|
|
$
|
220
|
|
|
$
|
171
|
|
|
Number of Shares
Subject to Stock Options
|
|
|
|
|
|
|
||||||||
|
Time
Vesting |
|
Market
Condition |
|
Weighted
Average Exercise Price per Share |
|
Weighted
Average Remaining Contractual Term |
|
Aggregate
Intrinsic Value (in thousands) |
||||||
Outstanding, 2016
|
951,688
|
|
|
171,495
|
|
|
$
|
11.48
|
|
|
|
|
|
||
Granted
|
626,667
|
|
|
83,333
|
|
|
4.75
|
|
|
|
|
|
|||
Forfeited
|
(629,240
|
)
|
|
(96,701
|
)
|
|
3.95
|
|
|
|
|
|
|||
Outstanding, 2017
|
949,115
|
|
|
158,127
|
|
|
$
|
7.60
|
|
|
8.3 years
|
|
$
|
478
|
|
Exercisable, 2017
|
277,398
|
|
|
—
|
|
|
$
|
11.10
|
|
|
6.8 years
|
|
$
|
10
|
|
(in thousands, except per share amounts)
|
2017
|
|
2016
|
|
2015
|
||||||
Weighted average grant date fair value per share
|
$
|
1.66
|
|
|
$
|
3.67
|
|
|
$
|
5.41
|
|
Total fair value of awards granted
|
$
|
1,179
|
|
|
$
|
651
|
|
|
$
|
1,039
|
|
Total fair value of awards vested
|
$
|
422
|
|
|
$
|
594
|
|
|
$
|
431
|
|
Total intrinsic value of stock options exercised
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
189
|
|
|
2017
|
|
2016
|
|
2015
|
Risk free rate
|
2.00%
|
|
1.74%
|
|
1.94%
|
Expected volatility
|
25.8%
|
|
30.4%
|
|
37.9%
|
Expected term
|
5.5 years
|
|
6.3 years
|
|
6.3 years
|
Expected dividend yield
|
0.0%
|
|
0.0%
|
|
0.0%
|
Note 14 — Earnings per Share (EPS)
|
(in thousands, except per share data)
|
2017
|
|
2016
|
|
2015
|
||||||
Earnings:
|
|
|
|
|
|
||||||
Net (loss) income
|
$
|
(7
|
)
|
|
$
|
2,649
|
|
|
$
|
4,411
|
|
Net loss attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
500
|
|
|||
Net (loss) income attributable to Papa Murphy’s
|
(7
|
)
|
|
2,649
|
|
|
4,911
|
|
|||
Cumulative Series A and B Preferred dividends
|
—
|
|
|
—
|
|
|
(2,150
|
)
|
|||
Net (loss) income available to common shareholders
|
$
|
(7
|
)
|
|
$
|
2,649
|
|
|
$
|
2,761
|
|
Shares:
|
|
|
|
|
|
||||||
Basic weighted average common shares outstanding
|
16,870
|
|
|
16,743
|
|
|
16,653
|
|
|||
Dilutive effect of restricted equity awards
(1)
|
—
|
|
|
30
|
|
|
218
|
|
|||
Diluted weighted average number of shares outstanding
|
16,870
|
|
|
16,773
|
|
|
16,871
|
|
|||
Earnings per share:
|
|
|
|
|
|
||||||
Basic earnings per share
|
$
|
—
|
|
|
$
|
0.16
|
|
|
$
|
0.29
|
|
Diluted earnings per share
|
$
|
—
|
|
|
$
|
0.16
|
|
|
$
|
0.29
|
|
(1)
|
An aggregated total of
901,000
,
746,000
, and
78,000
potential common shares have been excluded from the diluted
EPS
calculation for
2017
,
2016
, and
2015
, respectively, because their effect would have been anti-dilutive.
|
Note 15 — Commitments and Contingencies
|
(in thousands)
|
Total lease minimum payments
|
|
Sublease income
|
|
Net lease minimum payments
|
|||||||
Fiscal years
|
2018
|
$
|
5,227
|
|
|
$
|
54
|
|
|
$
|
5,173
|
|
|
2019
|
4,602
|
|
|
54
|
|
|
4,548
|
|
|||
|
2020
|
3,607
|
|
|
30
|
|
|
3,577
|
|
|||
|
2021
|
2,319
|
|
|
—
|
|
|
2,319
|
|
|||
|
2022
|
1,475
|
|
|
—
|
|
|
1,475
|
|
|||
|
Thereafter
|
2,855
|
|
|
—
|
|
|
2,855
|
|
|||
|
|
$
|
20,085
|
|
|
$
|
138
|
|
|
$
|
19,947
|
|
Fiscal Years
|
2018
|
$
|
598
|
|
|
2019
|
552
|
|
|
|
2020
|
430
|
|
|
|
2021
|
186
|
|
|
|
2022
|
14
|
|
|
|
|
$
|
1,780
|
|
Note 16 — Retirement Plans
|
Note 17 — Advertising Fund
|
|
|
|
|
||||||||
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Opening fund (deficit) surplus
|
$
|
(1,586
|
)
|
|
$
|
(1,200
|
)
|
|
$
|
505
|
|
Net activity during the period
|
(4,383
|
)
|
|
(386
|
)
|
|
(1,705
|
)
|
|||
Ending fund deficit
|
$
|
(5,969
|
)
|
|
$
|
(1,586
|
)
|
|
$
|
(1,200
|
)
|
Note 18 — Segment Information
|
|
Revenues
|
||||||||||
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Domestic Franchise
|
$
|
41,421
|
|
|
$
|
44,434
|
|
|
$
|
45,579
|
|
Domestic Company Stores
|
76,868
|
|
|
82,080
|
|
|
74,300
|
|
|||
International
|
372
|
|
|
369
|
|
|
330
|
|
|||
Total
|
$
|
118,661
|
|
|
$
|
126,883
|
|
|
$
|
120,209
|
|
|
Revenues
|
||||||||||
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
United States
|
$
|
118,289
|
|
|
$
|
126,514
|
|
|
$
|
119,879
|
|
International
|
372
|
|
|
369
|
|
|
330
|
|
|||
Total
|
$
|
118,661
|
|
|
$
|
126,883
|
|
|
$
|
120,209
|
|
|
Segment Adjusted EBITDA
|
||||||||||
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Domestic Franchise
|
$
|
24,195
|
|
|
$
|
23,772
|
|
|
$
|
26,142
|
|
Domestic Company Stores
|
2,751
|
|
|
2,808
|
|
|
5,943
|
|
|||
International
|
315
|
|
|
300
|
|
|
268
|
|
|||
Total reportable segments adjusted EBITDA
|
27,261
|
|
|
26,880
|
|
|
32,353
|
|
|||
Corporate and unallocated
|
(7,417
|
)
|
|
(5,184
|
)
|
|
(6,678
|
)
|
|||
Depreciation and amortization
|
(10,452
|
)
|
|
(12,236
|
)
|
|
(10,002
|
)
|
|||
Interest expense, net
|
(5,078
|
)
|
|
(4,868
|
)
|
|
(4,524
|
)
|
|||
Secondary offering costs
(1)
|
—
|
|
|
—
|
|
|
(345
|
)
|
|||
Loss on Project Pie impairment and disposal
(2)
|
—
|
|
|
—
|
|
|
(4,325
|
)
|
|||
CEO transition and restructuring
(3)
|
(2,614
|
)
|
|
—
|
|
|
—
|
|
|||
E-commerce impairment
(4)
|
(9,085
|
)
|
|
—
|
|
|
—
|
|
|||
Store closures and impairments
(5)
|
(7,712
|
)
|
|
—
|
|
|
—
|
|
|||
Litigation settlements
(6)
|
(4,453
|
)
|
|
—
|
|
|
—
|
|
|||
(Loss) Income Before Income Taxes
|
$
|
(19,550
|
)
|
|
$
|
4,592
|
|
|
$
|
6,479
|
|
(1)
|
Represents costs related to the secondary offering of the Company’s common stock.
|
(2)
|
Represents a $4 million loss recognized upon impairment of
Project Pie
, a cost-method investment, and its subsequent disposal, and the write-off as bad debt receivables totaling $325,000.
|
(3)
|
Represents non-recurring management transition and restructuring costs plus costs associated with recruitment of a new Chief Executive Officer and Chief Financial Officer.
|
(4)
|
Represents impairment of our e-commerce platform based on the decision to move to a third-party developed and hosted solution.
|
(5)
|
Represents non-cash charges associated with the disposal or impairment of store assets upon the determination that the book value of certain stores was higher than the fair value of those stores, plus lease buyouts and reserves for the residual contractual lease obligations on closed stores.
|
(6)
|
Payments and accruals made toward franchisee settlements and litigation reserves.
|
|
Depreciation and amortization
|
||||||||||
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Domestic Franchise
|
$
|
5,891
|
|
|
$
|
6,606
|
|
|
$
|
5,392
|
|
Domestic Company Stores
|
4,530
|
|
|
5,599
|
|
|
4,579
|
|
|||
International
|
31
|
|
|
31
|
|
|
31
|
|
|||
Total
|
$
|
10,452
|
|
|
$
|
12,236
|
|
|
$
|
10,002
|
|
|
Total Assets
|
||||||||||
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Domestic Franchise
|
$
|
119,964
|
|
|
$
|
133,466
|
|
|
$
|
139,705
|
|
Domestic Company Stores
|
38,674
|
|
|
52,531
|
|
|
45,217
|
|
|||
International
|
336
|
|
|
318
|
|
|
438
|
|
|||
Other
(1)
|
87,200
|
|
|
87,557
|
|
|
90,111
|
|
|||
Total
|
$
|
246,174
|
|
|
$
|
273,872
|
|
|
$
|
275,471
|
|
(1)
|
Other assets which are not allocated to the individual segments primarily include trade names & trademarks.
|
Note 19 — Selected Quarterly Financial Data (unaudited)
|
(in thousands, except per share data)
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
||||||||
2017
|
|
|
|
|
|
|
|
||||||||
Revenue
|
$
|
31,994
|
|
|
$
|
29,102
|
|
|
$
|
26,824
|
|
|
$
|
30,741
|
|
Operating (Loss) Income
|
(7,945
|
)
|
|
(6,861
|
)
|
|
(2,081
|
)
|
|
2,619
|
|
||||
Net (Loss) Income
|
(5,414
|
)
|
|
(6,187
|
)
|
|
(1,869
|
)
|
|
13,463
|
|
||||
Basic (loss) earnings per share
|
$
|
(0.32
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.80
|
|
Diluted (loss) earnings per share
|
$
|
(0.32
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
||||||||
2016
|
|
|
|
|
|
|
|
||||||||
Revenue
|
$
|
32,985
|
|
|
$
|
29,894
|
|
|
$
|
28,519
|
|
|
$
|
35,485
|
|
Operating Income
|
2,323
|
|
|
2,813
|
|
|
691
|
|
|
3,821
|
|
||||
Net Income (Loss)
|
642
|
|
|
952
|
|
|
(421
|
)
|
|
1,476
|
|
||||
Basic earnings (loss) per share
|
$
|
0.04
|
|
|
$
|
0.06
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.09
|
|
Diluted earnings (loss) per share
|
$
|
0.04
|
|
|
$
|
0.06
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.09
|
|
Evaluation of Disclosure Controls and Procedures
|
Management’s Annual Report on Internal Control over Financial Reporting
|
Changes in Internal Control over Financial Reporting
|
(a)
|
The following documents are filed as part of this report:
|
|
|
|
Form 10-K Page No.
|
1.
|
Financial Statements: The following financial statements are included in Item 8. “Financial Statements and Supplementary Data”:
|
|
|
Consolidated Statements of Operations for the Fiscal Years ended January 1, 2018, January 2, 2017, and December 28, 2015
|
|
|
Consolidated Balance Sheets as of January 1, 2018 and January 2, 2017
|
|
|
Consolidated Statements of Shareholders’ Equity for the Fiscal Years ended January 1, 2018, January 2, 2017, and December 28, 2015
|
|
|
Consolidated Statements of Cash Flows for the Fiscal Years ended January 1, 2018, January 2, 2017, and December 28, 2015
|
|
|
Notes to Consolidated Financial Statements
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
2.
|
Financial Statement Schedule:
|
|
|
Schedule I - Condensed Financial Information of the Registrant
|
|
|
Schedule II - Valuation and Qualifying Accounts
|
|
|
All other schedules are omitted because they are not applicable, not required or the required information is shown in the financial statements or the notes thereto.
|
|
3.
|
Exhibits:
|
|
|
|
Incorporated By Reference
|
|||
Exhibit
|
|
|
File
|
|
Filing
|
Number
|
Description Of Exhibits
|
Form
|
Number
|
Exhibit
|
Date
|
3.1
|
8-K
|
001-36432
|
3.1
|
May 13, 2014
|
|
3.2
|
8-K
|
001-36432
|
3.1
|
December 22, 2016
|
|
4.1
|
S-1/A
|
333-194488
|
4.1
|
April 28, 2014
|
|
4.2
|
8-K
|
001-36432
|
4.1
|
May 13, 2014
|
|
10.1‡
|
S-1/A
|
333-194488
|
10.1
|
April 4, 2014
|
|
10.2
|
8-K
|
001-36432
|
10.1
|
May 13, 2014
|
|
10.3
|
10-Q
|
001-36432
|
10.1
|
November 13, 2014
|
|
10.4‡
|
S-1/A
|
333-194488
|
10.5
|
April 28, 2014
|
|
10.5
|
S-1/A
|
333-194488
|
10.6
|
April 4, 2014
|
|
10.6
|
S-1/A
|
333-194488
|
10.7
|
April 4, 2014
|
|
10.7
|
S-1/A
|
333-194488
|
10.8
|
April 4, 2014
|
|
10.8*‡
|
|
|
|
|
|
10.9‡
|
S-1/A
|
333-194488
|
10.20
|
April 21, 2014
|
|
10.10‡
|
S-1/A
|
333-194488
|
10.21
|
April 21, 2014
|
|
|
Incorporated By Reference
|
|||
Exhibit
|
|
|
File
|
|
Filing
|
Number
|
Description Of Exhibits
|
Form
|
Number
|
Exhibit
|
Date
|
10.11‡
|
S-1/A
|
333-194488
|
10.22
|
April 21, 2014
|
|
10.12‡
|
S-1/A
|
333-194488
|
10.23
|
April 21, 2014
|
|
10.13‡
|
S-1/A
|
333-194488
|
10.24
|
April 21, 2014
|
|
10.14‡
|
S-1/A
|
333-194488
|
10.25
|
April 21, 2014
|
|
10.15‡
|
S-1/A
|
333-194488
|
10.26
|
April 21, 2014
|
|
10.16
|
S-1/A
|
333-194488
|
10.27
|
April 21, 2014
|
|
10.17
|
S-1/A
|
333-194488
|
10.28
|
April 21, 2014
|
|
10.18‡
|
S-1/A
|
333-194488
|
10.29
|
April 28, 2014
|
|
10.19
|
10-Q
|
001-36432
|
10.1
|
November 2, 2016
|
|
10.20
|
10-K
|
001-36432
|
10.32
|
March 15, 2017
|
|
10.21
|
10-K
|
001-36432
|
10.33
|
March 15, 2017
|
|
10.22‡
|
10-K
|
001-36432
|
10.16
|
March 15, 2017
|
|
10.23‡
|
10-K
|
001-36432
|
10.18
|
March 15, 2017
|
|
10.24‡
|
10-Q
|
001-36432
|
10.1
|
May 10, 2017
|
|
10.25‡
|
10-Q
|
001-36432
|
10.2
|
May 10, 2017
|
|
10.26*‡
|
|
|
|
|
|
10.27
|
8-K
|
001-36432
|
10.1
|
December 21, 2017
|
|
10.28
|
8-K
|
001-36432
|
10.2
|
December 21, 2017
|
|
21.1*
|
|
|
|
|
|
23.1*
|
|
|
|
|
|
24.1*
|
|
|
|
|
|
31.1*
|
|
|
|
|
|
31.2*
|
|
|
|
|
|
32.1*
|
|
|
|
|
|
32.2*
|
|
|
|
|
|
|
Incorporated By Reference
|
|||
Exhibit
|
|
|
File
|
|
Filing
|
Number
|
Description Of Exhibits
|
Form
|
Number
|
Exhibit
|
Date
|
101.INS*
|
XBRL Instance Document
|
|
|
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
|
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
|
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
|
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
|
|
Papa Murphy’s Holdings, Inc.
|
|
Fiscal Year
|
||||||||||
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Equity in (losses) earnings of subsidiaries
|
$
|
(16,718
|
)
|
|
$
|
6,905
|
|
|
$
|
9,486
|
|
Selling, general, and administrative expense
|
2,636
|
|
|
2,140
|
|
|
2,380
|
|
|||
Operating (Loss) Income
|
(19,354
|
)
|
|
4,765
|
|
|
7,106
|
|
|||
|
|
|
|
|
|
||||||
Other expense, net
|
200
|
|
|
180
|
|
|
136
|
|
|||
(Loss) Income Before Income Taxes
|
(19,554
|
)
|
|
4,585
|
|
|
6,970
|
|
|||
|
|
|
|
|
|
||||||
(Benefit from) provision for income taxes
|
(19,547
|
)
|
|
1,936
|
|
|
2,059
|
|
|||
Net (Loss) Income
|
(7
|
)
|
|
2,649
|
|
|
4,911
|
|
Papa Murphy’s Holdings, Inc.
|
(in thousands, except par value and share data)
|
January 1, 2018
|
|
January 2, 2017
|
||||
Assets
|
|
|
|
||||
Current Assets
|
|
|
|
||||
Prepaid expenses and other current assets
|
$
|
183
|
|
|
$
|
547
|
|
Total current assets
|
183
|
|
|
547
|
|
||
Investment in affiliates
|
128,631
|
|
|
145,349
|
|
||
Total assets
|
$
|
128,814
|
|
|
$
|
145,896
|
|
Liabilities and Equity
|
|
|
|
||||
Current Liabilities
|
|
|
|
||||
Other current liabilities
|
$
|
56
|
|
|
$
|
36
|
|
Due to consolidated affiliates
|
2,130
|
|
|
185
|
|
||
Total current liabilities
|
2,186
|
|
|
221
|
|
||
Deferred tax liability
|
24,457
|
|
|
44,179
|
|
||
Total liabilities
|
$
|
26,643
|
|
|
$
|
44,400
|
|
Commitments and contingencies
|
|
|
|
||||
Shareholders’ Equity
|
|
|
|
||||
Preferred stock ($0.01 par value; 15,000,000 shares authorized; no shares issued or outstanding)
|
—
|
|
|
—
|
|
||
Common stock ($0.01 par value; 200,000,000 shares authorized; 16,971,461 and 16,955,970 shares issued and outstanding, respectively)
|
170
|
|
|
170
|
|
||
Additional paid-in capital
|
120,614
|
|
|
119,932
|
|
||
Accumulated deficit
|
(18,613
|
)
|
|
(18,606
|
)
|
||
Total shareholders’ equity
|
102,171
|
|
|
101,496
|
|
||
Total liabilities and shareholders’ equity
|
$
|
128,814
|
|
|
$
|
145,896
|
|
Papa Murphy’s Holdings, Inc.
|
|
Fiscal Year
|
||||||||||
(in thousands)
|
2017
|
|
2016
|
|
2015
|
||||||
Net cash (used in) provided by operating activities
|
$
|
6
|
|
|
$
|
(209
|
)
|
|
$
|
(7,278
|
)
|
|
|
|
|
|
|
||||||
Investing Activities
|
|
|
|
|
|
||||||
(Deemed) dividend from subsidiary
|
—
|
|
|
—
|
|
|
6,912
|
|
|||
Net cash provided by (used in) investing activities
|
—
|
|
|
—
|
|
|
6,912
|
|
|||
|
|
|
|
|
|
||||||
Financing Activities
|
|
|
|
|
|
||||||
Repurchases of common stock
|
(6
|
)
|
|
(84
|
)
|
|
(10
|
)
|
|||
Proceeds from exercise of stock options
|
—
|
|
|
293
|
|
|
376
|
|
|||
Net cash provided by financing activities
|
(6
|
)
|
|
209
|
|
|
366
|
|
|||
|
|
|
|
|
|
||||||
Net change in cash and cash equivalents
|
—
|
|
|
—
|
|
|
—
|
|
|||
|
|
|
|
|
|
||||||
Cash and Cash Equivalents, beginning of year
|
—
|
|
|
—
|
|
|
—
|
|
|||
Cash and Cash Equivalents, end of period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Papa Murphy’s Holdings, Inc.
|
Note 1—Basis of Presentation
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
|
Balance at Beginning of Period
|
|
Charged to costs and expenses
|
|
(Write-offs), Net of Recoveries
|
|
Balance at
End of Period |
||||||||
Fiscal year 2017
|
|
|
|
|
|
|
|
||||||||
Allowance for trade and other receivables
|
$
|
37
|
|
|
$
|
48
|
|
|
$
|
(18
|
)
|
|
$
|
67
|
|
Fiscal year 2016
|
|
|
|
|
|
|
|
||||||||
Allowance for trade and other receivables
|
$
|
31
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
37
|
|
Fiscal year 2015
|
|
|
|
|
|
|
|
||||||||
Allowance for trade and other receivables
|
$
|
60
|
|
|
$
|
(30
|
)
|
|
$
|
1
|
|
|
$
|
31
|
|
PAPA MURPHY’S HOLDINGS, INC.
|
|||
|
|
|
|
By:
|
|
/s/ Mark Hutchens
|
|
|
|
Name:
|
Mark Hutchens
|
|
|
Title:
|
Executive Vice President, Chief Operating Officer, and Chief Financial Officer
|
|
SIGNATURE
|
TITLE
|
DATE
|
|
|
|
|
|
/s/ Weldon Spangler
|
Chief Executive Officer
|
March 14, 2018
|
|
Weldon Spangler
|
(Principal Executive Officer) and Director
|
|
|
|
|
|
|
/s/ Mark Hutchens
|
Executive Vice President, Chief Operating Officer, and Chief Financial Officer
|
March 14, 2018
|
|
Mark Hutchens
|
(Principal Financial Officer and Principal Accounting Officer)
|
|
|
|
|
|
|
/s/ Jean Birch*
|
Chair of the Board
|
March 14, 2018
|
|
Jean Birch
|
|
|
|
|
|
|
|
/s/ Benjamin Hochberg*
|
Director
|
March 14, 2018
|
|
Benjamin Hochberg
|
|
|
|
|
|
|
|
/s/ Yoo Jin Kim*
|
Director
|
March 14, 2018
|
|
Yoo Jin Kim
|
|
|
|
|
|
|
|
/s/ L. David Mounts*
|
Director
|
March 14, 2018
|
|
L. David Mounts
|
|
|
|
|
|
|
|
/s/ John Shafer*
|
Director
|
March 14, 2018
|
|
John Shafer
|
|
|
|
|
|
|
|
/s/ Rob Weisberg*
|
Director
|
March 14, 2018
|
|
Rob Weisberg
|
|
|
|
|
|
|
|
/s/ Katherine L. Scherping*
|
Director
|
March 14, 2018
|
|
Katherine L. Scherping
|
|
|
|
|
|
|
|
/s/ Noah Elbogen*
|
Director
|
March 14, 2018
|
|
Noah Elbogen
|
|
|
|
|
|
|
|
/s/ Alex Matina*
|
Director
|
March 14, 2018
|
|
Alex Matina
|
|
|
*By:
|
|
/s/ Mark Hutchens
|
|
|
Mark Hutchens
|
|
|
Attorney-in-fact pursuant to filed Power of Attorney
|
11.
|
Miscellaneous
.
|
Subsidiary
|
|
Jurisdiction of Organization
|
MM1 Regional LLC
|
|
Florida
|
MM2 Regional LLC
|
|
Florida
|
Murphy’s Marketing Services, Inc.
|
|
Florida
|
Papa Murphy’s Company Stores, Inc.
|
|
Washington
|
Papa Murphy’s Intermediate, Inc.
|
|
Delaware
|
Papa Murphy’s International LLC
|
|
Delaware
|
Papa Murphy’s Worldwide LLC
|
|
Delaware
|
PMI Holdings, Inc.
|
|
Delaware
|
1.
|
I have reviewed this annual report on Form 10-K of Papa Murphy's Holdings, Inc.;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a.
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b.
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;
|
c.
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d.
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
a.
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
b.
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
|
/s/ Weldon Spangler
|
|
Weldon Spangler
|
|
Chief Executive Officer
|
|
(Principal Executive Officer)
|
1.
|
I have reviewed this annual report on Form 10-K of Papa Murphy's Holdings, Inc.;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a.
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b.
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;
|
c.
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d.
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
a.
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
b.
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
|
/s/ Mark Hutchens
|
|
Mark Hutchens
|
|
Chief Financial Officer
|
|
(Principal Financial Officer)
|
(1)
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
|
/s/ Weldon Spangler
|
|
Weldon Spangler
|
|
Chief Executive Officer
|
(1)
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
|
/s/ Mark Hutchens
|
|
Mark Hutchens
|
|
Chief Financial Officer
|