Delaware
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27-2349094
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(State or Other Jurisdiction of Incorporation or Organization)
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(IRS Employer Identification No.)
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8000 NE Parkway Drive, Suite 350, Vancouver, WA
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98662
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(Address of principal executive offices)
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(Zip Code)
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(360) 260-7272
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(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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||
Common Stock, $0.01 par value
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NASDAQ Global Select Market
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(Title of Each Class)
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(Name of Each Exchange on Which Registered)
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Securities registered pursuant to Section 12(g) of the Act:
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NONE
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [X]
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Smaller reporting company [X]
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Emerging growth company [X]
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PART I
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Item 1.
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Business
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Item 1A.
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Risk Factors
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Item 1B.
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Unresolved Staff Comments
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Item 2.
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Properties
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Item 3.
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Legal Proceedings
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Item 4.
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Mine Safety Disclosures
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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Item 6.
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Selected Financial Data
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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Item 8.
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Financial Statements and Supplementary Data
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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Item 9A.
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Controls and Procedures
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Item 9B.
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Other Information
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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Item 11.
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Executive Compensation
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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Item 14.
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Principal Accountant Fees and Services
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules
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SIGNATURES
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General
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Our Concept
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•
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CREATE their fresh, personally customized pizza with high quality ingredients;
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•
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TAKE their fresh pizza home; and
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•
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BAKE their pizza fresh in their ovens, at their convenience, for a home-cooked meal served hot.
|
•
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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.
|
•
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Great Value: We offer a high quality pizza at a value price point.
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•
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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.
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•
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We make our dough fresh in each store daily, starting with flour, water, and yeast;
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•
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We grate our cheese daily from blocks of 100% whole-milk mozzarella cheese;
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•
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We slice fresh, never-frozen vegetables by hand;
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•
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We feature specialty, premium ingredients;
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•
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We use only high quality meats with no added fillers; and
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•
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We provide a convenient, easy, meal-time solution.
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▪
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Signature pizzas: classic combinations with broad appeal;
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▪
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Gourmet Delite pizzas: our artisan thin crust with premium, specialty toppings;
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▪
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Stuffed pizzas: two-layer, four-pound pizzas with meats and vegetables stuffed between two layers of dough;
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▪
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Fresh Pan pizzas: signature recipes with a thick, buttery crust; and
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▪
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“C.Y.O.” or Create Your Own pizzas: customer choice of crust, sauce, and any combination of our cheese, meat, and vegetable toppings.
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•
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Focus on creating fresh pizzas for carry out, reducing operational complexity for franchise owners and their employees;
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•
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Maintain shorter operating hours (typically 11:00 a.m. to 9:00 p.m.) that are attractive to franchise owners and their employees;
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•
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Require fewer employees each shift compared to other restaurant concepts, resulting in lower labor costs;
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•
|
Accept
electronic benefit transfer (“
EBT
”) payment systems
(food stamps);
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•
|
Benefit from local cooperative marketing and consistent creative marketing assets for use in a variety of media channels;
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•
|
Utilize a centrally-managed, locally customizable, integrated e-commerce platform; and
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•
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Receive strong franchisor support through training, operating standards, supply-chain management, and development assistance.
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Our Strategy
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•
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E-commerce and Online Ordering.
We continue to improve our e-commerce platform to provide a consistent and convenient online ordering experience for consumers. To remain relevant, we have designed 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 enables 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.
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•
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Expansion of Delivery.
Online ordering addresses only part of the convenience cycle. In 2018, we continued expansion of delivery through the use of various third-party delivery options as they became available in the markets we serve. Our research indicates a strong demand for delivery from our customers, with more than half indicating they would order more often if delivery was available. We have a unique opportunity with delivery because our pizzas are not baked and customers receive the same high quality fresh food when delivered as when they pick up their order in-store.
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•
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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.
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•
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Loyalty Program.
We are in the early stages of developing a loyalty program on a digital platform intended to increase the frequency of purchases.
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•
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Improved Messaging.
To better communicate the brand’s benefits and differentiation, we have refined our consumer messaging to reach a broader audience across all communication points. Emphasis will be placed on empowering consumers and providing them with control over ingredients, quality, and timing.
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•
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Targeted Communication.
In order to increase the effectiveness of our messaging, we have focused on reaching customers through targeted communications and offers.
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•
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Franchisee Relations.
Developing and maintaining strong relations with franchise owners are crucial components to our business strategy. With
1,400
stores across the United States and
460
domestic franchise owners as of
December 31, 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 us 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.
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•
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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.
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•
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Spending Optimization.
We continue to optimize and prioritize our spending to deliver improved store-level and support center 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.
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•
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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.
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Our Industry and Competition
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Suppliers and Distribution
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Intellectual Property and Trademarks
|
Management Information/Technology Systems
|
Franchising Overview
|
Employees
|
Government Regulation
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Risks Relating to Our Business and Industry
|
▪
|
declining economic conditions, 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;
|
▪
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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;
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▪
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changes in consumer tastes and preferences;
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▪
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demographic trends;
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▪
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customers’ budgeting constraints;
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▪
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customers’ willingness to accept menu price increases;
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▪
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adverse weather conditions;
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▪
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our reputation and consumer perception of our offerings in terms of quality, price, value, ambiance, and service; and
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▪
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customers’ experiences in our stores.
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▪
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food costs, particularly for mozzarella cheese and other raw materials, many of which we do not or cannot effectively hedge;
|
▪
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labor costs, including wages, which are affected by minimum wage requirements, workers’ compensation, health care, and other benefits expenses;
|
▪
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rent expenses and construction, remodeling, maintenance, and other costs under leases for our new and existing stores;
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▪
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compliance costs as a result of changes in legal, regulatory, or industry standards;
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▪
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energy, water, and other utility costs;
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▪
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insurance costs;
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▪
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information technology and other logistics costs; and
|
▪
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litigation expenses.
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▪
|
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;
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▪
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increases our vulnerability to adverse general economic or industry conditions;
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▪
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limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;
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▪
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makes us more vulnerable to increases in interest rates, since borrowings under our senior secured credit facilities are made at variable rates;
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▪
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limits our ability to obtain additional financing in the future for working capital or other purposes; and
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▪
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places us at a competitive disadvantage compared to our competitors that have less indebtedness.
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▪
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pay dividends on, redeem or repurchase our stock, or make other distributions;
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▪
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incur or guarantee additional indebtedness;
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▪
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sell stock in our subsidiaries;
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▪
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create or incur liens;
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▪
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make acquisitions or investments;
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▪
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transfer or sell certain assets or merge or consolidate with or into other companies;
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▪
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make certain payments or prepayments of indebtedness subordinated to our obligations under our new senior secured credit facilities; and
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▪
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enter into certain transactions with our affiliates.
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•
|
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 adverse effect on our reputation, brand, ability to attract prospective franchise owners, business, financial condition, or results of operations.
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•
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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.
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•
|
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 adverse effect on a franchise owner’s ability to satisfy obligations under the franchise agreement, including the ability to make royalty payments and perform
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•
|
Product liability exposure.
We require franchise owners to maintain general liability insurance coverage to protect against 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.
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•
|
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, 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.
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•
|
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.
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•
|
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.
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•
|
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 bankruptcy trustee may reject its franchise agreements pursuant to Section 365 under the United States Bankruptcy Code, in which case there would be no further royalty payments from such franchise owner.
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•
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recessionary or expansive trends in international markets;
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•
|
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;
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•
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legal and regulatory changes, and the burdens and costs of our compliance with a variety of foreign laws;
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•
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changes in inflation rates;
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•
|
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, including as a result of differences in foreign laws concerning proprietary rights;
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•
|
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;
|
▪
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environmental laws;
|
▪
|
compliance with securities laws and NASDAQ listed company rules;
|
▪
|
work 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
.
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Domestic Franchised
Stores
|
|
Company-
Owned
Stores
|
|
Total
|
|||
Alabama
|
33
|
|
|
—
|
|
|
33
|
|
Alaska
|
12
|
|
|
—
|
|
|
12
|
|
Arizona
|
54
|
|
|
—
|
|
|
54
|
|
Arkansas
|
7
|
|
|
3
|
|
|
10
|
|
California
|
159
|
|
|
—
|
|
|
159
|
|
Colorado
|
86
|
|
|
—
|
|
|
86
|
|
Florida
|
10
|
|
|
9
|
|
|
19
|
|
Georgia
|
5
|
|
|
—
|
|
|
5
|
|
Hawaii
|
2
|
|
|
—
|
|
|
2
|
|
Idaho
|
26
|
|
|
9
|
|
|
35
|
|
Illinois
|
23
|
|
|
—
|
|
|
23
|
|
Indiana
|
29
|
|
|
—
|
|
|
29
|
|
Iowa
|
33
|
|
|
—
|
|
|
33
|
|
Kansas
|
33
|
|
|
—
|
|
|
33
|
|
Kentucky
|
13
|
|
|
—
|
|
|
13
|
|
Louisiana
|
2
|
|
|
—
|
|
|
2
|
|
Michigan
|
11
|
|
|
10
|
|
|
21
|
|
Minnesota
|
72
|
|
|
25
|
|
|
97
|
|
Mississippi
|
1
|
|
|
—
|
|
|
1
|
|
Missouri
|
47
|
|
|
3
|
|
|
50
|
|
Montana
|
14
|
|
|
—
|
|
|
14
|
|
Nebraska
|
13
|
|
|
—
|
|
|
13
|
|
Nevada
|
25
|
|
|
—
|
|
|
25
|
|
New Mexico
|
13
|
|
|
6
|
|
|
19
|
|
North Carolina
|
20
|
|
|
—
|
|
|
20
|
|
North Dakota
|
13
|
|
|
—
|
|
|
13
|
|
Oklahoma
|
19
|
|
|
—
|
|
|
19
|
|
Oregon
|
98
|
|
|
7
|
|
|
105
|
|
South Carolina
|
1
|
|
|
—
|
|
|
1
|
|
South Dakota
|
14
|
|
|
—
|
|
|
14
|
|
Texas
|
79
|
|
|
—
|
|
|
79
|
|
Tennessee
|
25
|
|
|
16
|
|
|
41
|
|
Utah
|
60
|
|
|
—
|
|
|
60
|
|
Virginia
|
6
|
|
|
—
|
|
|
6
|
|
Washington
|
135
|
|
|
16
|
|
|
151
|
|
Wisconsin
|
91
|
|
|
2
|
|
|
93
|
|
Wyoming
|
10
|
|
|
—
|
|
|
10
|
|
Total
|
1,294
|
|
|
106
|
|
|
1,400
|
|
|
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
|
||||
October 2 to October 31, 2018
|
3,772
|
|
(1)
|
$
|
4.79
|
|
|
—
|
|
|
N/A
|
November 1 to November 30, 2018
|
—
|
|
|
—
|
|
|
—
|
|
|
N/A
|
|
December 1 to December 31, 2018
|
5,657
|
|
(1)
|
1.87
|
|
|
—
|
|
|
N/A
|
|
Total
|
9,429
|
|
|
$
|
3.04
|
|
|
—
|
|
|
N/A
|
(1)
|
The Company repurchased unvested restricted shares from former employees 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.
|
Dividends
|
Overview
|
2018 Review
|
|
Fiscal Year
|
||||
|
2018
|
|
2017
|
||
Franchise
|
(2.3
|
)%
|
|
(3.8
|
)%
|
Company Stores
|
(4.8
|
)%
|
|
(5.5
|
)%
|
Total
|
(2.5
|
)%
|
|
(4.0
|
)%
|
Key Operating Metrics
|
|
2018
|
|
2017
|
||||
Store average weekly sales (AWS)
|
$
|
10,518
|
|
|
$
|
10,483
|
|
Comparable store sales
|
(2.5
|
)%
|
|
(4.0
|
)%
|
||
Comparable stores
|
1,419
|
|
|
1,478
|
|
||
System-wide sales (in thousands)
|
$
|
808,727
|
|
|
$
|
846,864
|
|
System-wide stores
|
1,437
|
|
|
1,523
|
|
||
Adjusted EBITDA (in thousands)
|
$
|
22,306
|
|
|
$
|
20,500
|
|
|
Franchise
|
|
|
|
|
|
|
|||||||
|
Domestic
|
|
International
|
|
Total Franchise
|
|
Company Stores
|
|
Total
|
|||||
Store count at 1/2/2017
|
1,369
|
|
|
40
|
|
|
1,409
|
|
|
168
|
|
|
1,577
|
|
Openings
|
31
|
|
|
4
|
|
|
35
|
|
|
—
|
|
|
35
|
|
Closings
|
(69
|
)
|
|
(4
|
)
|
|
(73
|
)
|
|
(16
|
)
|
|
(89
|
)
|
Net transfers
|
7
|
|
|
—
|
|
|
7
|
|
|
(7
|
)
|
|
—
|
|
Store count at 1/1/2018
|
1,338
|
|
|
40
|
|
|
1,378
|
|
|
145
|
|
|
1,523
|
|
Openings
|
10
|
|
|
1
|
|
|
11
|
|
|
—
|
|
|
11
|
|
Closings
|
(83
|
)
|
|
(4
|
)
|
|
(87
|
)
|
|
(10
|
)
|
|
(97
|
)
|
Net transfers
|
29
|
|
|
—
|
|
|
29
|
|
|
(29
|
)
|
|
—
|
|
Store count at December 31, 2018
|
1,294
|
|
|
37
|
|
|
1,331
|
|
|
106
|
|
|
1,437
|
|
▪
|
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)
|
2018
|
|
2017
|
||||
Net Income (Loss)
|
$
|
4,324
|
|
|
$
|
(1,818
|
)
|
Depreciation and amortization
|
7,241
|
|
|
10,452
|
|
||
Income tax provision (benefit)
|
1,483
|
|
|
(18,509
|
)
|
||
Interest expense, net
|
5,212
|
|
|
5,078
|
|
||
EBITDA
|
18,260
|
|
|
(4,797
|
)
|
||
CEO transition and restructuring
(1)
|
595
|
|
|
2,614
|
|
||
E-commerce impairment
(2)
|
350
|
|
|
9,085
|
|
||
Store closures and impairments
(3)
|
1,918
|
|
|
9,145
|
|
||
Litigation settlements
(4)
|
908
|
|
|
4,453
|
|
||
Strategic alternatives
(5)
|
237
|
|
|
—
|
|
||
Debt refinancing
(6)
|
38
|
|
|
—
|
|
||
Adjusted EBITDA
|
$
|
22,306
|
|
|
$
|
20,500
|
|
(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 toward litigation reserves.
|
(5)
|
Reflects costs associated with the Company's exploration of strategic alternatives.
|
(6)
|
Reflects costs associated with amendments to the Company's credit facilities.
|
Our Segments
|
|
Fiscal Year
|
||||||
(in thousands)
|
2018
|
|
2017
|
||||
Revenues
|
|
|
|
||||
Franchise segment
|
$
|
44,864
|
|
|
$
|
42,707
|
|
Brand Funds segment
|
24,636
|
|
|
30,867
|
|
||
Intersegment eliminations
|
(4,847
|
)
|
|
(1,934
|
)
|
||
Franchise related
|
64,653
|
|
|
71,640
|
|
||
Company Stores segment
|
61,776
|
|
|
76,868
|
|
||
Total
|
$
|
126,429
|
|
|
$
|
148,508
|
|
|
Fiscal Year
|
||||||
(in thousands)
|
2018
|
|
2017
|
||||
Segment Adjusted EBITDA
|
|
|
|
||||
Franchise
|
$
|
25,673
|
|
|
$
|
25,682
|
|
Company Stores
|
884
|
|
|
2,685
|
|
||
Brand Funds
|
169
|
|
|
(450
|
)
|
||
Total reportable segments adjusted EBITDA
|
26,726
|
|
|
27,917
|
|
||
Corporate and unallocated
|
(4,420
|
)
|
|
(7,417
|
)
|
||
Adjusted EBITDA
|
22,306
|
|
|
20,500
|
|
||
Depreciation and amortization
|
(7,241
|
)
|
|
(10,452
|
)
|
||
Interest expense, net
|
(5,212
|
)
|
|
(5,078
|
)
|
||
CEO transition and restructuring
(1)
|
(595
|
)
|
|
(2,614
|
)
|
||
E-commerce impairment
(2)
|
(350
|
)
|
|
(9,085
|
)
|
||
Store closures and impairments
(3)
|
(1,918
|
)
|
|
(9,145
|
)
|
||
Litigation settlements
(4)
|
(908
|
)
|
|
(4,453
|
)
|
||
Strategic alternatives
(5)
|
(237
|
)
|
|
—
|
|
||
Debt refinancing
(6)
|
(38
|
)
|
|
—
|
|
||
Income (Loss) Before Income Taxes
|
$
|
5,807
|
|
|
$
|
(20,327
|
)
|
(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 toward litigation reserves.
|
(5)
|
Reflects costs associated with the Company's exploration of strategic alternatives.
|
(6)
|
Reflects costs associated with amendments to the Company's credit facilities.
|
|
Fiscal Year
|
||||||
(in thousands)
|
2018
|
|
2017
|
||||
Depreciation and amortization
|
|
|
|
||||
Franchise
|
$
|
4,644
|
|
|
$
|
5,921
|
|
Company Stores
|
2,597
|
|
|
4,531
|
|
||
Total
|
$
|
7,241
|
|
|
$
|
10,452
|
|
Key Financial Definitions
|
Results of Operations
|
|
Fiscal Year
|
||||||||||||
|
2018
|
|
2017
|
||||||||||
(dollars in thousands)
|
$
|
|
Total % of
Revenues |
|
$
|
|
Total % of
Revenues |
||||||
Revenues
|
|
|
|
|
|
|
|
||||||
Franchise
|
$
|
64,653
|
|
|
51.1
|
%
|
|
$
|
71,640
|
|
|
48.2
|
%
|
Company-owned store sales
|
61,776
|
|
|
48.9
|
%
|
|
76,868
|
|
|
51.8
|
%
|
||
Total revenues
|
126,429
|
|
|
100.0
|
%
|
|
148,508
|
|
|
100.0
|
%
|
||
Costs and Expenses
|
|
|
|
|
|
|
|
||||||
Store operating costs:
|
|
|
|
|
|
|
|
||||||
Cost of food and packaging
(1)
|
20,415
|
|
|
16.3
|
%
|
|
25,958
|
|
|
17.4
|
%
|
||
Compensation and benefits
(1)
|
19,601
|
|
|
15.5
|
%
|
|
23,603
|
|
|
15.9
|
%
|
||
Advertising
(1)
|
4,794
|
|
|
3.8
|
%
|
|
6,684
|
|
|
4.5
|
%
|
||
Occupancy
(1)
|
11,441
|
|
|
9.0
|
%
|
|
13,931
|
|
|
9.4
|
%
|
||
Selling, general, and administrative
|
49,731
|
|
|
39.3
|
%
|
|
64,565
|
|
|
43.5
|
%
|
||
Depreciation and amortization
|
7,241
|
|
|
5.7
|
%
|
|
10,452
|
|
|
7.0
|
%
|
||
Loss on disposal or impairment of property and equipment
|
1,937
|
|
|
1.5
|
%
|
|
18,360
|
|
|
12.4
|
%
|
||
Total costs and expenses
|
115,160
|
|
|
91.1
|
%
|
|
163,553
|
|
|
110.1
|
%
|
||
Operating Income (Loss)
|
11,269
|
|
|
8.9
|
%
|
|
(15,045
|
)
|
|
(10.1
|
)%
|
||
Interest expense, net
|
5,212
|
|
|
4.1
|
%
|
|
5,078
|
|
|
3.5
|
%
|
||
Loss on early retirement of debt
|
38
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
||
Other expense, net
|
212
|
|
|
0.2
|
%
|
|
204
|
|
|
0.1
|
%
|
||
Income (Loss) Before Income Taxes
|
5,807
|
|
|
4.6
|
%
|
|
(20,327
|
)
|
|
(13.7
|
)%
|
||
Provision for (benefit from) income taxes
|
1,483
|
|
|
1.2
|
%
|
|
(18,509
|
)
|
|
(12.5
|
)%
|
||
Net Income (Loss)
|
$
|
4,324
|
|
|
3.4
|
%
|
|
$
|
(1,818
|
)
|
|
(1.2
|
)%
|
(dollars in thousands)
|
2018
|
|
Change
|
|
2017
|
|||||
Franchise
|
$
|
64,653
|
|
|
(9.8
|
)%
|
|
$
|
71,640
|
|
Percentage of total revenues
|
51.1
|
%
|
|
|
|
48.2
|
%
|
(dollars in thousands)
|
2018
|
|
Change
|
|
2017
|
|||||
Company-owned store sales
|
$
|
61,776
|
|
|
(19.6
|
)%
|
|
$
|
76,868
|
|
Percentage of total revenues
|
48.9
|
%
|
|
|
|
51.8
|
%
|
(dollars in thousands)
|
2018
|
|
Change
|
|
2017
|
|||||
Store operating costs
|
$
|
56,251
|
|
|
(19.8
|
)%
|
|
$
|
70,176
|
|
Percentage of total revenues
|
44.5
|
%
|
|
|
|
47.3
|
%
|
•
|
Cost of food and packaging.
The decrease in costs of food and packaging as a percentage of Company-owned store sales was primarily due to decreases in commodity prices during 2018.
|
•
|
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.
|
•
|
Occupancy and other store operating costs.
The increase in occupancy and other store operating costs as a percentage of Company-owned store sales was primarily a result of gains on the settlement of lease liabilities recorded in 2017 and increased repairs and maintenance expenditures in 2018.
|
▪
|
Advertising.
Advertising costs as a percentage of Company-owned store sales decreased in 2018 primarily due to reduced levels of spending on printed advertising compared to 2017.
|
(dollars in thousands)
|
2018
|
|
Change
|
|
2017
|
|||||
Selling, general, and administrative
|
$
|
49,731
|
|
|
(23.0
|
)%
|
|
$
|
64,565
|
|
Percentage of total revenues
|
39.3
|
%
|
|
|
|
43.5
|
%
|
(dollars in thousands)
|
2018
|
|
Change
|
|
2017
|
|||||
Depreciation and amortization
|
$
|
7,241
|
|
|
(30.7
|
)%
|
|
$
|
10,452
|
|
Percentage of total revenues
|
5.7
|
%
|
|
|
|
7.0
|
%
|
(dollars in thousands)
|
2018
|
|
Change
|
|
2017
|
|||||
Loss on disposal or impairment of property and equipment
|
$
|
1,937
|
|
|
(89.4
|
)%
|
|
$
|
18,360
|
|
Percentage of total revenues
|
1.5
|
%
|
|
|
|
12.4
|
%
|
(dollars in thousands)
|
2018
|
|
Change
|
|
2017
|
|||||
Interest expense, net
|
$
|
5,212
|
|
|
2.6
|
%
|
|
$
|
5,078
|
|
Percentage of total revenues
|
4.1
|
%
|
|
|
|
3.5
|
%
|
(dollars in thousands)
|
2018
|
|
Change
|
|
2017
|
||||
Provision for (benefit from) income taxes
|
$
|
1,483
|
|
|
N/M
|
|
$
|
(18,509
|
)
|
Percentage of total revenues
|
1.2
|
%
|
|
|
|
(12.5
|
)%
|
||
Effective tax rate
|
25.5%
|
|
|
|
N/M
|
|
(dollars in thousands)
|
2018
|
|
Change
|
|
2017
|
|||||
Total revenues
|
$
|
44,864
|
|
|
5.1
|
%
|
|
$
|
42,707
|
|
Percentage of total revenues
|
31.6
|
%
|
|
|
|
27.4
|
%
|
|||
Adjusted EBITDA
|
25,673
|
|
|
—
|
%
|
|
25,682
|
|
(dollars in thousands)
|
2018
|
|
Change
|
|
2017
|
|||||
Total revenues
|
$
|
61,776
|
|
|
(19.6
|
)%
|
|
$
|
76,868
|
|
Percentage of total revenues
|
48.9
|
%
|
|
|
|
51.8
|
%
|
|||
Adjusted EBITDA
|
884
|
|
|
(67.1
|
)%
|
|
2,685
|
|
(dollars in thousands)
|
2018
|
|
Change
|
|
2017
|
|||||
Total revenues
|
$
|
24,636
|
|
|
(20.2
|
)%
|
|
$
|
30,867
|
|
Percentage of total revenues
|
19.5
|
%
|
|
|
|
20.8
|
%
|
|||
Adjusted EBITDA
|
169
|
|
|
N/M
|
|
|
(450
|
)
|
Liquidity and Capital Resources
|
|
Twelve Months Ended
|
||||||
(in thousands)
|
2018
|
|
2017
|
||||
Net cash provided by operating activities
|
$
|
10,240
|
|
|
$
|
15,537
|
|
Net cash used in (provided by) investing activities
|
6,986
|
|
|
(1,648
|
)
|
||
Net cash used in financing activities
|
(13,634
|
)
|
|
(13,784
|
)
|
||
Total cash flows
|
$
|
3,592
|
|
|
$
|
105
|
|
Off-Balance Sheet Arrangements
|
Critical Accounting Policies
|
|
|
Consolidated Statements of Operations for the Fiscal Years ended December 31, 2018 and January 1, 2018
|
|
Consolidated Balance Sheets as of December 31, 2018 and January 1, 2018
|
|
Consolidated Statements of Shareholders’ Equity for the Fiscal Years ended December 31, 2018 and January 1, 2018
|
|
Consolidated Statements of Cash Flows for the Fiscal Years ended December 31, 2018 and January 1, 2018
|
|
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)
|
December 31, 2018
|
|
January 1, 2018
|
||||
Revenues
|
|
|
|
||||
Franchise
|
$
|
64,653
|
|
|
$
|
71,640
|
|
Company-owned store sales
|
61,776
|
|
|
76,868
|
|
||
Total revenues
|
126,429
|
|
|
148,508
|
|
||
|
|
|
|
||||
Costs and Expenses
|
|
|
|
||||
Store operating costs:
|
|
|
|
||||
Cost of food and packaging
|
20,415
|
|
|
25,958
|
|
||
Compensation and benefits
|
19,601
|
|
|
23,603
|
|
||
Advertising
|
4,794
|
|
|
6,684
|
|
||
Occupancy and other store operating costs
|
11,441
|
|
|
13,931
|
|
||
Selling, general, and administrative
|
49,731
|
|
|
64,565
|
|
||
Depreciation and amortization
|
7,241
|
|
|
10,452
|
|
||
Loss on disposal or impairment of property and equipment
|
1,937
|
|
|
18,360
|
|
||
Total costs and expenses
|
115,160
|
|
|
163,553
|
|
||
Operating Income (Loss)
|
11,269
|
|
|
(15,045
|
)
|
||
|
|
|
|
||||
Interest expense, net
|
5,212
|
|
|
5,078
|
|
||
Loss on early retirement of debt
|
38
|
|
|
—
|
|
||
Other expense, net
|
212
|
|
|
204
|
|
||
Income (Loss) Before Income Taxes
|
5,807
|
|
|
(20,327
|
)
|
||
|
|
|
|
||||
Provision for (benefit from) income taxes
|
1,483
|
|
|
(18,509
|
)
|
||
Net Income (Loss)
|
$
|
4,324
|
|
|
$
|
(1,818
|
)
|
|
|
|
|
||||
Earnings (loss) per share of common stock
|
|
|
|
||||
Basic
|
$
|
0.26
|
|
|
$
|
(0.11
|
)
|
Diluted
|
$
|
0.25
|
|
|
$
|
(0.11
|
)
|
Weighted average common stock outstanding
|
|
|
|
||||
Basic
|
16,929,764
|
|
|
16,870,013
|
|
||
Diluted
|
17,000,858
|
|
|
16,870,013
|
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
(In thousands, except par value and share data)
|
December 31, 2018
|
|
January 1, 2018
|
||||
ASSETS
|
|
|
|
||||
Current Assets
|
|
|
|
||||
Cash and cash equivalents
|
$
|
5,766
|
|
|
$
|
2,174
|
|
Accounts receivable, net
|
3,564
|
|
|
3,788
|
|
||
Inventories
|
549
|
|
|
719
|
|
||
Prepaid expenses and other current assets
|
2,173
|
|
|
2,281
|
|
||
Total current assets
|
12,052
|
|
|
8,962
|
|
||
Property and equipment, net
|
4,866
|
|
|
10,064
|
|
||
Operating lease right of use assets
|
9,801
|
|
|
16,331
|
|
||
Goodwill
|
101,763
|
|
|
107,751
|
|
||
Trade name and trademarks
|
87,002
|
|
|
87,002
|
|
||
Definite-life intangibles, net
|
27,326
|
|
|
31,655
|
|
||
Assets held for sale
|
3,117
|
|
|
—
|
|
||
Other assets
|
797
|
|
|
350
|
|
||
Total assets
|
$
|
246,724
|
|
|
$
|
262,115
|
|
|
|
|
|
||||
LIABILITIES AND EQUITY
|
|
|
|
||||
Current Liabilities
|
|
|
|
||||
Accounts payable
|
$
|
4,773
|
|
|
$
|
5,389
|
|
Accrued expenses and other current liabilities
|
12,389
|
|
|
12,382
|
|
||
Current portion of lease liabilities
|
2,510
|
|
|
3,382
|
|
||
Current portion of unearned franchise and development fees
|
1,715
|
|
|
1,564
|
|
||
Current portion of long-term debt
|
11,400
|
|
|
8,400
|
|
||
Total current liabilities
|
32,787
|
|
|
31,117
|
|
||
Long-term debt, net of current portion
|
70,644
|
|
|
86,994
|
|
||
Lease liabilities, net of current portion
|
8,806
|
|
|
16,296
|
|
||
Unearned franchise and development fees, net of current portion
|
8,546
|
|
|
10,037
|
|
||
Deferred tax liability, net
|
23,121
|
|
|
21,825
|
|
||
Other long-term liabilities
|
3,797
|
|
|
1,704
|
|
||
Total liabilities
|
147,701
|
|
|
167,973
|
|
||
Commitments and contingencies (Note 17)
|
|
|
|
|
|
||
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; 17,025,028 and 16,971,461 shares issued and outstanding, respectively)
|
170
|
|
|
170
|
|
||
Additional paid-in capital
|
121,171
|
|
|
120,614
|
|
||
Accumulated deficit
|
(22,318
|
)
|
|
(26,642
|
)
|
||
Total equity
|
99,023
|
|
|
94,142
|
|
||
Total liabilities and equity
|
$
|
246,724
|
|
|
$
|
262,115
|
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
|
Common Stock
|
|
Additional Paid-In Capital
|
|
Accumulated
Deficit
|
|
Total
Equity
|
|||||||||||
(In thousands)
|
Shares
|
|
Amount
|
|
|
|
||||||||||||
BALANCE, January 2, 2017
|
16,956
|
|
|
$
|
170
|
|
|
$
|
119,932
|
|
|
$
|
(24,942
|
)
|
|
$
|
95,160
|
|
Cumulative effect adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
118
|
|
|
118
|
|
||||
Common stock issued
|
35
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||
Common stock repurchases
|
(20
|
)
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
||||
Stock based compensation expense
|
—
|
|
|
—
|
|
|
687
|
|
|
—
|
|
|
687
|
|
||||
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,818
|
)
|
|
(1,818
|
)
|
||||
BALANCE, January 1, 2018
|
16,971
|
|
|
$
|
170
|
|
|
$
|
120,614
|
|
|
$
|
(26,642
|
)
|
|
$
|
94,142
|
|
Common stock issued
|
64
|
|
|
—
|
|
|
91
|
|
|
—
|
|
|
91
|
|
||||
Common stock repurchases
|
(10
|
)
|
|
—
|
|
|
(29
|
)
|
|
—
|
|
|
(29
|
)
|
||||
Stock based compensation expense
|
—
|
|
|
—
|
|
|
495
|
|
|
—
|
|
|
495
|
|
||||
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
4,324
|
|
|
4,324
|
|
||||
BALANCE, December 31, 2018
|
17,025
|
|
|
$
|
170
|
|
|
$
|
121,171
|
|
|
$
|
(22,318
|
)
|
|
$
|
99,023
|
|
Papa Murphy’s Holdings, Inc. and Subsidiaries
|
|
Fiscal Year Ended
|
||||||
(In thousands)
|
December 31, 2018
|
|
January 1, 2018
|
||||
Operating Activities
|
|
|
|
||||
Net Income (Loss)
|
$
|
4,324
|
|
|
$
|
(1,818
|
)
|
Adjustments to reconcile to cash from operating activities
|
|
|
|
||||
Depreciation and amortization
|
7,241
|
|
|
10,452
|
|
||
Loss on disposal or impairment of property and equipment
|
1,937
|
|
|
18,360
|
|
||
Deferred taxes
|
1,296
|
|
|
(18,689
|
)
|
||
Share-based compensation
|
495
|
|
|
687
|
|
||
Other non-cash items
|
342
|
|
|
422
|
|
||
Change in operating assets and liabilities
|
|
|
|
||||
Accounts receivable
|
238
|
|
|
1,541
|
|
||
Prepaid expenses and other assets
|
1,985
|
|
|
4,879
|
|
||
Unearned franchise and development fees
|
(1,508
|
)
|
|
(753
|
)
|
||
Accounts payable
|
(1,208
|
)
|
|
(548
|
)
|
||
Accrued expenses and other liabilities
|
(4,902
|
)
|
|
1,004
|
|
||
Net cash provided by operating activities
|
10,240
|
|
|
15,537
|
|
||
|
|
|
|
||||
Investing Activities
|
|
|
|
||||
Acquisition of property and equipment
|
(576
|
)
|
|
(3,987
|
)
|
||
Acquisition of stores, less cash acquired
|
(134
|
)
|
|
—
|
|
||
Proceeds from sale of stores
|
7,599
|
|
|
2,288
|
|
||
Payments received on notes receivable
|
97
|
|
|
51
|
|
||
Net cash provided by (used in) investing activities
|
6,986
|
|
|
(1,648
|
)
|
||
|
|
|
|
||||
Financing Activities
|
|
|
|
||||
Payments on long-term debt
|
(13,392
|
)
|
|
(12,979
|
)
|
||
Advances on revolver
|
5,900
|
|
|
14,900
|
|
||
Payments on revolver
|
(5,900
|
)
|
|
(15,700
|
)
|
||
Repurchases of common stock
|
(29
|
)
|
|
(5
|
)
|
||
Proceeds from exercise of stock options
|
91
|
|
|
—
|
|
||
Debt issuance and modification costs
|
(304
|
)
|
|
—
|
|
||
Net cash used in financing activities
|
(13,634
|
)
|
|
(13,784
|
)
|
||
|
|
|
|
||||
Net change in cash and cash equivalents
|
3,592
|
|
|
105
|
|
||
Cash and Cash Equivalents, beginning of year
|
2,174
|
|
|
2,069
|
|
||
Cash and Cash Equivalents, end of period
|
$
|
5,766
|
|
|
$
|
2,174
|
|
|
|
|
|
||||
Supplemental Disclosures of Cash Flow Information
|
|
|
|
||||
Cash paid during the period for interest
|
$
|
4,970
|
|
|
$
|
4,835
|
|
Cash paid (received) during the period for income taxes
|
$
|
66
|
|
|
$
|
(185
|
)
|
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
|
Revenue
|
|
Note 13
|
Leases
|
|
Note 14
|
Income Taxes
|
|
Note 15
|
Share-based Compensation
|
|
Note 16
|
Earnings per Share (EPS)
|
|
Note 17
|
Commitments and Contingencies
|
|
Note 18
|
Retirement Plans
|
|
Note 19
|
Brand Marketing Fund
|
|
Note 20
|
Segment Information
|
|
Note 21
|
Subsequent Events
|
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
|
•
|
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
|
•
|
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.
|
•
|
Gift cards.
The Company operates a system-wide gift card program and recognizes revenue from gift cards when a gift card is redeemed in a Company-owned store. As gift cards are redeemed by a customer, an estimate of the value of gift card balances that will be unredeemed (“
gift card breakage
”) is recognized by the Company as a contribution to the brand marketing fund described under Advertising and marketing costs below. The Company determines the
gift card breakage
rate based upon Company-specific historical redemption patterns.
|
|
Fiscal 2017 Income Statement
|
|||||||||||
(in thousands, except earnings per share)
|
As Reported
|
New Revenue Standard Adjustment
|
New Lease Standard Adjustment
|
As Adjusted
|
||||||||
Total revenues
(1)
|
$
|
118,661
|
|
$
|
29,847
|
|
$
|
—
|
|
$
|
148,508
|
|
Store operating costs
|
72,927
|
|
(1,570
|
)
|
(1,181
|
)
|
70,176
|
|
||||
Selling, general, and administrative
(1)
|
33,869
|
|
30,737
|
|
(42
|
)
|
64,565
|
|
||||
Loss on disposal or impairment of property and equipment
|
15,680
|
|
—
|
|
2,680
|
|
18,360
|
|
||||
(Benefit from) provision for income taxes
|
(19,543
|
)
|
1,416
|
|
(383
|
)
|
(18,509
|
)
|
||||
Net loss
|
(8
|
)
|
(736
|
)
|
(1,074
|
)
|
(1,818
|
)
|
||||
Diluted earnings (loss) per share
|
0.00
|
|
(0.04
|
)
|
(0.07
|
)
|
(0.11
|
)
|
|
Balance Sheet as of 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 3 — Acquisitions
|
Note 4 — Prepaid Expenses and Other Current Assets
|
(in thousands)
|
2018
|
|
2017
|
||||
Prepaid media production costs
|
$
|
724
|
|
|
$
|
376
|
|
Prepaid software and support
|
469
|
|
|
223
|
|
||
Prepaid occupancy related costs
|
136
|
|
|
159
|
|
||
Prepaid insurance
|
160
|
|
|
377
|
|
||
Taxes receivable
|
61
|
|
|
182
|
|
||
POS software licenses for resale
|
368
|
|
|
364
|
|
||
Assets held for sale
|
257
|
|
|
432
|
|
||
Advertising cooperative assets, restricted
|
(24
|
)
|
|
4
|
|
||
Other
|
22
|
|
|
164
|
|
||
Total prepaid expenses and other current assets
|
$
|
2,173
|
|
|
$
|
2,281
|
|
Note 5 — Property and Equipment
|
(in thousands)
|
2018
|
|
2017
|
||||
Leasehold improvements
|
$
|
4,184
|
|
|
$
|
7,475
|
|
Restaurant equipment and fixtures
|
6,891
|
|
|
12,515
|
|
||
Office furniture and equipment
|
3,017
|
|
|
2,978
|
|
||
Software
|
8,923
|
|
|
7,917
|
|
||
Vehicles
|
—
|
|
|
6
|
|
||
Construction in progress
|
436
|
|
|
1,059
|
|
||
|
23,451
|
|
|
31,950
|
|
||
Accumulated depreciation and amortization
|
(18,585
|
)
|
|
(21,886
|
)
|
||
Property and equipment, net
|
$
|
4,866
|
|
|
$
|
10,064
|
|
Note 6 — Divestitures
|
Note 7 — Goodwill
|
(in thousands)
|
Company Stores
|
|
Franchise
|
|
Total
|
||||||
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
|
|
|||
Disposition
|
(5,988
|
)
|
|
—
|
|
|
(5,988
|
)
|
|||
Balance at December 31, 2018
|
$
|
20,217
|
|
|
$
|
81,546
|
|
|
$
|
101,763
|
|
Note 8 — Intangible Assets
|
|
2018
|
|
|
||||||||||
(in thousands)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Weighted Average Amortization Period
|
||||||
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
||||||
Franchise relationships
|
$
|
56,000
|
|
|
$
|
(30,355
|
)
|
|
$
|
25,645
|
|
|
16.0
|
Reacquired franchise rights
|
4,660
|
|
|
(2,979
|
)
|
|
1,681
|
|
|
7.8
|
|||
Net intangible assets subject to amortization
|
$
|
60,660
|
|
|
$
|
(33,334
|
)
|
|
$
|
27,326
|
|
|
15.4
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
||||||
Trade name and trademarks
|
|
|
|
|
$
|
87,002
|
|
|
|
|
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
|
|
|
|
Fiscal year
|
2019
|
$
|
4,056
|
|
|
2020
|
3,943
|
|
|
|
2021
|
3,876
|
|
|
|
2022
|
3,803
|
|
|
|
2023
|
3,503
|
|
|
|
Thereafter
|
8,145
|
|
|
|
|
$
|
27,326
|
|
Note 9 — Financing Arrangements
|
(in thousands)
|
2018
|
|
2017
|
||||
Term loan under credit facility
|
$
|
79,508
|
|
|
$
|
92,900
|
|
Notes payable
|
3,000
|
|
|
3,000
|
|
||
Total principal amount of long-term debt
|
82,508
|
|
|
95,900
|
|
||
Less unamortized debt issuance costs
|
(464
|
)
|
|
(506
|
)
|
||
Total long-term debt
|
82,044
|
|
|
95,394
|
|
||
Less current portion
|
(11,400
|
)
|
|
(8,400
|
)
|
||
Total long-term debt, net of current portion
|
$
|
70,644
|
|
|
$
|
86,994
|
|
(in thousands)
|
Senior Secured Credit Facility
|
|
Notes Payable
|
|
Total
|
|||||||
Fiscal Years
|
2019
|
$
|
8,400
|
|
|
$
|
3,000
|
|
|
$
|
11,400
|
|
|
2020
|
71,108
|
|
|
—
|
|
|
71,108
|
|
|||
|
|
$
|
79,508
|
|
|
$
|
3,000
|
|
|
$
|
82,508
|
|
Fiscal Years
|
2019
|
$
|
287
|
|
|
2020
|
177
|
|
|
|
|
$
|
464
|
|
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.
|
|
2018
|
|
2017
|
|
|
||||||||||||
(in thousands)
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Fair Value Measurements
|
||||||||
Financial assets
|
|
|
|
|
|
|
|
|
|
||||||||
Notes receivable
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
97
|
|
|
$
|
88
|
|
|
Level 3
|
Other receivables
(1)
|
505
|
|
|
439
|
|
|
—
|
|
|
—
|
|
|
Level 3
|
(1)
|
The fair value of notes receivable and other receivables 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)
|
2018
|
|
2017
|
||||
Accrued compensation and related costs
|
$
|
4,100
|
|
|
$
|
3,902
|
|
Accrued legal settlement costs
|
2,363
|
|
|
3,940
|
|
||
Gift cards and certificates payable
|
2,700
|
|
|
2,676
|
|
||
Accrued interest and non-income taxes payable
|
318
|
|
|
461
|
|
||
Convention fund balance
|
1,175
|
|
|
841
|
|
||
Advertising cooperative liabilities
|
25
|
|
|
60
|
|
||
Lease liabilities held for sale
|
763
|
|
|
—
|
|
||
Other
|
945
|
|
|
502
|
|
||
Total accrued expenses and other current liabilities
|
$
|
12,389
|
|
|
$
|
12,382
|
|
Note 12 — Revenue
|
|
2018
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
Franchise royalties
|
$
|
36,234
|
|
|
$
|
—
|
|
|
$
|
14,677
|
|
|
$
|
50,911
|
|
Franchise fees
|
2,891
|
|
|
—
|
|
|
—
|
|
|
2,891
|
|
||||
Vendor payments
|
—
|
|
|
—
|
|
|
5,008
|
|
|
5,008
|
|
||||
E-commerce fees
|
2,384
|
|
|
—
|
|
|
—
|
|
|
2,384
|
|
||||
Other franchise and brand
|
99
|
|
|
—
|
|
|
3,360
|
|
|
3,459
|
|
||||
Company-owned stores
|
—
|
|
|
61,776
|
|
|
—
|
|
|
61,776
|
|
||||
Total revenues
|
41,608
|
|
|
61,776
|
|
|
23,045
|
|
|
126,429
|
|
||||
Intersegment revenues
|
3,256
|
|
|
—
|
|
|
1,591
|
|
|
4,847
|
|
||||
Reconciliation to business segment revenues
|
$
|
44,864
|
|
|
$
|
61,776
|
|
|
$
|
24,636
|
|
|
$
|
131,276
|
|
|
2017
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
Franchise royalties
|
$
|
37,552
|
|
|
$
|
—
|
|
|
$
|
22,189
|
|
|
$
|
59,741
|
|
Franchise fees
|
2,907
|
|
|
—
|
|
|
—
|
|
|
2,907
|
|
||||
Vendor payments
|
—
|
|
|
—
|
|
|
4,524
|
|
|
4,524
|
|
||||
E-commerce fees
|
1,936
|
|
|
—
|
|
|
—
|
|
|
1,936
|
|
||||
Other franchise and brand
|
85
|
|
|
—
|
|
|
2,447
|
|
|
2,532
|
|
||||
Company-owned stores
|
—
|
|
|
76,868
|
|
|
—
|
|
|
76,868
|
|
||||
Total revenues
|
42,480
|
|
|
76,868
|
|
|
29,160
|
|
|
148,508
|
|
||||
Intersegment revenues
|
227
|
|
|
—
|
|
|
1,707
|
|
|
1,934
|
|
||||
Reconciliation to business segment revenues
|
$
|
42,707
|
|
|
$
|
76,868
|
|
|
$
|
30,867
|
|
|
$
|
150,442
|
|
|
2018
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
United States
|
$
|
41,280
|
|
|
$
|
61,776
|
|
|
$
|
23,045
|
|
|
$
|
126,101
|
|
International
|
328
|
|
|
—
|
|
|
—
|
|
|
328
|
|
||||
Total revenues
|
$
|
41,608
|
|
|
$
|
61,776
|
|
|
$
|
23,045
|
|
|
$
|
126,429
|
|
|
2017
|
||||||||||||||
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
||||||||
United States
|
$
|
42,084
|
|
|
$
|
76,868
|
|
|
$
|
29,160
|
|
|
$
|
148,112
|
|
International
|
396
|
|
|
—
|
|
|
—
|
|
|
396
|
|
||||
Total revenues
|
$
|
42,480
|
|
|
$
|
76,868
|
|
|
$
|
29,160
|
|
|
$
|
148,508
|
|
(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
|
(2,718
|
)
|
|
Cash received, net of amounts recognized as revenue during the period
|
1,775
|
|
|
Contract refunds
|
(330
|
)
|
|
Balance at December 31, 2018
|
$
|
9,878
|
|
Fiscal year
|
2019
|
$
|
1,623
|
|
|
2020
|
1,488
|
|
|
|
2021
|
1,331
|
|
|
|
2022
|
1,170
|
|
|
|
2023
|
937
|
|
|
|
Thereafter
|
3,329
|
|
|
|
Total
|
$
|
9,878
|
|
Note 13 — Leases
|
(in thousands)
|
2018
|
|
2017
|
||||
Operating lease cost
|
$
|
3,789
|
|
|
$
|
5,068
|
|
Short-term lease cost
|
45
|
|
|
22
|
|
||
Variable lease cost
|
16
|
|
|
34
|
|
||
Sublease income
|
(60
|
)
|
|
(66
|
)
|
||
Total lease cost
|
$
|
3,790
|
|
|
$
|
5,058
|
|
(in thousands)
|
2018
|
|
2017
|
||||
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
||||
Operating cash flows from operating leases
|
$
|
4,410
|
|
|
$
|
4,871
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
926
|
|
|
213
|
|
||
Weighted-average remaining lease term of operating leases
|
5.3 years
|
|
|
5.9 years
|
|
||
Weighted-average discount rate of operating leases
|
6.0
|
%
|
|
6.0
|
%
|
Fiscal year
|
2019
|
$
|
4,104
|
|
|
2020
|
3,509
|
|
|
|
2021
|
2,580
|
|
|
|
2022
|
1,913
|
|
|
|
2023
|
1,490
|
|
|
|
Thereafter
|
2,655
|
|
|
|
Total future minimum lease payments
|
16,251
|
|
|
|
Less imputed interest
|
(2,804
|
)
|
|
|
Less lease liabilities held for sale
(1)
|
(2,131
|
)
|
|
|
Total Lease Liabilities
|
$
|
11,316
|
|
(1)
|
Lease liabilities held for sale includes
$0.8 million
reported in Accrued expenses and other current liabilities (see
Note 11 — Accrued and Other Liabilities
) and
$1.4 million
reported in Other long-term liabilities in the Company's
Consolidated Balance Sheets
.
|
Fiscal Years
|
2019
|
$
|
1,133
|
|
|
2020
|
900
|
|
|
|
2021
|
486
|
|
|
|
2022
|
240
|
|
|
|
2023
|
181
|
|
|
|
Thereafter
|
56
|
|
|
|
|
$
|
2,996
|
|
Note 14 — Income Taxes
|
(in thousands)
|
2018
|
|
2017
|
||||
Current tax provision
|
|
|
|
||||
Federal
|
$
|
10
|
|
|
$
|
9
|
|
State
|
177
|
|
|
171
|
|
||
|
187
|
|
|
180
|
|
||
Deferred tax provision (benefit)
|
|
|
|
||||
Federal
|
1,156
|
|
|
(17,790
|
)
|
||
State
|
140
|
|
|
(899
|
)
|
||
|
1,296
|
|
|
(18,689
|
)
|
||
Total provision for (benefit from) income taxes
|
$
|
1,483
|
|
|
$
|
(18,509
|
)
|
(in thousands)
|
2018
|
|
2017
|
||||
Deferred income tax assets:
|
|
|
|
||||
Unearned franchise and development fees
|
$
|
1,816
|
|
|
$
|
2,565
|
|
Convention and Advertising funds balance
|
255
|
|
|
208
|
|
||
Compensation accruals
|
652
|
|
|
449
|
|
||
Gift card accruals
|
134
|
|
|
348
|
|
||
Asset retirement obligation
|
52
|
|
|
120
|
|
||
Lease obligations
|
700
|
|
|
596
|
|
||
Share-based compensation
|
838
|
|
|
769
|
|
||
Net operating loss
|
158
|
|
|
1,013
|
|
||
Other
|
700
|
|
|
213
|
|
||
Total deferred tax assets
|
5,305
|
|
|
6,281
|
|
||
Valuation allowance
|
(134
|
)
|
|
(98
|
)
|
||
Total deferred tax assets after valuation allowance
|
5,171
|
|
|
6,183
|
|
||
Deferred income tax liabilities:
|
|
|
|
||||
Fixed asset, goodwill, and intangible asset basis differences
|
(26,283
|
)
|
|
(27,273
|
)
|
||
Other
|
(2,009
|
)
|
|
(735
|
)
|
||
Total deferred tax liabilities
|
(28,292
|
)
|
|
(28,008
|
)
|
||
Net deferred tax liability
|
$
|
(23,121
|
)
|
|
$
|
(21,825
|
)
|
Balance as of the end of fiscal 2017
|
$
|
77
|
|
Additions for tax positions of prior years
|
—
|
|
|
Balance as of the end of fiscal 2018
|
$
|
77
|
|
(in thousands)
|
2018
|
|
2017
|
||||
Federal income tax provision based on statutory rate
|
$
|
1,219
|
|
|
$
|
(6,899
|
)
|
State and local income tax effect
|
250
|
|
|
(481
|
)
|
||
Impact of change in tax rates
|
—
|
|
|
(11,300
|
)
|
||
Non-deductible expenses
|
62
|
|
|
203
|
|
||
Tax credits and other
|
(48
|
)
|
|
(32
|
)
|
||
Provision for (benefit from) income taxes
|
$
|
1,483
|
|
|
$
|
(18,509
|
)
|
Note 15 — Share-based Compensation
|
|
Number of Shares of
Restricted Common Stock
|
|
|
||||||
|
Time
Vesting
|
|
Market
Condition
|
|
Weighted Average
Award Date
Fair Value per Share
|
||||
Unvested, January 1, 2018
|
34,898
|
|
|
40,354
|
|
|
$
|
3.44
|
|
Granted
|
41,000
|
|
|
—
|
|
|
5.33
|
|
|
Vested
|
(34,898
|
)
|
|
—
|
|
|
4.82
|
|
|
Forfeited/Repurchased
|
—
|
|
|
(10,183
|
)
|
|
3.80
|
|
|
Unvested, December 31, 2018
|
41,000
|
|
|
30,171
|
|
|
$
|
3.79
|
|
(in thousands, except per share amounts)
|
2018
|
|
2017
|
||||
Weighted average grant date fair value per share
|
$
|
5.33
|
|
|
$
|
4.65
|
|
Total fair value of shares issued
|
$
|
218
|
|
|
$
|
164
|
|
Total fair value of shares vested
|
$
|
168
|
|
|
$
|
697
|
|
|
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, January 1, 2018
|
949,115
|
|
|
158,127
|
|
|
$
|
7.60
|
|
|
|
|
|
||
Granted
|
210,700
|
|
|
—
|
|
|
5.12
|
|
|
|
|
|
|||
Exercised
|
(22,750
|
)
|
|
—
|
|
|
3.99
|
|
|
|
|
|
|||
Forfeited
|
(333,721
|
)
|
|
(46,837
|
)
|
|
7.34
|
|
|
|
|
|
|||
Outstanding, December 31, 2018
|
803,344
|
|
|
111,290
|
|
|
$
|
7.23
|
|
|
7.8 years
|
|
$
|
121
|
|
Exercisable, December 31, 2018
|
395,928
|
|
|
—
|
|
|
$
|
9.11
|
|
|
6.7 years
|
|
$
|
51
|
|
(in thousands, except per share amounts)
|
2018
|
|
2017
|
||||
Weighted average grant date fair value per share
|
$
|
1.76
|
|
|
$
|
1.66
|
|
Total fair value of awards granted
|
$
|
370
|
|
|
$
|
1,179
|
|
Total fair value of awards vested
|
$
|
435
|
|
|
$
|
422
|
|
Total intrinsic value of stock options exercised
|
$
|
32
|
|
|
$
|
—
|
|
|
2018
|
|
2017
|
Risk free rate
|
2.40%
|
|
2.00%
|
Expected volatility
|
24.4%
|
|
25.8%
|
Expected term
|
5.1 years
|
|
5.5 years
|
Expected dividend yield
|
0.0%
|
|
0.0%
|
Note 16 — Earnings per Share (EPS)
|
(in thousands, except per share data)
|
2018
|
|
2017
|
||||
Earnings:
|
|
|
|
||||
Net income (loss)
|
$
|
4,324
|
|
|
$
|
(1,818
|
)
|
Preferred dividends
|
—
|
|
|
—
|
|
||
Net income (loss) available to common shareholders
|
$
|
4,324
|
|
|
$
|
(1,818
|
)
|
Shares:
|
|
|
|
||||
Basic weighted average common shares outstanding
|
16,930
|
|
|
16,870
|
|
||
Dilutive effect of restricted equity awards
(1)
|
71
|
|
|
—
|
|
||
Diluted weighted average number of shares outstanding
|
17,001
|
|
|
16,870
|
|
||
Earnings (loss) per share:
|
|
|
|
||||
Basic earnings (loss) per share
|
$
|
0.26
|
|
|
$
|
(0.11
|
)
|
Diluted earnings (loss) per share
|
$
|
0.25
|
|
|
$
|
(0.11
|
)
|
(1)
|
An aggregated total of
661,000
and
901,000
potential common shares have been excluded from the diluted
EPS
calculation for
2018
and
2017
, respectively, because their effect would have been anti-dilutive.
|
Note 17 — Commitments and Contingencies
|
Note 18 — Retirement Plans
|
Note 19 — Brand Marketing Fund
|
|
|
||||||
(in thousands)
|
2018
|
|
2017
|
||||
Opening fund (deficit) surplus
|
$
|
(5,461
|
)
|
|
$
|
(1,071
|
)
|
Net activity during the period
|
38
|
|
|
(4,390
|
)
|
||
Ending fund deficit
|
$
|
(5,423
|
)
|
|
$
|
(5,461
|
)
|
Note 20 — Segment Information
|
|
Revenues
|
||||||
(in thousands)
|
2018
|
|
2017
|
||||
Franchise segment
|
$
|
44,864
|
|
|
$
|
42,707
|
|
Brand Funds segment
|
24,636
|
|
|
30,867
|
|
||
Intersegment eliminations
|
(4,847
|
)
|
|
(1,934
|
)
|
||
Franchise related
|
64,653
|
|
|
71,640
|
|
||
Company Stores segment
|
61,776
|
|
|
76,868
|
|
||
Total
|
126,429
|
|
|
148,508
|
|
|
Segment Adjusted EBITDA
|
||||||
(in thousands)
|
2018
|
|
2017
|
||||
Franchise
|
$
|
25,673
|
|
|
$
|
25,682
|
|
Company Stores
|
884
|
|
|
2,685
|
|
||
Brand Funds
|
169
|
|
|
(450
|
)
|
||
Total reportable segments adjusted EBITDA
|
26,726
|
|
|
27,917
|
|
||
Corporate and unallocated
|
(4,420
|
)
|
|
(7,417
|
)
|
||
Depreciation and amortization
|
(7,241
|
)
|
|
(10,452
|
)
|
||
Interest expense, net
|
(5,212
|
)
|
|
(5,078
|
)
|
||
CEO transition and restructuring
(1)
|
(595
|
)
|
|
(2,614
|
)
|
||
E-commerce impairment
(2)
|
(350
|
)
|
|
(9,085
|
)
|
||
Store closures and impairments
(3)
|
(1,918
|
)
|
|
(9,145
|
)
|
||
Litigation settlements
(4)
|
(908
|
)
|
|
(4,453
|
)
|
||
Strategic alternatives
(5)
|
(237
|
)
|
|
—
|
|
||
Debt refinancing
(6)
|
(38
|
)
|
|
—
|
|
||
Income (Loss) Before Income Taxes
|
$
|
5,807
|
|
|
$
|
(20,327
|
)
|
(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 the Company's 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 toward litigation reserves.
|
(5)
|
Reflects costs associated with the exploration of strategic alternatives.
|
(6)
|
Reflects costs associated with amendments to the Company's credit facilities.
|
|
Total Assets
|
||||||
(in thousands)
|
2018
|
|
2017
|
||||
Franchise
|
$
|
120,611
|
|
|
$
|
121,180
|
|
Company Stores
|
38,177
|
|
|
53,226
|
|
||
Brand Funds
|
873
|
|
|
509
|
|
||
Other
(1)
|
87,063
|
|
|
87,200
|
|
||
Total
|
$
|
246,724
|
|
|
$
|
262,115
|
|
(1)
|
Other assets which are not allocated to the individual segments primarily include trade names & trademarks.
|
Note 21 — Subsequent Events
|
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 December 31, 2018 and January 1, 2018
|
|
|
Consolidated Balance Sheets as of December 31, 2018 and January 1, 2018
|
|
|
Consolidated Statements of Shareholders’ Equity for the Fiscal Years ended December 31, 2018 and January 1, 2018
|
|
|
Consolidated Statements of Cash Flows for the Fiscal Years ended December 31, 2018 and January 1, 2018
|
|
|
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
|
10.11‡
|
10-K
|
001-36432
|
10.8
|
March 15, 2018
|
|
10.12*‡
|
|
|
|
|
|
10.13‡
|
10-K
|
001-36432
|
10.16
|
March 15, 2017
|
|
10.14*‡
|
|
|
|
|
|
10.15‡
|
S-1/A
|
333-194488
|
10.20
|
April 21, 2014
|
|
10.16‡
|
S-1/A
|
333-194488
|
10.21
|
April 21, 2014
|
|
10.17‡
|
S-1/A
|
333-194488
|
10.22
|
April 21, 2014
|
|
10.18‡
|
S-1/A
|
333-194488
|
10.23
|
April 21, 2014
|
|
10.19‡
|
S-1/A
|
333-194488
|
10.24
|
April 21, 2014
|
|
10.20‡
|
S-1/A
|
333-194488
|
10.25
|
April 21, 2014
|
|
10.21‡
|
S-1/A
|
333-194488
|
10.26
|
April 21, 2014
|
|
10.22
|
S-1/A
|
333-194488
|
10.27
|
April 21, 2014
|
|
10.23
|
S-1/A
|
333-194488
|
10.28
|
April 21, 2014
|
|
10.24‡
|
S-1/A
|
333-194488
|
10.29
|
April 28, 2014
|
|
10.25
|
10-Q
|
001-36432
|
10.1
|
November 2, 2016
|
|
10.26
|
10-Q
|
001-36432
|
10.1
|
November 7, 2018
|
|
10.27‡
|
10-Q
|
001-36432
|
10.1
|
May 10, 2017
|
|
10.28‡
|
10-Q
|
001-36432
|
10.2
|
May 10, 2017
|
|
10.29
|
8-K
|
001-36432
|
10.1
|
December 21, 2017
|
|
10.30
|
8-K
|
001-36432
|
10.2
|
December 21, 2017
|
|
10.31
|
10-Q
|
001-36432
|
10.3
|
May 10, 2018
|
|
21.1*
|
|
|
|
|
|
23.1*
|
|
|
|
|
|
24.1*
|
|
|
|
|
|
31.1*
|
|
|
|
|
|
|
Incorporated By Reference
|
|||
Exhibit
|
|
|
File
|
|
Filing
|
Number
|
Description Of Exhibits
|
Form
|
Number
|
Exhibit
|
Date
|
31.2*
|
|
|
|
|
|
32.1*
|
|
|
|
|
|
32.2*
|
|
|
|
|
|
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)
|
2018
|
|
2017
|
||||
Equity in earnings (losses) of subsidiaries
|
$
|
8,209
|
|
|
$
|
(17,490
|
)
|
Selling, general, and administrative expense
|
2,202
|
|
|
2,637
|
|
||
Operating Income (Loss)
|
6,007
|
|
|
(20,127
|
)
|
||
|
|
|
|
||||
Other expense, net
|
200
|
|
|
200
|
|
||
Income (Loss) Before Income Taxes
|
5,807
|
|
|
(20,327
|
)
|
||
|
|
|
|
||||
Provision for (benefit from) income taxes
|
1,483
|
|
|
(18,509
|
)
|
||
Net Income (Loss)
|
4,324
|
|
|
(1,818
|
)
|
Papa Murphy’s Holdings, Inc.
|
(in thousands, except par value and share data)
|
December 31, 2018
|
|
January 1, 2018
|
||||
Assets
|
|
|
|
||||
Current Assets
|
|
|
|
||||
Prepaid expenses and other current assets
|
$
|
—
|
|
|
$
|
183
|
|
Current deferred tax asset
|
61
|
|
|
—
|
|
||
Total current assets
|
61
|
|
|
183
|
|
||
Investment in affiliates
|
126,181
|
|
|
117,971
|
|
||
Total assets
|
$
|
126,242
|
|
|
$
|
118,154
|
|
Liabilities and Equity
|
|
|
|
||||
Current Liabilities
|
|
|
|
||||
Other current liabilities
|
$
|
40
|
|
|
$
|
56
|
|
Due to consolidated affiliates
|
4,057
|
|
|
2,130
|
|
||
Total current liabilities
|
4,097
|
|
|
2,186
|
|
||
Deferred tax liability
|
23,121
|
|
|
20,600
|
|
||
Total liabilities
|
$
|
27,218
|
|
|
$
|
22,786
|
|
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; 17,025,028 and 16,971,461 shares issued and outstanding, respectively)
|
170
|
|
|
170
|
|
||
Additional paid-in capital
|
121,171
|
|
|
120,614
|
|
||
Accumulated deficit
|
(22,317
|
)
|
|
(25,416
|
)
|
||
Total shareholders’ equity
|
99,024
|
|
|
95,368
|
|
||
Total liabilities and shareholders’ equity
|
$
|
126,242
|
|
|
$
|
118,154
|
|
Papa Murphy’s Holdings, Inc.
|
|
Fiscal Year
|
||||||
(in thousands)
|
2018
|
|
2017
|
||||
Net cash provided by operating activities
|
$
|
1,163
|
|
|
$
|
(1,153
|
)
|
|
|
|
|
||||
Investing Activities
|
|
|
|
||||
(Deemed) dividend from subsidiary
|
(1,225
|
)
|
|
1,159
|
|
||
Net cash provided by investing activities
|
(1,225
|
)
|
|
1,159
|
|
||
|
|
|
|
||||
Financing Activities
|
|
|
|
||||
Repurchases of common stock
|
62
|
|
|
(6
|
)
|
||
Net cash provided by financing activities
|
62
|
|
|
(6
|
)
|
||
|
|
|
|
||||
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 2018
|
|
|
|
|
|
|
|
||||||||
Allowance for trade and other receivables
|
$
|
67
|
|
|
$
|
118
|
|
|
$
|
(114
|
)
|
|
$
|
71
|
|
Fiscal year 2017
|
|
|
|
|
|
|
|
||||||||
Allowance for trade and other receivables
|
$
|
37
|
|
|
$
|
48
|
|
|
$
|
(18
|
)
|
|
$
|
67
|
|
PAPA MURPHY’S HOLDINGS, INC.
|
|||
|
|
|
|
By:
|
|
/s/ Nik Rupp
|
|
|
|
Name:
|
Nik Rupp
|
|
|
Title:
|
Chief Financial Officer
|
|
SIGNATURE
|
TITLE
|
DATE
|
|
|
|
|
|
/s/ Weldon Spangler
|
Chief Executive Officer
|
March 14, 2019
|
|
Weldon Spangler
|
(Principal Executive Officer) and Director
|
|
|
|
|
|
|
/s/ Nik Rupp
|
Chief Financial Officer
|
March 14, 2019
|
|
Nik Rupp
|
(Principal Financial Officer and Principal Accounting Officer)
|
|
|
|
|
|
|
/s/ Jean Birch*
|
Chair of the Board
|
March 14, 2019
|
|
Jean Birch
|
|
|
|
|
|
|
|
/s/ Benjamin Hochberg*
|
Director
|
March 14, 2019
|
|
Benjamin Hochberg
|
|
|
|
|
|
|
|
/s/ Yoo Jin Kim*
|
Director
|
March 14, 2019
|
|
Yoo Jin Kim
|
|
|
|
|
|
|
|
/s/ L. David Mounts*
|
Director
|
March 14, 2019
|
|
L. David Mounts
|
|
|
|
|
|
|
|
/s/ John Shafer*
|
Director
|
March 14, 2019
|
|
John Shafer
|
|
|
|
|
|
|
|
/s/ Rob Weisberg*
|
Director
|
March 14, 2019
|
|
Rob Weisberg
|
|
|
|
|
|
|
|
/s/ Katherine L. Scherping*
|
Director
|
March 14, 2019
|
|
Katherine L. Scherping
|
|
|
|
|
|
|
|
/s/ Noah Elbogen*
|
Director
|
March 14, 2019
|
|
Noah Elbogen
|
|
|
|
|
|
|
|
/s/ Alex Matina*
|
Director
|
March 14, 2019
|
|
Alex Matina
|
|
|
*By:
|
|
/s/ Nik Rupp
|
|
|
Nik Rupp
|
|
|
Attorney-in-fact pursuant to filed Power of Attorney
|
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
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5.
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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):
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a.
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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
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b.
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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.
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/s/ Weldon Spangler
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Weldon Spangler
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Chief Executive Officer
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(Principal Executive Officer)
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1.
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I have reviewed this annual report on Form 10-K of Papa Murphy's Holdings, Inc.;
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2.
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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;
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3.
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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;
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4.
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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:
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a.
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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;
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b.
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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;
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c.
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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
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d.
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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
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5.
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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.
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/s/ Nik Rupp
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Nik Rupp
|
|
Chief Financial Officer
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|
(Principal Financial Officer)
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(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
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(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
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(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
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(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
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|
Nik Rupp
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|
Chief Financial Officer
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