Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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27-2349094
(IRS Employer
Identification No.)
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8000 NE Parkway Drive, Suite 350
Vancouver, WA
(Address of principal executive offices)
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98662
(Zip Code)
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Large accelerated filer [ ]
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Accelerated filer [X]
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Non-accelerated filer [ ]
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Smaller reporting company [X]
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Emerging growth company [X]
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Papa Murphy’s Holdings, Inc. and Subsidiaries
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
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October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
(In thousands, except share and per share data)
|
(unaudited)
|
|
(as adjusted)
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|
(unaudited)
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|
(as adjusted)
|
||||||||
Revenues
|
|
|
|
|
|
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|
||||||||
Franchise related
|
$
|
15,872
|
|
|
$
|
16,171
|
|
|
$
|
46,876
|
|
|
$
|
52,961
|
|
Company-owned stores
|
12,958
|
|
|
17,520
|
|
|
47,519
|
|
|
57,010
|
|
||||
Total revenues
|
28,830
|
|
|
33,691
|
|
|
94,395
|
|
|
109,971
|
|
||||
|
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|
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|
||||||||
Costs and Expenses
|
|
|
|
|
|
|
|
||||||||
Store operating costs:
|
|
|
|
|
|
|
|
||||||||
Cost of food and packaging
|
4,216
|
|
|
5,858
|
|
|
15,657
|
|
|
19,376
|
|
||||
Compensation and benefits
|
4,341
|
|
|
5,478
|
|
|
15,183
|
|
|
17,735
|
|
||||
Advertising
|
1,147
|
|
|
1,604
|
|
|
3,700
|
|
|
5,055
|
|
||||
Occupancy and other store operating costs
|
2,720
|
|
|
3,012
|
|
|
8,925
|
|
|
10,255
|
|
||||
Selling, general, and administrative
|
11,710
|
|
|
12,517
|
|
|
36,146
|
|
|
49,042
|
|
||||
Depreciation and amortization
|
1,662
|
|
|
2,336
|
|
|
5,677
|
|
|
8,359
|
|
||||
Loss on disposal or impairment of property and equipment
|
2,521
|
|
|
6,253
|
|
|
1,808
|
|
|
17,830
|
|
||||
Total costs and expenses
|
28,317
|
|
|
37,058
|
|
|
87,096
|
|
|
127,652
|
|
||||
Operating Income (Loss)
|
513
|
|
|
(3,367
|
)
|
|
7,299
|
|
|
(17,681
|
)
|
||||
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|
|
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|
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|
||||||||
Interest expense, net
|
1,254
|
|
|
1,305
|
|
|
3,842
|
|
|
3,818
|
|
||||
Other expense, net
|
57
|
|
|
57
|
|
|
160
|
|
|
149
|
|
||||
(Loss) Income Before Income Taxes
|
(798
|
)
|
|
(4,729
|
)
|
|
3,297
|
|
|
(21,648
|
)
|
||||
|
|
|
|
|
|
|
|
||||||||
(Benefit from) provision for income taxes
|
(159
|
)
|
|
(2,051
|
)
|
|
970
|
|
|
(7,678
|
)
|
||||
Net (Loss) Income
|
$
|
(639
|
)
|
|
$
|
(2,678
|
)
|
|
$
|
2,327
|
|
|
$
|
(13,970
|
)
|
|
|
|
|
|
|
|
|
||||||||
(Loss) earnings per share of common stock
|
|
|
|
|
|
|
|
||||||||
Basic
|
$
|
(0.04
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
Diluted
|
$
|
(0.04
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
Weighted average common stock outstanding
|
|
|
|
|
|
|
|
||||||||
Basic
|
16,944,777
|
|
|
16,882,193
|
|
|
16,924,037
|
|
|
16,863,122
|
|
||||
Diluted
|
16,944,777
|
|
|
16,882,193
|
|
|
16,963,084
|
|
|
16,863,122
|
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
|
October 1, 2018
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|
January 1, 2018
|
||||
(In thousands, except par value and share data)
|
(unaudited)
|
|
(as adjusted)
|
||||
ASSETS
|
|
|
|
||||
Current Assets
|
|
|
|
||||
Cash and cash equivalents
|
$
|
3,359
|
|
|
$
|
2,174
|
|
Accounts receivable, net
|
3,088
|
|
|
3,788
|
|
||
Inventories
|
590
|
|
|
719
|
|
||
Prepaid expenses and other current assets
|
2,964
|
|
|
2,281
|
|
||
Total current assets
|
10,001
|
|
|
8,962
|
|
||
Property and equipment, net
|
4,988
|
|
|
10,064
|
|
||
Operating lease right of use assets
|
9,608
|
|
|
16,331
|
|
||
Goodwill
|
101,763
|
|
|
107,751
|
|
||
Trade name and trademarks
|
87,002
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|
87,002
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|
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Definite-life intangibles, net
|
28,372
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|
|
31,655
|
|
||
Assets held for sale
|
3,415
|
|
|
—
|
|
||
Other assets
|
678
|
|
|
350
|
|
||
Total assets
|
$
|
245,827
|
|
|
$
|
262,115
|
|
|
|
|
|
||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
||||
Current Liabilities
|
|
|
|
||||
Accounts payable
|
$
|
3,889
|
|
|
$
|
5,389
|
|
Accrued expenses and other current liabilities
|
10,924
|
|
|
12,382
|
|
||
Current portion of lease liabilities
|
2,115
|
|
|
3,382
|
|
||
Current portion of unearned franchise and development fees
|
1,747
|
|
|
1,564
|
|
||
Current portion of long-term debt
|
3,000
|
|
|
8,400
|
|
||
Total current liabilities
|
21,675
|
|
|
31,117
|
|
||
Long-term debt, net of current portion
|
81,527
|
|
|
86,994
|
|
||
Lease liabilities, net of current portion
|
9,580
|
|
|
16,296
|
|
||
Unearned franchise and development fees, net of current portion
|
8,969
|
|
|
10,037
|
|
||
Deferred tax liability
|
22,642
|
|
|
21,825
|
|
||
Other long-term liabilities
|
4,325
|
|
|
1,704
|
|
||
Total liabilities
|
148,718
|
|
|
167,973
|
|
||
Commitments and contingencies (Note 16)
|
|
|
|
|
|
||
|
|
|
|
||||
Stockholders’ Equity
|
|
|
|
||||
Preferred stock ($0.01 par value; 15,000,000 shares authorized; no shares issued)
|
—
|
|
|
—
|
|
||
Common stock ($0.01 par value; 200,000,000 shares authorized; 17,031,707 and 16,971,461 shares issued, respectively)
|
170
|
|
|
170
|
|
||
Additional paid-in capital
|
121,254
|
|
|
120,614
|
|
||
Accumulated deficit
|
(24,315
|
)
|
|
(26,642
|
)
|
||
Total stockholders’ equity
|
97,109
|
|
|
94,142
|
|
||
Total liabilities and stockholders’ equity
|
$
|
245,827
|
|
|
$
|
262,115
|
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
|
Nine Months Ended
|
||||||
|
October 1, 2018
|
|
October 2, 2017
|
||||
(In thousands)
|
(unaudited)
|
|
(as adjusted)
|
||||
Operating Activities
|
|
|
|
||||
Net income (loss)
|
$
|
2,327
|
|
|
$
|
(13,970
|
)
|
Adjustments to reconcile to cash from operating activities
|
|
|
|
||||
Depreciation and amortization
|
5,677
|
|
|
8,359
|
|
||
Loss on disposal or impairment of property and equipment
|
1,808
|
|
|
17,830
|
|
||
Deferred taxes
|
817
|
|
|
(7,831
|
)
|
||
Stock-based compensation
|
561
|
|
|
489
|
|
||
Other non-cash items
|
253
|
|
|
341
|
|
||
Change in operating assets and liabilities
|
|
|
|
||||
Accounts receivable
|
714
|
|
|
2,285
|
|
||
Prepaid expenses and other assets
|
1,025
|
|
|
3,885
|
|
||
Unearned franchise and development fees
|
(1,011
|
)
|
|
(158
|
)
|
||
Accounts payable
|
(1,693
|
)
|
|
(2,028
|
)
|
||
Accrued expenses and other liabilities
|
(5,459
|
)
|
|
(978
|
)
|
||
Net cash from operating activities
|
5,019
|
|
|
8,224
|
|
||
|
|
|
|
||||
Investing Activities
|
|
|
|
||||
Acquisition of property and equipment
|
(497
|
)
|
|
(2,957
|
)
|
||
Proceeds from sale of property and equipment
|
7,586
|
|
|
2,206
|
|
||
Payments received on notes receivable
|
97
|
|
|
42
|
|
||
Net cash from investing activities
|
7,186
|
|
|
(709
|
)
|
||
|
|
|
|
||||
Financing Activities
|
|
|
|
||||
Payments on term loan
|
(11,100
|
)
|
|
(7,879
|
)
|
||
Advances on revolver
|
4,500
|
|
|
12,700
|
|
||
Payments on revolver
|
(4,500
|
)
|
|
(13,500
|
)
|
||
Repurchases of common stock
|
—
|
|
|
(6
|
)
|
||
Proceeds from exercise of stock options
|
80
|
|
|
—
|
|
||
Net cash from financing activities
|
(11,020
|
)
|
|
(8,685
|
)
|
||
|
|
|
|
||||
Net change in cash and cash equivalents
|
1,185
|
|
|
(1,170
|
)
|
||
Cash and Cash Equivalents, beginning of period
|
2,174
|
|
|
2,069
|
|
||
Cash and Cash Equivalents, end of period
|
$
|
3,359
|
|
|
$
|
899
|
|
|
|
|
|
||||
Supplemental Disclosures of Cash Flow Information
|
|
|
|
||||
Cash paid during the period for interest
|
$
|
3,668
|
|
|
$
|
3,637
|
|
Cash paid (received) during the period for income taxes
|
$
|
100
|
|
|
$
|
(246
|
)
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
Note 1 — Description of Business and Basis of Presentation
|
Statement of Operations
|
Three Months Ended October 2, 2017
|
|||||||||||
|
(unaudited)
|
|||||||||||
(in thousands, except earnings per share)
|
As Reported
|
New Revenue Standard Adjustment
|
New Lease Standard Adjustment
|
As Adjusted
|
||||||||
Total revenues
(1)
|
$
|
26,825
|
|
$
|
6,866
|
|
$
|
—
|
|
$
|
33,691
|
|
Store operating costs
|
16,647
|
|
(357
|
)
|
(338
|
)
|
15,952
|
|
||||
Selling, general, and administrative
(1)
|
5,596
|
|
6,929
|
|
(8
|
)
|
12,517
|
|
||||
Loss on disposal or impairment of property and equipment
|
4,327
|
|
—
|
|
1,926
|
|
6,253
|
|
||||
(Benefit from) provision for income taxes
|
(1,575
|
)
|
109
|
|
(585
|
)
|
(2,051
|
)
|
||||
Net (loss) income
|
(1,869
|
)
|
185
|
|
(994
|
)
|
(2,678
|
)
|
||||
Diluted (loss) earnings per share
|
(0.11
|
)
|
0.01
|
|
(0.06
|
)
|
(0.16
|
)
|
(1)
|
Recognition of advertising revenue and expense on a gross basis instead of a net basis by the
Brand Funds
comprised
$6.6 million
of the revenue adjustment and
$6.9 million
of the expense adjustment under the revenue standard. The revenue adjustment due to the change in method of recognizing franchise and development fees was
$0.3 million
.
|
Statement of Operations
|
Nine Months Ended October 2, 2017
|
|||||||||||
|
(unaudited)
|
|||||||||||
(in thousands, except earnings per share)
|
As Reported
|
New Revenue Standard Adjustment
|
New Lease Standard Adjustment
|
As Adjusted
|
||||||||
Total revenues
(1)
|
$
|
87,920
|
|
$
|
22,051
|
|
$
|
—
|
|
$
|
109,971
|
|
Store operating costs
|
54,855
|
|
(1,165
|
)
|
(1,270
|
)
|
52,420
|
|
||||
Selling, general, and administrative
(1)
|
26,216
|
|
22,860
|
|
(34
|
)
|
49,042
|
|
||||
Loss on disposal or impairment of property and equipment
|
15,377
|
|
—
|
|
2,453
|
|
17,830
|
|
||||
(Benefit from) provision for income taxes
|
(7,384
|
)
|
132
|
|
(426
|
)
|
(7,678
|
)
|
||||
Net (loss) income
|
(13,471
|
)
|
224
|
|
(723
|
)
|
(13,970
|
)
|
||||
Diluted (loss) earnings per share
|
(0.80
|
)
|
0.01
|
|
(0.04
|
)
|
(0.83
|
)
|
(1)
|
Recognition of advertising revenue and expense on a gross basis instead of a net basis by the
Brand Funds
comprised
$21.7 million
of the revenue adjustment and
$22.9 million
of the expense adjustment under the revenue standard. The revenue adjustment due to the change in method of recognizing franchise and development fees was
$0.4 million
.
|
Balance Sheet
|
January 1, 2018
|
|||||||||||
(in thousands)
|
As Reported
|
New Revenue Standard Adjustment
|
New Lease Standard Adjustment
|
As Adjusted
|
||||||||
Prepaid expenses and other current assets
|
$
|
2,671
|
|
$
|
—
|
|
$
|
(390
|
)
|
$
|
2,281
|
|
Operating lease right of use assets
|
—
|
|
—
|
|
16,331
|
|
16,331
|
|
||||
Unearned franchise and development fees
|
1,702
|
|
9,899
|
|
—
|
|
11,601
|
|
||||
Accrued expenses and other current liabilities
|
13,139
|
|
(507
|
)
|
(250
|
)
|
12,382
|
|
||||
Lease liabilities
|
—
|
|
—
|
|
19,678
|
|
19,678
|
|
||||
Deferred tax liability, net
|
24,457
|
|
(2,319
|
)
|
(313
|
)
|
21,825
|
|
||||
Other long-term liabilities
|
3,922
|
|
—
|
|
(2,218
|
)
|
1,704
|
|
||||
Accumulated deficit
|
(18,613
|
)
|
(7,073
|
)
|
(956
|
)
|
(26,642
|
)
|
Note 2 — Prepaid Expenses and Other Current Assets
|
|
October 1, 2018
|
|
January 1, 2018
|
||||
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
||||
Prepaid media production costs
|
$
|
718
|
|
|
$
|
376
|
|
Prepaid software and support
|
713
|
|
|
223
|
|
||
Prepaid occupancy related costs
|
271
|
|
|
159
|
|
||
Prepaid insurance
|
376
|
|
|
377
|
|
||
Taxes receivable
|
129
|
|
|
182
|
|
||
POS software licenses for resale
|
368
|
|
|
364
|
|
||
Assets held for sale
|
241
|
|
|
432
|
|
||
Advertising cooperative assets, restricted
|
71
|
|
|
4
|
|
||
Other
|
77
|
|
|
164
|
|
||
Total prepaid expenses and other current assets
|
$
|
2,964
|
|
|
$
|
2,281
|
|
Note 3 — Property and Equipment
|
Note 4 — Divestitures
|
Note 5 — Goodwill
|
(in thousands)
|
Company Stores
|
|
Franchise
|
|
Total
|
||||||
Balance at January 1, 2018
|
$
|
26,205
|
|
|
$
|
81,546
|
|
|
$
|
107,751
|
|
Allocated to assets held for sale
|
(833
|
)
|
|
—
|
|
|
(833
|
)
|
|||
Disposition
|
(5,155
|
)
|
|
—
|
|
|
(5,155
|
)
|
|||
Balance at October 1, 2018
|
$
|
20,217
|
|
|
$
|
81,546
|
|
|
$
|
101,763
|
|
Note 6 — Intangible Assets
|
Note 7 — Financing Arrangements
|
(in thousands)
|
October 1, 2018
|
|
January 1, 2018
|
||||
Term loan
|
$
|
81,800
|
|
|
$
|
92,900
|
|
Notes payable
|
3,000
|
|
|
3,000
|
|
||
Total principal amount of long-term debt
|
84,800
|
|
|
95,900
|
|
||
Unamortized debt issuance costs
|
(273
|
)
|
|
(506
|
)
|
||
Total long-term debt
|
84,527
|
|
|
95,394
|
|
||
Less current portion
|
(3,000
|
)
|
|
(8,400
|
)
|
||
Total long-term debt, net of current portion
|
$
|
81,527
|
|
|
$
|
86,994
|
|
Note 8 — 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.
|
|
October 1, 2018
|
|
January 1, 2018
|
|
|
||||||||||||
(in thousands)
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Fair Value Measurement
|
||||||||
Financial assets
|
|
|
|
|
|
|
|
|
|
||||||||
Notes receivable
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
97
|
|
|
$
|
88
|
|
|
Level 3
|
Other receivables
(1)
|
391
|
|
|
335
|
|
|
—
|
|
|
—
|
|
|
Level 3
|
(1)
|
The fair value of notes receivable and other receivables were estimated primarily using a discounted cash flow method based on a discount rate, reflecting the applicable credit spread. The notes receivable were paid in full as of
October 1, 2018
.
|
Note 9 — Accrued Expenses and Other Current Liabilities
|
|
October 1, 2018
|
|
January 1, 2018
|
||||
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
||||
Accrued compensation and related costs
|
$
|
3,447
|
|
|
$
|
3,902
|
|
Accrued legal settlement costs
|
2,700
|
|
|
3,940
|
|
||
Gift cards payable
|
1,898
|
|
|
2,676
|
|
||
Accrued interest and non-income taxes payable
|
384
|
|
|
461
|
|
||
Convention fund balance
|
765
|
|
|
841
|
|
||
Advertising cooperative liabilities
|
116
|
|
|
60
|
|
||
Lease liabilities held for sale
|
758
|
|
|
—
|
|
||
Other
|
856
|
|
|
502
|
|
||
Total accrued expenses and other current liabilities
|
$
|
10,924
|
|
|
$
|
12,382
|
|
Note 10 — Revenue
|
•
|
Royalty revenues.
Royalty revenues, which include advertising fees from domestic franchise stores, are based on a percentage of sales and are recognized when the food items are delivered to or carried out by customers. Payments for domestic royalties and advertising fees are generally due and collected within seven days of the prior week end date. Payments for international royalties are due and collected within 30 days of month-end.
|
•
|
Franchise and development fees.
Franchise and development fees are paid in advance of a store opening, typically when entering into a new franchise or development agreement. Fees allocated to the franchise license are recognized as revenue on a straight-line basis over the term of each respective franchise store agreement. Initial franchise agreement terms are typically ten years while successive agreement terms are typically five years. The Company has determined that these fees, which are paid in advance of when they are recognized as revenue, do not contain a significant financing component.
|
•
|
E-commerce fees.
E-commerce fees include point-of-sale (“
POS
”) support fees and transaction fees for purchases made through the Company’s e-commerce platform.
POS
support fees are due quarterly in advance and recognized as revenue over the respective quarter. Transaction fees are recognized when the food items purchased from a store are delivered to or carried out by customers and are due and collected within seven days of the prior week end date.
|
•
|
Vendor payments.
Vendor payments are received from vendors that supply franchised and Company-owned stores with products and are typically based on the volume of product purchased by the stores. Revenues from the sale of products are recognized when product is shipped from a distribution center to a store. Payments are due and collected within 30 days after month-end.
|
•
|
Marketing kits.
The Company charges domestic stores for marketing materials shipped to stores one to three times per quarter. These products are sold at cost and the revenues from their sale are recognized when the product is shipped by the vendors producing the kits. Payments are due and collected within 30 days of shipment.
|
|
Three Months Ended October 1, 2018
|
||||||||||||||
|
(unaudited)
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
Franchise royalties
|
$
|
8,279
|
|
|
$
|
—
|
|
|
$
|
3,362
|
|
|
$
|
11,641
|
|
Franchise fees
|
756
|
|
|
—
|
|
|
—
|
|
|
756
|
|
||||
Vendor payments
|
—
|
|
|
—
|
|
|
1,312
|
|
|
1,312
|
|
||||
E-commerce fees
|
602
|
|
|
—
|
|
|
—
|
|
|
602
|
|
||||
Other franchise and brand
|
29
|
|
|
—
|
|
|
1,532
|
|
|
1,561
|
|
||||
Company-owned stores
|
—
|
|
|
12,958
|
|
|
—
|
|
|
12,958
|
|
||||
Total revenues
|
9,666
|
|
|
12,958
|
|
|
6,206
|
|
|
28,830
|
|
||||
Intersegment revenues
|
695
|
|
|
—
|
|
|
346
|
|
|
1,041
|
|
||||
Reconciliation to business segment revenues
|
$
|
10,361
|
|
|
$
|
12,958
|
|
|
$
|
6,552
|
|
|
$
|
29,871
|
|
|
Three Months Ended October 2, 2017
|
||||||||||||||
|
(as adjusted)
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
Franchise royalties
|
$
|
8,539
|
|
|
$
|
—
|
|
|
$
|
5,050
|
|
|
$
|
13,589
|
|
Franchise fees
|
563
|
|
|
—
|
|
|
—
|
|
|
563
|
|
||||
Vendor payments
|
—
|
|
|
—
|
|
|
1,038
|
|
|
1,038
|
|
||||
E-commerce fees
|
435
|
|
|
—
|
|
|
—
|
|
|
435
|
|
||||
Other franchise and brand
|
21
|
|
|
—
|
|
|
525
|
|
|
546
|
|
||||
Company-owned stores
|
—
|
|
|
17,520
|
|
|
—
|
|
|
17,520
|
|
||||
Total revenues
|
9,558
|
|
|
17,520
|
|
|
6,613
|
|
|
33,691
|
|
||||
Intersegment revenues
|
52
|
|
|
—
|
|
|
387
|
|
|
439
|
|
||||
Reconciliation to business segment revenues
|
$
|
9,610
|
|
|
$
|
17,520
|
|
|
$
|
7,000
|
|
|
$
|
34,130
|
|
|
Nine Months Ended October 1, 2018
|
||||||||||||||
|
(unaudited)
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
Franchise royalties
|
$
|
26,462
|
|
|
$
|
—
|
|
|
$
|
10,740
|
|
|
$
|
37,202
|
|
Franchise fees
|
2,216
|
|
|
—
|
|
|
—
|
|
|
2,216
|
|
||||
Vendor payments
|
—
|
|
|
—
|
|
|
3,265
|
|
|
3,265
|
|
||||
E-commerce fees
|
1,664
|
|
|
—
|
|
|
—
|
|
|
1,664
|
|
||||
Other franchise and brand
|
64
|
|
|
—
|
|
|
2,465
|
|
|
2,529
|
|
||||
Company-owned stores
|
—
|
|
|
47,519
|
|
|
—
|
|
|
47,519
|
|
||||
Total revenues
|
30,406
|
|
|
47,519
|
|
|
16,470
|
|
|
94,395
|
|
||||
Intersegment revenues
|
2,480
|
|
|
—
|
|
|
1,203
|
|
|
3,683
|
|
||||
Reconciliation to business segment revenues
|
$
|
32,886
|
|
|
$
|
47,519
|
|
|
$
|
17,673
|
|
|
$
|
98,078
|
|
|
Nine Months Ended October 2, 2017
|
||||||||||||||
|
(as adjusted)
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
Franchise royalties
|
$
|
27,674
|
|
|
$
|
—
|
|
|
$
|
16,319
|
|
|
$
|
43,993
|
|
Franchise fees
|
2,101
|
|
|
—
|
|
|
—
|
|
|
2,101
|
|
||||
Vendor payments
|
—
|
|
|
—
|
|
|
3,493
|
|
|
3,493
|
|
||||
E-commerce fees
|
1,421
|
|
|
—
|
|
|
—
|
|
|
1,421
|
|
||||
Other franchise and brand
|
67
|
|
|
—
|
|
|
1,886
|
|
|
1,953
|
|
||||
Company-owned stores
|
—
|
|
|
57,010
|
|
|
—
|
|
|
57,010
|
|
||||
Total revenues
|
31,263
|
|
|
57,010
|
|
|
21,698
|
|
|
109,971
|
|
||||
Intersegment revenues
|
169
|
|
|
—
|
|
|
1,233
|
|
|
1,402
|
|
||||
Reconciliation to business segment revenues
|
$
|
31,432
|
|
|
$
|
57,010
|
|
|
$
|
22,931
|
|
|
$
|
111,373
|
|
|
Three Months Ended October 1, 2018
|
||||||||||||||
|
(unaudited)
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
United States
|
$
|
9,589
|
|
|
$
|
12,958
|
|
|
$
|
6,206
|
|
|
$
|
28,753
|
|
International
|
77
|
|
|
—
|
|
|
—
|
|
|
77
|
|
||||
Total revenues
|
$
|
9,666
|
|
|
$
|
12,958
|
|
|
$
|
6,206
|
|
|
$
|
28,830
|
|
|
Three Months Ended October 2, 2017
|
||||||||||||||
|
(as adjusted)
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
United States
|
$
|
9,463
|
|
|
$
|
17,520
|
|
|
$
|
6,613
|
|
|
$
|
33,596
|
|
International
|
95
|
|
|
—
|
|
|
—
|
|
|
95
|
|
||||
Total revenues
|
$
|
9,558
|
|
|
$
|
17,520
|
|
|
$
|
6,613
|
|
|
$
|
33,691
|
|
|
Nine Months Ended October 1, 2018
|
||||||||||||||
|
(unaudited)
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
United States
|
$
|
30,168
|
|
|
$
|
47,519
|
|
|
$
|
16,470
|
|
|
$
|
94,157
|
|
International
|
238
|
|
|
—
|
|
|
—
|
|
|
238
|
|
||||
Total revenues
|
$
|
30,406
|
|
|
$
|
47,519
|
|
|
$
|
16,470
|
|
|
$
|
94,395
|
|
|
Nine Months Ended October 2, 2017
|
||||||||||||||
|
(as adjusted)
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
United States
|
$
|
30,962
|
|
|
$
|
57,010
|
|
|
$
|
21,698
|
|
|
$
|
109,670
|
|
International
|
301
|
|
|
—
|
|
|
—
|
|
|
301
|
|
||||
Total revenues
|
$
|
31,263
|
|
|
$
|
57,010
|
|
|
$
|
21,698
|
|
|
$
|
109,971
|
|
(in thousands)
|
Contract Liabilities
|
||
Balance at January 1, 2018
|
$
|
11,151
|
|
Revenue recognized that was included in the balance at the beginning of the period
|
(2,129
|
)
|
|
Cash received, net of amounts recognized as revenue during the period
|
1,449
|
|
|
Contract refunds
|
(305
|
)
|
|
Balance at October 1, 2018
|
$
|
10,166
|
|
Fiscal year
|
2018
|
$
|
410
|
|
|
2019
|
1,598
|
|
|
|
2020
|
1,458
|
|
|
|
2021
|
1,299
|
|
|
|
2022
|
1,135
|
|
|
|
Thereafter
|
4,266
|
|
|
|
Total
|
$
|
10,166
|
|
Note 11 — Leases
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
||||||||
Operating lease cost
|
$
|
818
|
|
|
$
|
1,150
|
|
|
$
|
2,903
|
|
|
$
|
3,609
|
|
Short-term lease cost
|
11
|
|
|
5
|
|
|
36
|
|
|
16
|
|
||||
Variable lease cost
|
2
|
|
|
5
|
|
|
8
|
|
|
26
|
|
||||
Sublease income
|
(16
|
)
|
|
(17
|
)
|
|
(42
|
)
|
|
(53
|
)
|
||||
Total lease cost
|
$
|
815
|
|
|
$
|
1,143
|
|
|
$
|
2,905
|
|
|
$
|
3,598
|
|
|
Nine Months Ended
|
||||||
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
||||
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
||
Operating cash flows from operating leases
|
$
|
3,303
|
|
|
$
|
3,655
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
505
|
|
|
213
|
|
||
Weighted-average remaining lease term of operating leases
|
4.8 years
|
|
|
6.1 years
|
|
||
Weighted-average discount rate of operating leases
|
4.5
|
%
|
|
4.8
|
%
|
Fiscal year
|
2018
|
$
|
765
|
|
|
2019
|
4,500
|
|
|
|
2020
|
3,736
|
|
|
|
2021
|
2,626
|
|
|
|
2022
|
1,865
|
|
|
|
Thereafter
|
3,382
|
|
|
|
Total future minimum lease payments
|
16,874
|
|
|
|
Less imputed interest
|
(2,839
|
)
|
|
|
Less lease liabilities held for sale
(1)
|
(2,340
|
)
|
|
|
Total Lease Liabilities
|
$
|
11,695
|
|
(1)
|
Lease liabilities held for sale includes
$0.8 million
reported in Accrued expenses and other current assets (see
Note 9 — Accrued Expenses and Other Current Liabilities
) and
$1.5 million
reported in Other long-term liabilities in the Company's
Condensed Consolidated Balance Sheets
.
|
Note 12 — Income Taxes
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
||||||||
(Benefit from) provision for income taxes
|
$
|
(159
|
)
|
|
$
|
(2,051
|
)
|
|
$
|
970
|
|
|
$
|
(7,678
|
)
|
(Loss) income before income taxes
|
(798
|
)
|
|
(4,729
|
)
|
|
3,297
|
|
|
(21,648
|
)
|
||||
Effective income tax rate
|
19.9
|
%
|
|
43.4
|
%
|
|
29.4
|
%
|
|
35.5
|
%
|
Note 13 — Share-based Compensation
|
|
Number of Shares of Restricted Common Stock
|
|
Weighted Average
Award Date
Fair Value Per Share
|
||||||
|
Time Vesting
|
|
Market Condition
|
|
|||||
Unvested, January 1, 2018
|
34,898
|
|
|
40,354
|
|
|
$
|
3.44
|
|
Granted
|
41,000
|
|
|
—
|
|
|
5.33
|
|
|
Vested
|
(28,898
|
)
|
|
—
|
|
|
4.60
|
|
|
Repurchased
|
—
|
|
|
(754
|
)
|
|
0.19
|
|
|
Unvested, October 1, 2018
|
47,000
|
|
|
39,600
|
|
|
$
|
3.97
|
|
Note 14 — Brand Marketing Fund
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
||||||||
Opening BMF deficit
|
$
|
(5,877
|
)
|
|
$
|
(6,604
|
)
|
|
$
|
(5,461
|
)
|
|
$
|
(1,071
|
)
|
Net activity during the period
|
461
|
|
|
1,718
|
|
|
45
|
|
|
(3,815
|
)
|
||||
Ending BMF deficit
|
$
|
(5,416
|
)
|
|
$
|
(4,886
|
)
|
|
$
|
(5,416
|
)
|
|
$
|
(4,886
|
)
|
Note 15 — Earnings per Share (EPS)
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
(in thousands, except per share data)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
||||||||
Earnings:
|
|
|
|
|
|
|
|
||||||||
Net (loss) income
|
$
|
(639
|
)
|
|
$
|
(2,678
|
)
|
|
$
|
2,327
|
|
|
$
|
(13,970
|
)
|
Shares:
|
|
|
|
|
|
|
|
||||||||
Weighted average common shares outstanding
|
16,945
|
|
|
16,882
|
|
|
16,924
|
|
|
16,863
|
|
||||
Dilutive effect of restricted equity awards
(1)
|
—
|
|
|
—
|
|
|
39
|
|
|
—
|
|
||||
Diluted weighted average number of shares outstanding
|
16,945
|
|
|
16,882
|
|
|
16,963
|
|
|
16,863
|
|
||||
(Loss) earnings per share:
|
|
|
|
|
|
|
|
||||||||
Basic (loss) earnings per share
|
$
|
(0.04
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
Diluted (loss) earnings per share
|
$
|
(0.04
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
(1)
|
The Company’s securities that provide a right to receive common stock in the future such as stock options and restricted stock were not included in the computation of diluted EPS for the three months ended October 1, 2018 and the three and nine months ended October 2, 2017, as the effect of including these shares in the calculation would have been anti-dilutive.
|
Note 16 — Commitments and Contingencies
|
Note 17 — Segment Information
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
||||||||
Revenues
|
|
|
|
|
|
|
|
||||||||
Franchise segment
|
$
|
10,361
|
|
|
$
|
9,610
|
|
|
$
|
32,886
|
|
|
$
|
31,432
|
|
Brand Funds segment
|
6,552
|
|
|
7,000
|
|
|
17,673
|
|
|
22,931
|
|
||||
Intersegment eliminations
|
(1,041
|
)
|
|
(439
|
)
|
|
(3,683
|
)
|
|
(1,402
|
)
|
||||
Franchise related
|
15,872
|
|
|
16,171
|
|
|
46,876
|
|
|
52,961
|
|
||||
Company Stores segment
|
12,958
|
|
|
17,520
|
|
|
47,519
|
|
|
57,010
|
|
||||
Total
|
$
|
28,830
|
|
|
$
|
33,691
|
|
|
$
|
94,395
|
|
|
$
|
109,971
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
||||||||
Segment Adjusted EBITDA
|
|
|
|
|
|
|
|
||||||||
Franchise
|
$
|
5,617
|
|
|
$
|
4,778
|
|
|
$
|
18,664
|
|
|
$
|
19,208
|
|
Company Stores
|
(462
|
)
|
|
312
|
|
|
529
|
|
|
1,637
|
|
||||
Brand Funds
|
461
|
|
|
1,718
|
|
|
297
|
|
|
(3,814
|
)
|
||||
Total reportable segments adjusted EBITDA
|
5,616
|
|
|
6,808
|
|
|
19,490
|
|
|
17,031
|
|
||||
Corporate and unallocated
|
(950
|
)
|
|
(1,262
|
)
|
|
(3,108
|
)
|
|
(5,801
|
)
|
||||
Depreciation and amortization
|
(1,662
|
)
|
|
(2,336
|
)
|
|
(5,677
|
)
|
|
(8,359
|
)
|
||||
Interest expense, net
|
(1,254
|
)
|
|
(1,305
|
)
|
|
(3,842
|
)
|
|
(3,818
|
)
|
||||
CEO transition and restructuring costs
(1)
|
(27
|
)
|
|
(190
|
)
|
|
(390
|
)
|
|
(2,519
|
)
|
||||
E-commerce impairment and transition costs
(2)
|
—
|
|
|
—
|
|
|
(350
|
)
|
|
(9,124
|
)
|
||||
Store divestitures, closures, and impairments
(3)
|
(2,521
|
)
|
|
(5,981
|
)
|
|
(1,797
|
)
|
|
(8,595
|
)
|
||||
Litigation settlement and reserves
(4)
|
—
|
|
|
(463
|
)
|
|
(1,029
|
)
|
|
(463
|
)
|
||||
(Loss) Income Before Income Taxes
|
$
|
(798
|
)
|
|
$
|
(4,729
|
)
|
|
$
|
3,297
|
|
|
$
|
(21,648
|
)
|
(1)
|
Represents non-recurring management transition and restructuring costs in connection with the recruitment of a new Chief Executive Officer and other executive positions.
|
(2)
|
Represents impairment charges on the write-down of our e-commerce platform based on the decision to move to a third-party developed and hosted solution and non-recurring costs incurred to complete the transition.
|
(3)
|
For 2018, represents primarily net losses on the refranchising of Company-owned stores primarily from the recording of contingent liabilities for committed marketing support expenditures in addition to impairments for Company-owned stores held for sale. For 2017, represents primarily non-cash charges associated with the impairment and disposal of store assets upon the decision to close stores.
|
(4)
|
Accruals made for litigation settlements.
|
|
October 1, 2018
|
|
January 1, 2018
|
||||
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
||||
Total Assets
|
|
|
|
||||
Franchise
|
$
|
119,366
|
|
|
$
|
121,179
|
|
Company Stores
|
38,838
|
|
|
53,226
|
|
||
Brand Funds
|
492
|
|
|
509
|
|
||
Other
(1)
|
87,131
|
|
|
87,201
|
|
||
Total
|
$
|
245,827
|
|
|
$
|
262,115
|
|
(1)
|
Other assets which are not allocated to the individual segments primarily include trade names and trademarks and taxes receivable.
|
Note 18 — Subsequent Events
|
2018 Highlights
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||
Franchise
|
(1.8
|
)%
|
|
(4.2
|
)%
|
|
(2.7)%
|
|
(4.2)%
|
Company Stores
|
(6.9
|
)%
|
|
(2.7
|
)%
|
|
(4.5)%
|
|
(6.6)%
|
Total
|
(2.1
|
)%
|
|
(4.1
|
)%
|
|
(2.9)%
|
|
(4.5)%
|
Key Operating Metrics
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
Store average weekly sales
|
$
|
9,660
|
|
|
$
|
9,593
|
|
|
$
|
10,225
|
|
|
$
|
10,235
|
|
Comparable store sales
|
(2.1
|
)%
|
|
(4.1
|
)%
|
|
(2.9
|
)%
|
|
(4.5
|
)%
|
||||
Comparable stores
|
1,442
|
|
|
1,483
|
|
|
1,442
|
|
|
1,483
|
|
||||
System-wide sales (in thousands)
|
$
|
184,163
|
|
|
$
|
192,903
|
|
|
$
|
594,062
|
|
|
$
|
623,049
|
|
System-wide stores
|
1,460
|
|
|
1,542
|
|
|
1,460
|
|
|
1,542
|
|
||||
Adjusted EBITDA (in thousands)
|
$
|
4,666
|
|
|
$
|
5,546
|
|
|
$
|
16,382
|
|
|
$
|
11,230
|
|
|
Franchise
|
|
|
|
|
|
|
|||||||
|
Domestic
|
|
International
|
|
Total Franchise
|
|
Company Stores
|
|
Total
|
|||||
Store count at January 1, 2018
|
1,338
|
|
|
40
|
|
|
1,378
|
|
|
145
|
|
|
1,523
|
|
Openings
|
7
|
|
|
1
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Closings
|
(67
|
)
|
|
(1
|
)
|
|
(68
|
)
|
|
(3
|
)
|
|
(71
|
)
|
Net transfers
(1)
|
29
|
|
|
—
|
|
|
29
|
|
|
(29
|
)
|
|
—
|
|
Store count at October 1, 2018
|
1,307
|
|
|
40
|
|
|
1,347
|
|
|
113
|
|
|
1,460
|
|
(1)
|
Net transfers are the number of franchised stores acquired by us, less the number of Company-owned stores refranchised. During this period, the Company refranchised 29 Company-owned stores and did not acquire any franchised stores.
|
▪
|
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.
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
Net (Loss) Income
|
$
|
(639
|
)
|
|
$
|
(2,678
|
)
|
|
$
|
2,327
|
|
|
$
|
(13,970
|
)
|
Depreciation and amortization
|
1,662
|
|
|
2,336
|
|
|
5,677
|
|
|
8,359
|
|
||||
(Benefit from) provision for income taxes
|
(159
|
)
|
|
(2,051
|
)
|
|
970
|
|
|
(7,678
|
)
|
||||
Interest expense, net
|
1,254
|
|
|
1,305
|
|
|
3,842
|
|
|
3,818
|
|
||||
EBITDA
|
$
|
2,118
|
|
|
$
|
(1,088
|
)
|
|
$
|
12,816
|
|
|
$
|
(9,471
|
)
|
CEO transition and restructuring costs
(1)
|
27
|
|
|
190
|
|
|
390
|
|
|
2,519
|
|
||||
E-commerce impairment and transition costs
(2)
|
—
|
|
|
—
|
|
|
350
|
|
|
9,124
|
|
||||
Store divestitures, closures, and impairments
(3)
|
2,521
|
|
|
5,981
|
|
|
1,797
|
|
|
8,595
|
|
||||
Litigation settlement and reserves
(4)
|
—
|
|
|
463
|
|
|
1,029
|
|
|
463
|
|
||||
Adjusted EBITDA
|
$
|
4,666
|
|
|
$
|
5,546
|
|
|
$
|
16,382
|
|
|
$
|
11,230
|
|
(1)
|
Represents non-recurring management transition and restructuring costs in connection with the recruitment of a new Chief Executive Officer and other executive positions.
|
(2)
|
Represents impairment charges on the write-down of our e-commerce platform based on the decision to move to a third-party developed and hosted solution and non-recurring costs incurred to complete the transition.
|
(3)
|
For 2018, represents primarily net losses on the refranchising of Company-owned stores primarily from the recording of contingent liabilities for committed marketing support expenditures in addition to impairments for Company-owned stores held for sale. For 2017, represents primarily non-cash charges associated with the impairment and disposal of store assets upon the decision to close stores.
|
(4)
|
Accruals made for litigation settlements.
|
Our Segments
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
Revenues
|
|
|
|
|
|
|
|
||||||||
Franchise segment
|
$
|
10,361
|
|
|
$
|
9,610
|
|
|
$
|
32,886
|
|
|
$
|
31,432
|
|
Brand Funds segment
|
6,552
|
|
|
7,000
|
|
|
17,673
|
|
|
22,931
|
|
||||
Intersegment eliminations
|
(1,041
|
)
|
|
(439
|
)
|
|
(3,683
|
)
|
|
(1,402
|
)
|
||||
Franchise related
|
15,872
|
|
|
16,171
|
|
|
46,876
|
|
|
52,961
|
|
||||
Company Stores segment
|
12,958
|
|
|
17,520
|
|
|
47,519
|
|
|
57,010
|
|
||||
Total
|
$
|
28,830
|
|
|
$
|
33,691
|
|
|
$
|
94,395
|
|
|
$
|
109,971
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
Segment Adjusted EBITDA
|
|
|
|
|
|
|
|
||||||||
Franchise
|
$
|
5,617
|
|
|
$
|
4,778
|
|
|
$
|
18,664
|
|
|
$
|
19,208
|
|
Company Stores
|
(462
|
)
|
|
312
|
|
|
529
|
|
|
1,637
|
|
||||
Brand Funds
|
461
|
|
|
1,718
|
|
|
297
|
|
|
(3,814
|
)
|
||||
Total reportable segments adjusted EBITDA
|
5,616
|
|
|
6,808
|
|
|
19,490
|
|
|
17,031
|
|
||||
Corporate and unallocated
|
(950
|
)
|
|
(1,262
|
)
|
|
(3,108
|
)
|
|
(5,801
|
)
|
||||
Adjusted EBITDA
|
4,666
|
|
|
5,546
|
|
|
16,382
|
|
|
11,230
|
|
||||
Depreciation and amortization
|
(1,662
|
)
|
|
(2,336
|
)
|
|
(5,677
|
)
|
|
(8,359
|
)
|
||||
Interest expense, net
|
(1,254
|
)
|
|
(1,305
|
)
|
|
(3,842
|
)
|
|
(3,818
|
)
|
||||
CEO transition and restructuring costs
(1)
|
(27
|
)
|
|
(190
|
)
|
|
(390
|
)
|
|
(2,519
|
)
|
||||
E-commerce impairment and transition costs
(2)
|
—
|
|
|
—
|
|
|
(350
|
)
|
|
(9,124
|
)
|
||||
Store divestitures, closures, and impairments
(3)
|
(2,521
|
)
|
|
(5,981
|
)
|
|
(1,797
|
)
|
|
(8,595
|
)
|
||||
Litigation settlement and reserves
(4)
|
—
|
|
|
(463
|
)
|
|
(1,029
|
)
|
|
(463
|
)
|
||||
(Loss) Income Before Income Taxes
|
$
|
(798
|
)
|
|
$
|
(4,729
|
)
|
|
$
|
3,297
|
|
|
$
|
(21,648
|
)
|
(1)
|
Represents non-recurring management transition and restructuring costs in connection with the recruitment of a new Chief Executive Officer and other executive positions.
|
(2)
|
Represents impairment charges on the write-down of our e-commerce platform based on the decision to move to a third-party developed and hosted solution and non-recurring costs incurred to complete the transition.
|
(3)
|
For 2018, represents primarily net losses on the refranchising of Company-owned stores primarily from the recording of contingent liabilities for committed marketing support expenditures in addition to impairments for Company-owned stores held for sale. For 2017, represents primarily non-cash charges associated with the impairment and disposal of store assets upon the decision to close stores.
|
(4)
|
Accruals made for litigation settlements.
|
Results of Operations
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||||||||||||||
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||||||||||||||
(dollars in thousands)
|
$
|
|
Total % of
Revenues |
|
$
(1)
|
|
Total % of
Revenues |
|
$
|
|
Total % of
Revenues |
|
$
(1)
|
|
Total % of
Revenues |
||||||||||||
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Franchise related
|
$
|
15,872
|
|
|
55.1
|
%
|
|
$
|
16,171
|
|
|
48.0
|
%
|
|
$
|
46,876
|
|
|
49.7
|
%
|
|
$
|
52,961
|
|
|
48.2
|
%
|
Company-owned stores
|
12,958
|
|
|
44.9
|
%
|
|
17,520
|
|
|
52.0
|
%
|
|
47,519
|
|
|
50.3
|
%
|
|
57,010
|
|
|
51.8
|
%
|
||||
Total revenues
|
28,830
|
|
|
100.0
|
%
|
|
33,691
|
|
|
100.0
|
%
|
|
94,395
|
|
|
100.0
|
%
|
|
109,971
|
|
|
100.0
|
%
|
||||
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Store operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Cost of food and packaging
(2)
|
4,216
|
|
|
14.6
|
%
|
|
5,858
|
|
|
17.3
|
%
|
|
15,657
|
|
|
16.5
|
%
|
|
19,376
|
|
|
17.7
|
%
|
||||
Compensation and benefits
(2)
|
4,341
|
|
|
15.1
|
%
|
|
5,478
|
|
|
16.3
|
%
|
|
15,183
|
|
|
16.1
|
%
|
|
17,735
|
|
|
16.1
|
%
|
||||
Advertising
(2)
|
1,147
|
|
|
4.0
|
%
|
|
1,604
|
|
|
4.8
|
%
|
|
3,700
|
|
|
3.9
|
%
|
|
5,055
|
|
|
4.6
|
%
|
||||
Other store operating costs
(2)
|
2,720
|
|
|
9.4
|
%
|
|
3,012
|
|
|
8.9
|
%
|
|
8,925
|
|
|
9.5
|
%
|
|
10,255
|
|
|
9.3
|
%
|
||||
Selling, general, and administrative
|
11,710
|
|
|
40.6
|
%
|
|
12,517
|
|
|
37.2
|
%
|
|
36,146
|
|
|
38.4
|
%
|
|
49,042
|
|
|
44.6
|
%
|
||||
Depreciation and amortization
|
1,662
|
|
|
5.8
|
%
|
|
2,336
|
|
|
6.9
|
%
|
|
5,677
|
|
|
6.0
|
%
|
|
8,359
|
|
|
7.6
|
%
|
||||
Loss on disposal or impairment of property and equipment
|
2,521
|
|
|
8.7
|
%
|
|
6,253
|
|
|
18.6
|
%
|
|
1,808
|
|
|
1.9
|
%
|
|
17,830
|
|
|
16.2
|
%
|
||||
Total costs and expenses
|
28,317
|
|
|
98.2
|
%
|
|
37,058
|
|
|
110.0
|
%
|
|
87,096
|
|
|
92.3
|
%
|
|
127,652
|
|
|
116.1
|
%
|
||||
Operating Income (Loss)
|
513
|
|
|
1.8
|
%
|
|
(3,367
|
)
|
|
(10.0
|
)%
|
|
7,299
|
|
|
7.7
|
%
|
|
(17,681
|
)
|
|
(16.1
|
)%
|
||||
Interest expense, net
|
1,254
|
|
|
4.4
|
%
|
|
1,305
|
|
|
3.8
|
%
|
|
3,842
|
|
|
4.0
|
%
|
|
3,818
|
|
|
3.5
|
%
|
||||
Other expense, net
|
57
|
|
|
0.2
|
%
|
|
57
|
|
|
0.2
|
%
|
|
160
|
|
|
0.2
|
%
|
|
149
|
|
|
0.1
|
%
|
||||
(Loss) Income Before Income Taxes
|
(798
|
)
|
|
(2.8
|
)%
|
|
(4,729
|
)
|
|
(14.0
|
)%
|
|
3,297
|
|
|
3.5
|
%
|
|
(21,648
|
)
|
|
(19.7
|
)%
|
||||
(Benefit from) provision for income taxes
|
(159
|
)
|
|
(0.6
|
)%
|
|
(2,051
|
)
|
|
(6.1
|
)%
|
|
970
|
|
|
1.0
|
%
|
|
(7,678
|
)
|
|
(7.0
|
)%
|
||||
Net (Loss) Income
|
$
|
(639
|
)
|
|
(2.2
|
)%
|
|
$
|
(2,678
|
)
|
|
(7.9
|
)%
|
|
$
|
2,327
|
|
|
2.5
|
%
|
|
$
|
(13,970
|
)
|
|
(12.7
|
)%
|
(1)
|
Prior year numbers have been adjusted to reflect the impacts of adopting
ASU 2014-09
(the new revenue accounting standard) and
ASU 2016-02
(the new lease accounting standard). See Recently Adopted Accounting Standards under
Note 1 — Description of Business and Basis of Presentation
for more information on these two standards and a reconciliation of results as previously reported to adjusted results as presented above.
|
(2)
|
Please see the table presented under
Costs and Expenses
below, which presents Company-owned store expenses as a percentage of Company-owned store sales for the
three and nine
months ended
October 1, 2018
, and
October 2, 2017
.
|
•
|
Cost of food and packaging.
Food and packaging costs declined during the
three and nine
months ended
October 1, 2018
compared to the
three and nine
months ended
October 2, 2017
primarily due to decreases in commodity prices and the closing of six stores since
October 2, 2017
that had lower sales and higher food costs as a percentage of store sales than the system average.
|
•
|
Compensation and benefits.
Compensation and benefits increased during the
three and nine
months ended
October 1, 2018
compared to the
three and nine
months ended
October 2, 2017
primarily due to minimum wage increases in markets where we have Company-owned stores.
|
•
|
Advertising costs.
Advertising costs decreased in the
three and nine
months ended
October 1, 2018
compared to the
three and nine
months ended
October 2, 2017
primarily due to reduced levels of spending on advertising during the
third
quarter ended
October 1, 2018
.
|
▪
|
Occupancy and other store operating costs.
The increase in occupancy and other store operating costs as a percentage of Company-owned store sales during the
three and nine
months ended
October 1, 2018
, compared to the
three and nine
months ended
October 2, 2017
was primarily a result of gains on the settlement of lease liabilities recorded during the three months ended
October 2, 2017
, partially offset by increased repairs and maintenance expenditures during the three months ended
October 1, 2018
.
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
||||||||
Opening BMF deficit
|
$
|
(5,877
|
)
|
|
$
|
(6,604
|
)
|
|
$
|
(5,461
|
)
|
|
$
|
(1,071
|
)
|
Net activity during the period
|
461
|
|
|
1,718
|
|
|
45
|
|
|
(3,815
|
)
|
||||
Ending BMF deficit
|
$
|
(5,416
|
)
|
|
$
|
(4,886
|
)
|
|
$
|
(5,416
|
)
|
|
$
|
(4,886
|
)
|
Liquidity and Capital Resources
|
|
Nine Months Ended
|
||||||
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
||||
Cash flows from operating activities
|
$
|
5,019
|
|
|
$
|
8,224
|
|
Cash flows from investing activities
|
7,186
|
|
|
(709
|
)
|
||
Cash flows from financing activities
|
(11,020
|
)
|
|
(8,685
|
)
|
||
Total cash flows
|
$
|
1,185
|
|
|
$
|
(1,170
|
)
|
Critical Accounting Policies
|
Evaluation of Disclosure Controls and Procedures
|
Changes in Internal Control over Financial Reporting
|
|
Total Number of Shares Purchased
|
|
Average Price Paid per Share
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
|
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
|
||||
July 3 to July 31, 2018
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
N/A
|
August 1 to August 31, 2018
|
—
|
|
|
—
|
|
|
—
|
|
|
N/A
|
|
September 1 to October 1, 2018
|
754
|
|
(1)
|
0.19
|
|
|
—
|
|
|
N/A
|
|
Total
|
754
|
|
|
$
|
0.19
|
|
|
—
|
|
|
N/A
|
(1)
|
The Company repurchased unvested restricted shares from a former employee whose employment with the Company had terminated. The unvested shares were repurchased by the Company at the historical price paid by the former employee for the unvested shares.
|
Exhibit Number
|
Description of Exhibits
|
Form
|
File Number
|
Exhibit
|
Filing 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.
|
|||
|
|
|
|
By:
|
|
/s/ Nik Rupp
|
|
|
|
Name:
|
Nik Rupp
|
|
|
Title:
|
Chief Financial Officer
|
Date of Payment
|
Amount of Term
Loan Payment
|
March 31, 2015
|
$700,000.00
|
June 29, 2015
|
$700,000.00
|
September 28, 2015
|
$700,000.00
|
December 28, 2015
|
$700,000.00
|
|
|
March 28, 2016
|
$700,000.00
|
June 27, 2016
|
$700,000.00
|
September 26, 2016
|
$1,400,000.00
|
January 2, 2017
|
$2,100,000.00
|
Date of Payment
|
Amount of Term
Loan Payment
|
|
|
April 3, 2017
|
$2,100,000.00
|
July 3, 2017
|
$2,100,000.00
|
October 2, 2017
|
$2,100,000.00
|
January 1, 2018
|
$2,100,000.00
|
|
|
April 2, 2018
|
$2,100,000.00
|
July 2, 2018
|
$2,100,000.00
|
Second Amendment Effective Date
|
$191,666.67
|
December 31, 2018
|
$2,100,000.00
|
|
|
April 1, 2019
|
$2,100,000.00
|
July 1, 2019
|
$2,100,000.00
|
September 30, 2019
|
$2,100,000.00
|
December 30, 2019
|
$2,100,000.00
|
|
|
March 30, 2020
|
$2,100,000.00
|
June 29, 2020
|
$2,100,000.00
|
August 28, 2020
|
$66,908,333.33
|
Date
|
Maximum Leverage Ratio
|
September 29, 2014
|
5.75
|
December 29, 2014
|
5.75
|
March 30, 2015
|
5.75
|
Date
|
Maximum Leverage Ratio
|
June 29, 2015
|
5.75
|
September 28, 2015
|
5.50
|
December 28, 2015
|
5.25
|
March 28, 2016
|
5.25
|
June 27, 2016
|
5.25
|
September 26, 2016
|
5.00
|
January 2, 2017
|
5.25
|
April 3, 2017
|
5.25
|
July 3, 2017
|
5.25
|
October 2, 2017
|
5.25
|
January 1, 2018
|
5.25
|
April 2, 2018
|
5.00
|
July 2, 2018
|
5.00
|
October 1, 2018
|
4.75
|
December 31, 2018
|
4.75
|
April 1, 2019
|
4.75
|
July 1, 2019
|
4.75
|
September 30, 2019 and the last day of each Fiscal Quarter thereafter
|
4.50
|
Leverage Ratio
|
LIBOR Margin
|
Base Rate Margin
|
Greater than 4.00x
|
4.00%
|
3.00%
|
Equal to or Less than 4.00x but greater than 3.00x
|
3.75%
|
2.75%
|
Equal to or Less than 3.00x but greater than 2.00x
|
3.50%
|
2.50%
|
Equal to or Less than 2.00x
|
3.00%
|
2.00%
|
Lender
|
Revolving Loan Commitment
|
|
|
Wells Fargo Bank, National Association
|
$1,547,202.76
|
Citizens Bank, N.A.
|
$996,503.62
|
Regions Bank
|
$786,713.25
|
Midcap Funding XVI Trust
|
$3,750,000.00
|
Banner Bank
|
$419,580.37
|
|
|
Total:
|
$7,500,000
|
1.
|
I have reviewed this quarterly report on Form 10-Q of Papa Murphy's Holdings, Inc.;
|
2.
|
Based on my knowledge, this quarterly 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 quarterly report on Form 10-Q of Papa Murphy's Holdings, Inc.;
|
2.
|
Based on my knowledge, this quarterly 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/ Nik Rupp
|
|
Nik Rupp
|
|
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/ Nik Rupp
|
|
Nik Rupp
|
|
Chief Financial Officer
|