Notes to Unaudited Condensed Consolidated Financial Statements
|
|
Note 1 — Description of Business and Basis of Presentation
|
Description of business
Papa Murphy’s Holdings, Inc. (“Papa Murphy’s” or the “Company”), together with its subsidiaries, is a franchisor and operator of a Take ‘N’ Bake pizza chain. The Company franchises the right to operate Papa Murphy’s Take ‘N’ Bake pizza franchises and operates Papa Murphy's Take ‘N’ Bake pizza stores owned by the Company. As of
April 3, 2017
, the Company had
1,566
stores consisting of
1,525
domestic stores (
1,357
franchised stores and
168
Company-owned stores) across
38
states, plus
41
franchised stores in Canada and the United Arab Emirates.
Substantially all of the Company’s revenues are derived from retail sales of pizza and other food and beverage products to the general public by Company-owned stores and the collection of franchise royalties and fees associated with franchise and development rights.
Basis of presentation
The accompanying
interim unaudited
condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “
SEC
”). Accordingly, they do not include all information and footnotes required by generally accepted accounting principles in the United States (“
GAAP
”) for complete financial statements. In the Company’s opinion, all necessary adjustments, consisting of only normal recurring adjustments, have been made for the fair statement of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying
interim unaudited
condensed consolidated financial statements
should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
January 2, 2017
.
Principles of consolidation
The
interim unaudited
condensed consolidated financial statements
include the accounts of Papa Murphy’s Holdings, Inc., its subsidiaries and certain entities which the Company consolidates as variable interest entities (“
VIE
s”). All significant intercompany transactions and balances have been eliminated.
Throughout the
interim unaudited
condensed consolidated financial statements
and the related notes thereto, “Papa Murphy’s” and “the Company” refer to Papa Murphy’s Holdings, Inc. and its consolidated subsidiaries.
Fiscal year
The Company uses a 52- or 53-week fiscal year, ending on the Monday nearest to December 31. Fiscal year
2017
is a 52-week year and fiscal
2016
was a 53-week year. All three month periods presented herein contain 13 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods. References to fiscal
2017
and
2016
are references to fiscal years ending
January 1, 2018
and ended
January 2, 2017
, respectively.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“
FASB
”) issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“
ASU 2014-09
”), a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under GAAP. The new standard, as amended, requires adoption by the first quarter of fiscal 2018. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
which is an amendment to the new revenue recognition standard on assessing whether an entity is a principal or an agent in a revenue transaction. This amendment addresses implementation issues that were discussed by the Revenue Recognition Transition Resource Group to clarify the principal versus agent assessment and lead to more consistent application. This new standard has the same effective date and transition requirements as
ASU 2014-09
.
The new revenue standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company anticipates adopting the standard in the first quarter of fiscal 2018 using the full retrospective method to restate each prior reporting period presented.
The Company anticipates this standard will have a material impact on its consolidated financial statements. While the Company continues to assess all potential impacts of the standard, it currently believes the most significant effects will relate to its: (i) accounting for franchise and development fees, and (ii) accounting for its advertising funds. The Company expects revenue related to its franchise royalties, which are based on a percentage of franchise sales, and revenue from Company-owned restaurants to remain substantially unchanged. Specifically, under the new standard the Company expects to recognize franchise fees ratably over the life of the contract rather than at the time the store is opened or a successive contract commences. In addition, the Company expects to account for advertising fund revenues on a gross basis, instead of net, as the Company has determined that it is the principal since it controls the funds and determines how the funds collected will be spent. The Company continues to evaluate the impact the adoption of this standard will have on the recognition of other revenue transactions such as the refranchising of Company-owned restaurants.
In February 2016, the
FASB
issued ASU No. 2016-02,
Leases (Topic 842)
(“
ASU 2016-02
”). This update requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than twelve months.
ASU 2016-02
also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include both qualitative and quantitative information. The effective date for
ASU 2016-02
is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with earlier adoption permitted. The Company is still evaluating the impact of
ASU 2016-02
on its financial position and results of operations.
In August 2016, the
FASB
issued ASU No. 2016-15,
Statement of Cash Flows (Topic 320)
(“
ASU 2016-15
”). This update clarifies the presentation of certain cash receipts and cash payments in the statement of cash flows. The effective date for
ASU 2016-15
is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is still evaluating the impact of
ASU 2016-15
on its consolidated statements of cash flows.
In January 2017, the
FASB
issued ASU No. 2017-04,
Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment
(“
ASU 2017-04
”). The new standard simplifies how an entity measures goodwill impairment by removing the second step of the two-step quantitative goodwill impairment test. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured at the amount by which the carrying value exceeds the fair value of a reporting unit; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount.
ASU 2017-04
requires prospective adoption and is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is still evaluating the impact of
ASU 2017-04
on its financial position and results of operations.
|
|
Note 2 — Prepaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 3, 2017
|
|
January 2, 2017
|
Prepaid media production costs
|
$
|
635
|
|
|
$
|
606
|
|
Prepaid software and support
|
1,276
|
|
|
985
|
|
Prepaid rents
|
629
|
|
|
622
|
|
Prepaid insurance
|
421
|
|
|
453
|
|
Taxes receivable
|
150
|
|
|
547
|
|
Assets held for sale
|
1,420
|
|
|
1,406
|
|
Advertising cooperative assets, restricted
|
72
|
|
|
48
|
|
Other
|
143
|
|
|
41
|
|
Total prepaid expenses and other current assets
|
$
|
4,746
|
|
|
$
|
4,708
|
|
|
|
Note 3 — Property and Equipment
|
Property and equipment are net of accumulated depreciation of
$19.0 million
and
$17.1 million
at
April 3, 2017
, and
January 2, 2017
, respectively. Depreciation expense amounted to
$1.9 million
and
$1.4 million
during the three months ended
April 3, 2017
, and
March 28, 2016
, respectively.
|
|
Note 4 — Intangible Assets
|
Definite-lived intangible assets are net of accumulated amortization of
$27.8 million
and
$26.6 million
as of
April 3, 2017
, and
January 2, 2017
, respectively. Amortization expense amounted to
$1.2 million
and
$1.3 million
during the three months ended
April 3, 2017
, and
March 28, 2016
, respectively.
Notes Receivable
Notes receivable consist of a note maturing in 2020 that is collateralized by store assets. Changes in the account balance represent amortization payments collected pursuant to the terms of the note.
Accounts Receivable
Allowance for doubtful accounts amounted to
$28,000
and
$37,000
as of
April 3, 2017
, and
January 2, 2017
, respectively.
|
|
Note 6 — Financing Arrangements
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 3, 2017
|
|
January 2, 2017
|
Term loan
|
$
|
102,200
|
|
|
$
|
105,879
|
|
Revolving line of credit
|
4,400
|
|
|
800
|
|
Notes payable
|
3,000
|
|
|
3,000
|
|
Total principal amount of long-term debt
|
109,600
|
|
|
109,679
|
|
Unamortized debt issuance costs
|
(751
|
)
|
|
(835
|
)
|
Total long-term debt
|
108,849
|
|
|
108,844
|
|
Less current portion
|
(8,400
|
)
|
|
(7,879
|
)
|
Total long-term debt, net of current portion
|
$
|
100,449
|
|
|
$
|
100,965
|
|
Senior secured credit facility
On August 28, 2014, PMI Holdings, Inc., a wholly-owned subsidiary of Papa Murphy’s Holdings, Inc., entered into a
$132.0 million
senior secured credit facility (the “
Senior Credit Facility
”) consisting of a
$112.0 million
term loan and a
$20.0 million
revolving credit facility, which includes a
$2.5 million
letter of credit subfacility and a
$1.0 million
swing-line loan subfacility. The term loan and any loans made under the revolving credit facility mature in
August 2019
. As of
April 3, 2017
, the term loan was subject to the LIBOR rate option at
4.23%
. As of
April 3, 2017
,
$3.9 million
of the revolving credit facility was subject to the LIBOR rate option at
4.20%
, and the remaining
$0.5 million
was subject to the base rate option at
6.25%
.
With a maturity date of over one year from
April 3, 2017
, balances outstanding under the
Senior Credit Facility
are classified as non-current on the
Condensed Consolidated Balance Sheets
, except for mandatory, minimum term loan amortization payments of
$2.1 million
due on the last day of each fiscal quarter.
The weighted average interest rate for all borrowings under our
Senior Credit Facility
for the
first
quarter of
2017
was
4.05%
.
Notes payable
Papa Murphy’s Company Stores, Inc., a wholly owned subsidiary of Papa Murphy’s Holdings, Inc., has a
$3.0 million
note payable which bears interest at
5%
and matures in
December 2018
. This note is subordinated to the
Senior Credit Facility
.
|
|
Note 7 — Fair Value Measurement
|
The Company determines the fair value of assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant.
GAAP
defines a fair value hierarchy that prioritizes the assumptions used to measure fair value. The three levels of the fair value hierarchy are defined as follows:
|
|
▪
|
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.
|
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2017
|
|
January 2, 2017
|
|
|
(in thousands)
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Fair Value Measurement
|
Financial assets
|
|
|
|
|
|
|
|
|
|
Notes receivable
(1)
|
$
|
121
|
|
|
$
|
122
|
|
|
$
|
149
|
|
|
$
|
150
|
|
|
Level 3
|
|
|
(1)
|
The fair value of notes receivable was estimated primarily using a discounted cash flow method based on a discount rate, reflecting the applicable credit spread.
|
Financial instruments not included in the table above consist of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The fair values of cash and cash equivalents, accounts receivable, and accounts payable approximate carrying value because of the short-term nature of the accounts. The fair value of long-term debt approximates carrying value because the borrowings are made with variable market rates and negotiated terms and conditions that are consistent with current market rates.
|
|
Note 8 — Accrued Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 3, 2017
|
|
January 2, 2017
|
Accrued compensation and related costs
|
$
|
4,857
|
|
|
$
|
2,192
|
|
Gift cards payable
|
2,461
|
|
|
3,033
|
|
Accrued interest and non-income taxes payable
|
406
|
|
|
524
|
|
Convention fund balance
|
1,194
|
|
|
1,025
|
|
Advertising cooperative liabilities
|
178
|
|
|
204
|
|
Other
|
195
|
|
|
525
|
|
Total accrued expenses and other current liabilities
|
$
|
9,291
|
|
|
$
|
7,503
|
|
Information on the Company’s income taxes for the periods reported is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 3, 2017
|
|
March 28, 2016
|
(Benefit from) provision for income taxes
|
$
|
(3,802
|
)
|
|
$
|
460
|
|
(Loss) income before income taxes
|
(9,216
|
)
|
|
1,102
|
|
Effective income tax rate
|
41.3
|
%
|
|
41.7
|
%
|
The effective income tax rate for the three months ended
April 3, 2017
, includes the effect of a discrete adjustment for the share-based compensation expense recorded for vesting restricted common shares. The effective income tax rate for the three months ended
March 28, 2016
, includes the effect of certain permanent adjustments arising from differences between U.S.
GAAP
and U.S. federal and state income tax law and the relative impact of those adjustments on a small quarterly income before income taxes.
|
|
Note 10 — Share-based Compensation
|
In May 2010, the Company’s Board of Directors approved the 2010 Amended Management Incentive Plan (the “
2010 Plan
”). In May 2014, the Company’s Board of Directors adopted the 2014 Equity Incentive Plan (the “
2014 Plan
,” and together with
the
2010 Plan
, the “
Incentive Plans
”). The
Incentive Plans
reserve
2,116,747
common shares for equity incentive awards consisting of incentive stock options, non-qualified stock options, restricted stock awards, and unrestricted stock awards. Equity incentive awards may be issued from either the
2014 Plan
or the
2010 Plan
.
Restricted common shares
Information with respect to restricted stock awards is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares of Restricted Common Stock
|
|
Weighted Average
Award Date
Fair Value Per Share
|
|
Time Vesting
|
|
Market Condition
|
|
Unvested, January 2, 2017
|
30,670
|
|
|
148,946
|
|
|
$
|
2.70
|
|
Granted
|
11,333
|
|
|
—
|
|
|
4.41
|
|
Vested
|
(4,826
|
)
|
|
(94,866
|
)
|
|
4.29
|
|
Unvested, April 3, 2017
|
37,177
|
|
|
54,080
|
|
|
$
|
4.58
|
|
Stock options
Information with respect to stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
Subject to Options
|
|
Weighted
Average
Exercise
Price Per Share
|
|
Weighted
Average Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
(thousands)
|
|
Time
Vesting
|
|
Market
Condition
|
|
|
|
Outstanding, January 2, 2017
|
951,688
|
|
|
171,495
|
|
|
$
|
11.48
|
|
|
|
|
|
Granted
|
299,000
|
|
|
—
|
|
|
3.98
|
|
|
|
|
|
Forfeited
|
(459,602
|
)
|
|
(80,385
|
)
|
|
11.43
|
|
|
|
|
|
Outstanding, April 3, 2017
|
791,086
|
|
|
91,110
|
|
|
$
|
8.97
|
|
|
8.4 years
|
|
$
|
315
|
|
Exercisable, April 3, 2017
|
263,125
|
|
|
—
|
|
|
$
|
11.60
|
|
|
7.4 years
|
|
$
|
—
|
|
Compensation cost
Pre-tax compensation costs recognized in connection with the
Incentive Plans
for the three months ended
April 3, 2017
and
March 28, 2016
amounted to
$230,000
and
$231,000
, respectively.
As of
April 3, 2017
, the total unrecognized stock-based compensation expense was
$1.6 million
, with
$1.3 million
associated with time vesting awards and
$0.3 million
associated with market condition awards. The remaining weighted average contractual life for unrecognized stock-based compensation expense was
2.3 years
as of
April 3, 2017
.
|
|
Note 11 — Earnings per Share (EPS)
|
The number of shares and earnings per share (“
EPS
”) data for all periods presented are based on the historical weighted-average shares of common stock outstanding. Basic
EPS
is calculated by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted
EPS
is calculated using income available to common stockholders divided by diluted weighted-average shares of common stock outstanding during each period, which includes unvested restricted common stock and outstanding stock options. Diluted
EPS
considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect.
The following table sets forth the computations of basic and dilutive
EPS
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands, except per share data)
|
April 3, 2017
|
|
March 28, 2016
|
Earnings:
|
|
|
|
Net (loss) income
|
$
|
(5,414
|
)
|
|
$
|
642
|
|
Shares:
|
|
|
|
Weighted average common shares outstanding
|
16,839
|
|
|
16,717
|
|
Dilutive effect of restricted equity awards
(1)
|
—
|
|
|
37
|
|
Diluted weighted average number of shares outstanding
|
16,839
|
|
|
16,753
|
|
(Loss) earnings per share:
|
|
|
|
Basic (loss) earnings per share
|
$
|
(0.32
|
)
|
|
$
|
0.04
|
|
Diluted (loss) earnings per share
|
$
|
(0.32
|
)
|
|
$
|
0.04
|
|
|
|
(1)
|
The Company’s potential common stock instruments such as stock options and restricted stock were not included in the computation of diluted EPS for the three months ended April 3, 2017, as the effect of including these shares in the calculation would have been anti-dilutive.
|
For the three months ended
April 3, 2017
, and
March 28, 2016
, an aggregated total of
1.4 million
shares and
0.4 million
shares, respectively, have been excluded from the diluted
EPS
calculation because their effect would have been anti-dilutive.
|
|
Note 12 — Commitments and Contingencies
|
Operating lease commitments
The Company leases facilities and various office equipment under non-cancelable operating leases which expire through
December 2025
. Lease terms for its Company-owned stores are generally for
five years
with renewal options and generally require the Company to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs.
The Company has entered into operating leases that it has subleased to
two
franchised stores. These operating leases have minimum base rent terms, contingent rent terms if individual franchised store sales exceed certain levels and have terms expiring on various dates from
May 2020
to
October 2020
.
Lease guarantees
The Company is the guarantor for operating leases of
17
franchised stores that have terms expiring on various dates from
September 2017
to
September 2021
. The obligations from these leases will generally continue to decrease over time as the leases expire. The applicable franchise owners continue to have primary liability for these operating leases. As of
April 3, 2017
, the Company does not believe it is probable it would be required to perform under the outstanding guarantees.
Legal proceedings
There have been no material developments in the legal proceedings described in Part I, Item 3, of the Company’s Annual Report on Form 10-K for the fiscal year ended
January 2, 2017
.
|
|
Note 13 — Segment Information
|
The Company has the following reportable segments: (i) Domestic Franchise; (ii) Domestic Company Stores; and (iii) International. The Domestic Franchise segment includes operations with respect to franchised stores in the United States and derives its revenues primarily from franchise and development fees and franchise royalties from franchised stores in the United States. The Domestic Company Stores segment includes operations with respect to Company-owned stores in the United States and derives its revenues from retail sales of pizza and side items to the general public. The International segment includes operations related to the Company’s operations outside the United States and derives its revenues from franchise and development fees and franchise royalties from franchised stores outside the United States.
The Company measures the performance of its segments based on segment adjusted
EBITDA
and allocates resources based primarily on this measure. “
EBITDA
” is calculated as net
(loss) income
before interest expense, income taxes, depreciation, and amortization. Segment adjusted
EBITDA
excludes certain unallocated and corporate expenses. Although segment adjusted
EBITDA
is not a measure of financial condition or performance determined in accordance with
GAAP
, the Company uses segment adjusted
EBITDA
to compare the operating performance of its segments on a consistent basis and to evaluate
the performance and effectiveness of its operational strategies. The Company’s calculation of segment adjusted
EBITDA
may not be comparable to that reported by other companies.
The following tables summarize information on revenues, segment adjusted
EBITDA
and assets for each of the Company’s reportable segments and includes a reconciliation of segment adjusted
EBITDA
to
(loss) income
before income taxes:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 3, 2017
|
|
March 28, 2016
|
Revenues
|
|
|
|
Domestic Franchise
|
$
|
11,129
|
|
|
$
|
12,215
|
|
Domestic Company Stores
|
20,775
|
|
|
20,674
|
|
International
|
90
|
|
|
96
|
|
Total
|
$
|
31,994
|
|
|
$
|
32,985
|
|
Segment Adjusted EBITDA
|
|
|
|
Domestic Franchise
|
$
|
(2,037
|
)
|
|
$
|
5,290
|
|
Domestic Company Stores
|
575
|
|
|
1,151
|
|
International
|
69
|
|
|
64
|
|
Total reportable segments adjusted EBITDA
|
(1,393
|
)
|
|
6,505
|
|
Corporate and unallocated
|
(3,479
|
)
|
|
(1,509
|
)
|
Depreciation and amortization
|
(3,117
|
)
|
|
(2,715
|
)
|
Interest expense, net
|
(1,227
|
)
|
|
(1,179
|
)
|
(Loss) Income Before Income Taxes
|
$
|
(9,216
|
)
|
|
$
|
1,102
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 3, 2017
|
|
January 2, 2017
|
Total Assets
|
|
|
|
Domestic Franchise
|
$
|
129,623
|
|
|
$
|
133,466
|
|
Domestic Company Stores
|
51,017
|
|
|
52,531
|
|
International
|
302
|
|
|
318
|
|
Other
(1)
|
87,198
|
|
|
87,557
|
|
Total
|
$
|
268,140
|
|
|
$
|
273,872
|
|
|
|
(1)
|
Other assets which are not allocated to the individual segments primarily include trade names and trademarks and taxes receivable.
|
|
|
Note 14 — Subsequent Events
|
Divestitures
In December 2016, the Company decided to sell
seven
Company-owned stores located in the Denver, Colorado area and categorized these assets as assets held for sale on the Company’s
Condensed Consolidated Balance Sheets
in prepaid expenses and other current assets. In May 2017, the Company completed the sale and refranchise of the
seven
Company-owned stores for
$2.45 million
in cash, inclusive of franchise fees for these
seven
stores and
three
stores to be developed in the future.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited
condensed consolidated financial statements
and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended
January 2, 2017
. To match our operating cycle, we use a 52- or 53-week fiscal year, ending on the Monday nearest to December 31. Our fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. Fiscal year
2017
is a 52-week period ending on
January 1, 2018
, and
2016
was a 53-week period ended on
January 2, 2017
.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended
January 2, 2017
. All statements other than statements of historical fact or relating to present facts or current conditions included in this discussion and analysis are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Examples of forward-looking statements include those regarding our future financial or operating results, cash flows, sufficiency of liquidity, financing resources, business strategies and priorities,
effects of advertising cost increases and shift in mix of marketing efforts, decrease in the advertising fund deficit over the remainder of 2017,
resolution of litigation and claims, expansion and growth opportunities, the number and mix of new store openings, our refranchising initiative and its effects on our operating results, reduction in the number of Company-owned stores, adoption of new accounting standards, our qualification as an “emerging growth company,” exposure to foreign currency and interest rate risk, as well as industry trends and outlooks. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events
.
The forward-looking statements contained in this discussion and analysis are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. As you read and consider this discussion and analysis, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements. We believe these factors include, but are not limited to, those described under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended
January 2, 2017
. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual operating and financial performance may vary in material respects from expectations based on these forward-looking statements.
Any forward-looking statement made by us in this discussion and analysis speaks only as of the date on which we make it. Factors or events that could cause our actual operating and financial performance to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Revenue
Total revenues for the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, declined
3.0%
from
$33.0 million
to
$32.0 million
, primarily due to a decline in comparable store sales and lower fees from lower franchise store openings. Comparable store sales in
2017
compared to
2016
for selected segments were as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3, 2017
|
|
March 28, 2016
|
Domestic Franchise
|
(4.5
|
)%
|
|
(2.8
|
)%
|
Domestic Company Stores
|
(9.9
|
)%
|
|
(2.8
|
)%
|
Total domestic stores
|
(5.0
|
)%
|
|
(2.8
|
)%
|
Comparable store sales for the
three
months ended
April 3, 2017
were lower due to increased competition resulting in reduced numbers of sales transactions while the average amount of each sales transaction has remained mostly flat.
Store Development
Our franchise owners opened
seven
stores, including
six
in the United States, in the three months ended
April 3, 2017
. While we operate a small percentage of stores as Company-owned stores, we expect the majority of our new store expansion to continue to come from new franchised store openings.
Refranchising
During the past several years, we have focused our financial resources on accelerating the build out of several markets with Company-owned stores. We see materially stronger store performance in markets with greater penetration and higher brand awareness. We are now entering the next phase of our strategic development plan which entails refranchising more than 100 of our Company-owned stores to experienced franchisees that are well-capitalized and can further grow these markets. Our target is to reduce the number of Company-owned stores to about 50 stores by 2020, which will be used to focus on operational excellence, innovation and testing.
National Media
During the quarter, we aired a national media campaign for all domestic stores. Several of our markets that historically receive no television media were provided with a few weeks of national cable advertising.
Online Ordering
We began the system-wide roll-out of our online ordering platform a year ago and have seen positive results to date as the average transaction amount continues to be about 20% higher with online orders than in-store orders. We strategically use online-only promotions communicated through text and email messaging.
We operate in three business segments: Domestic Franchise, Domestic Company Stores, and International. Our Domestic Franchise segment consists of our domestic franchised stores, which represent the majority of our system-wide stores. Our Domestic Company Stores segment consists of our Company-owned stores in the United States. Our International segment consists of our stores outside of the United States, all of which are franchised.
We measure the performance of our segments based on segment adjusted
EBITDA
and allocate resources based primarily on this measure. “
EBITDA
” is calculated as net
(loss) income
before interest expense, income taxes, depreciation, and amortization. Segment adjusted
EBITDA
excludes certain unallocated and corporate expenses, which include costs related to our board of directors, CEO, CFO and certain legal expenses. Although segment adjusted
EBITDA
is not a measure of financial condition or performance determined in accordance with
GAAP
, we use segment adjusted
EBITDA
to compare the operating performance of our segments on a consistent basis and to evaluate the performance and effectiveness of our operational strategies. Our calculation of segment adjusted
EBITDA
may not be comparable to that reported by other companies.
Our measure of segment performance has changed beginning in fiscal year
2017
. Previously, segment operating income was used as the measure of segment performance. Our Chief Operating Decision Maker (“CODM”) now uses segment adjusted EBITDA as the primary measure of segment performance to allocate resources. The CODM believes this measure provides an enhanced basis for consistently measuring segment performance against operational objectives and strategies.
The following table sets forth our revenues and segment adjusted
EBITDA
for each of our segments for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 3, 2017
|
|
March 28, 2016
|
Revenues
|
|
|
|
Domestic Franchise
|
$
|
11,129
|
|
|
$
|
12,215
|
|
Domestic Company Stores
|
20,775
|
|
|
20,674
|
|
International
|
90
|
|
|
96
|
|
Total
|
$
|
31,994
|
|
|
$
|
32,985
|
|
Segment Adjusted EBITDA
|
|
|
|
Domestic Franchise
|
$
|
(2,037
|
)
|
|
$
|
5,290
|
|
Domestic Company Stores
|
575
|
|
|
1,151
|
|
International
|
69
|
|
|
64
|
|
Total reportable segments adjusted EBITDA
|
(1,393
|
)
|
|
6,505
|
|
Corporate and unallocated
|
(3,479
|
)
|
|
(1,509
|
)
|
Depreciation and amortization
|
(3,117
|
)
|
|
(2,715
|
)
|
Interest expense, net
|
(1,227
|
)
|
|
(1,179
|
)
|
(Loss) Income Before Income Taxes
|
$
|
(9,216
|
)
|
|
$
|
1,102
|
|
We evaluate the performance of our business using a variety of operating and performance metrics. Set forth below is a description of our key operating metrics.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3, 2017
|
|
March 28, 2016
|
Domestic store average weekly sales
|
$
|
11,140
|
|
|
$
|
11,928
|
|
Domestic comparable store sales
|
(5.0
|
)%
|
|
(2.8
|
)%
|
Domestic comparable stores
|
1,436
|
|
|
1,407
|
|
System-wide sales (in thousands)
|
$
|
225,610
|
|
|
$
|
236,851
|
|
System-wide stores
|
1,566
|
|
|
1,555
|
|
EBITDA (in thousands)
|
$
|
(4,872
|
)
|
|
$
|
4,996
|
|
Average Weekly Sales
Average Weekly Sales (“
AWS
”) consists of the average weekly sales of domestic franchised and Company-owned stores over a specified period of time.
AWS
is calculated by dividing the total net sales of our domestic system-wide stores for the relevant time period by the number of weeks these stores were open in such time period. This measure allows management to assess changes in customer traffic and spending patterns in our domestic stores.
Comparable Store Sales
Comparable store sales represents the change in year-over-year sales for comparable stores. A comparable store is a store open for at least 52 full weeks from the comparable date (the Tuesday following the opening date). Comparable store sales reflects changes in the number of transactions and in customer spend per transaction at existing stores. Customer spend per transaction is affected by changes in menu prices, sales mix, and the number of items sold per customer.
System-Wide Sales
System-wide sales include net sales by all of our system-wide stores. This measure allows management to assess the health of our brand, our relative position to competitors, and changes in our royalty revenues.
Store Openings, Closures, Acquisitions, and Divestitures
We review the number of new stores, the number of closed stores, and the number of acquired and divested stores to assess growth in system-wide sales, royalty revenues, and Company-owned store sales. We operate through a footprint of
1,566
stores as of
April 3, 2017
, of which
89.3%
are franchised, located in
38
states plus Canada and the Middle East. The following table presents the changes in the number of stores in our system for the
three months ended April 3, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Company Stores
|
|
Domestic Franchise
|
|
Total Domestic
|
|
International
|
|
Total
|
Store count at January 2, 2017
|
168
|
|
|
1,369
|
|
|
1,537
|
|
|
40
|
|
|
1,577
|
|
Openings
|
—
|
|
|
6
|
|
|
6
|
|
|
1
|
|
|
7
|
|
Closings
|
—
|
|
|
(18
|
)
|
|
(18
|
)
|
|
—
|
|
|
(18
|
)
|
Store count at April 3, 2017
|
168
|
|
|
1,357
|
|
|
1,525
|
|
|
41
|
|
|
1,566
|
|
EBITDA
To supplement our
condensed consolidated financial statements
presented in accordance with generally accepted accounting principles in the U.S. (“
GAAP
”), we consider certain financial measures that are not prepared in accordance with
GAAP
. These non-
GAAP
financial measures are not based on any standardized methodology prescribed by
GAAP
and are not necessarily comparable to similarly-titled measures presented by other companies.
“
EBITDA
” is calculated as net
(loss) income
before interest expense, income taxes, depreciation, and amortization.
EBITDA
is a supplemental measure of operating performance that does not represent and should not be considered as an alternative to net
(loss) income
, as determined by
GAAP
. Our calculation of
EBITDA
may not be comparable to that reported by other companies.
EBITDA
is a non-
GAAP
financial measure. Management believes that
EBITDA
, when viewed with our results of operations in accordance with
GAAP
and our reconciliation of
EBITDA
to net
(loss) income
, provides additional information to investors. We provide this non-
GAAP
financial measure to enhance investors’ understanding of our business and our results of operations and to assist investors in evaluating how well we are executing strategic initiatives. We believe
EBITDA
is used by investors as a supplemental measure to evaluate the overall operating performance of companies in our industry.
Management uses
EBITDA
and other similar measures:
|
|
▪
|
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.
|
EBITDA
has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under
GAAP
. Some of the limitations are:
|
|
▪
|
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
EBITDA
does not reflect the cash requirements for such replacements; and
|
|
|
▪
|
EBITDA
does not reflect our tax expense or the cash requirements to pay our taxes.
|
To address these limitations, we reconcile
EBITDA
to the most directly comparable
GAAP
measure, net income. Further, we also review
GAAP
measures and evaluate individual measures that are not included in
EBITDA
.
The following table provides a reconciliation of our net
(loss) income
to
EBITDA
for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 3, 2017
|
|
March 28, 2016
|
Net (Loss) Income
|
$
|
(5,414
|
)
|
|
$
|
642
|
|
Depreciation and amortization
|
3,117
|
|
|
2,715
|
|
(Benefit from) provision for income taxes
|
(3,802
|
)
|
|
460
|
|
Interest expense, net
|
1,227
|
|
|
1,179
|
|
EBITDA
|
$
|
(4,872
|
)
|
|
$
|
4,996
|
|
The following table sets forth our results of operations in dollars and as a percentage of total revenues for the
three
months ended
April 3, 2017
, and
March 28, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3, 2017
|
|
March 28, 2016
|
(in thousands)
|
$
|
|
Total
% of
Revenues
|
|
$
|
|
Total
% of
Revenues
|
Revenues
|
|
|
|
|
|
|
|
Franchise royalties
|
$
|
10,034
|
|
|
31.4
|
%
|
|
$
|
10,496
|
|
|
31.8
|
%
|
Franchise and development fees
|
601
|
|
|
1.9
|
%
|
|
954
|
|
|
2.9
|
%
|
Company-owned store sales
|
20,775
|
|
|
64.9
|
%
|
|
20,674
|
|
|
62.7
|
%
|
Other
|
584
|
|
|
1.8
|
%
|
|
861
|
|
|
2.6
|
%
|
Total revenues
|
31,994
|
|
|
100.0
|
%
|
|
32,985
|
|
|
100.0
|
%
|
Costs and Expenses
|
|
|
|
|
|
|
|
Store operating costs:
|
|
|
|
|
|
|
|
Cost of food and packaging
(1)
|
7,215
|
|
|
22.6
|
%
|
|
7,272
|
|
|
22.0
|
%
|
Compensation and benefits
(1)
|
6,334
|
|
|
19.8
|
%
|
|
5,734
|
|
|
17.4
|
%
|
Advertising
(1)
|
2,128
|
|
|
6.7
|
%
|
|
2,166
|
|
|
6.6
|
%
|
Occupancy
(1)
|
1,701
|
|
|
5.3
|
%
|
|
1,375
|
|
|
4.2
|
%
|
Other store operating costs
(1)
|
2,222
|
|
|
6.9
|
%
|
|
2,291
|
|
|
6.9
|
%
|
Selling, general, and administrative
|
17,213
|
|
|
53.8
|
%
|
|
9,055
|
|
|
27.5
|
%
|
Depreciation and amortization
|
3,117
|
|
|
9.7
|
%
|
|
2,715
|
|
|
8.2
|
%
|
Loss on disposal or impairment of property and equipment
|
9
|
|
|
0.0
|
%
|
|
54
|
|
|
0.2
|
%
|
Total costs and expenses
|
39,939
|
|
|
124.8
|
%
|
|
30,662
|
|
|
93.0
|
%
|
Operating (Loss) Income
|
(7,945
|
)
|
|
(24.8
|
)%
|
|
2,323
|
|
|
7.0
|
%
|
Interest expense, net
|
1,227
|
|
|
3.9
|
%
|
|
1,179
|
|
|
3.6
|
%
|
Other expense, net
|
44
|
|
|
0.1
|
%
|
|
42
|
|
|
0.1
|
%
|
(Loss) Income Before Income Taxes
|
(9,216
|
)
|
|
(28.8
|
)%
|
|
1,102
|
|
|
3.3
|
%
|
(Benefit from) provision for income taxes
|
(3,802
|
)
|
|
(11.9
|
)%
|
|
460
|
|
|
1.4
|
%
|
Net (Loss) Income
|
(5,414
|
)
|
|
(16.9
|
)%
|
|
642
|
|
|
1.9
|
%
|
|
|
(1)
|
Please see the table presented in
Costs and Expenses
below, which presents Company-owned store expenses as a percentage of Company-owned store sales for the
three
months ended
April 3, 2017
, and
March 28, 2016
.
|
Revenues
Total revenues.
In the three months ended
April 3, 2017
, total revenues decreased compared to the three months ended
March 28, 2016
, primarily due to a decline in domestic comparable store sales of
5.0%
.
Franchise royalties.
Franchise royalties
decreased
in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, primarily due to a decline in Domestic Franchise comparable store sales of
4.5%
and a reduction in the number of franchised stores year-over-year.
The decrease in franchise royalties as a percentage of total revenues for the
three
months ended
April 3, 2017
, compared to the
three
months ended
March 28, 2016
, was the result of the relative increase in the number of Company-owned stores year-over-year as the number of Company-owned stores increased while the number of franchised stores decreased.
Franchise and development fees.
Franchise and development fees
decreased
in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, primarily due to the opening of fewer franchised stores.
Company-owned store sales.
Company-owned store sales
increased
in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, due to an increase in the number of Company-owned stores year-over-year, partially offset by a decline in comparable store sales of
9.9%
in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
.
Costs and Expenses
Total costs and expenses.
Total costs and expenses
increased
in the
three
months ended
April 3, 2017
, compared to the
three
months ended
March 28, 2016
, primarily as a result of an increase in advertising costs associated with our national media campaign.
Store operating costs.
Store operating costs as a percentage of total revenues
increased
in the
three
months ended
April 3, 2017
, compared to the
three
months ended
March 28, 2016
. The following table presents the components of store operating costs as a percentage of Company-owned store sales for the periods reported:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3, 2017
|
|
March 28, 2016
|
Store operating costs as a % of Company-owned store sales:
|
|
|
Cost of food and packaging
|
34.7
|
%
|
|
35.2
|
%
|
Compensation and benefits
|
30.5
|
%
|
|
27.7
|
%
|
Advertising
|
10.2
|
%
|
|
10.5
|
%
|
Occupancy
|
8.2
|
%
|
|
6.7
|
%
|
Other store operating costs
|
10.7
|
%
|
|
11.0
|
%
|
Total store operating costs
|
94.3
|
%
|
|
91.1
|
%
|
Total store operating costs as a percentage of Company-owned store sales
increased
320
basis points overall in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, due primarily to the effect of Company-owned store portfolio changes as we increased our store ownership in less developed markets. Since
December 28, 2015
, we acquired
10
stores from franchise owners, opened
35
new stores, closed
one
store, and refranchised
three
stores. Most of the stores acquired and all of the new stores opened have sales volumes lower than the average store sales for the rest of our portfolio.
|
|
•
|
Occupancy.
As a result of the portfolio changes mentioned above, costs that are primarily fixed at the individual store level, such as Occupancy, increased overall on an absolute dollar basis and as a percentage of Company-owned store sales.
|
|
|
•
|
Compensation and benefits.
Compensation and benefits increased due to inefficiencies in labor utilization associated with the rapid increase of Company-owned stores in markets with lower than average store sales, coupled with increases in the minimum wage in many of our established markets.
|
|
|
▪
|
Cost of food and packaging
.
Fluctuations in cheese prices did not have a material affect on the cost of food and packaging during the quarter and efficiencies in established markets outweighed the impacts of adding the new lower volume stores.
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Selling, general, and administrative.
Selling, general, and administrative costs
increased
in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, primarily due to advertising fund expenses associated with our first national media program. Advertising fund expenses exceeded fund contributions by $8.3 million and $1.1 million in the three months ended
April 3, 2017
and
March 28, 2016
, respectively. We expect the advertising fund deficit to largely reverse throughout the remainder of
2017
. Since our national media test did not provide the desired results, advertising funds will be redirected back to regional advertising, enhanced with increasing digital media advertising. Additionally, one-time severance and restructuring costs of $2.2 million were recorded in the three months ended
April 3, 2017
.
Depreciation and amortization.
Depreciation and amortization
increased
in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, due primarily to the depreciation associated with an increased number of Company-owned stores and increased capital expenditures for business technology projects.
Interest expense, net.
Interest expense, net
increased
in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, due to increased average borrowing rates and draws on our revolving credit facility.
Income Taxes.
Income taxes
decreased
in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, due primarily to a decrease in income before income taxes. The effective tax rate for the three months ended
April 3, 2017
, was
41.3%
compared to
41.7%
for the three months ended
March 28, 2016
. The effective income tax rate decreased primarily due to a discrete adjustment for share-based compensation expense related to the vesting of restricted common shares in the current year.
Our income taxes have varied from what would be expected from the application of prevailing statutory rates, primarily due to the impact of meal and entertainment expenses and share-based compensation expenses.
Segment Results
Domestic Franchise.
Total revenues for the Domestic Franchise segment
decreased
$1.1 million
in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, primarily due to a decline in Domestic Franchise comparable store sales of
4.5%
and a reduction in the number of franchised stores year-over-year.
Adjusted
EBITDA
for the Domestic Franchise segment
decreased
$7.3 million
in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, primarily due to advertising fund expenses associated with our first national media program. Advertising fund expenses exceeded fund contributions by $8.3 million and $1.1 million in the three months ended
April 3, 2017
and
March 28, 2016
, respectively. We expect the advertising fund deficit to largely reverse throughout the remainder of
2017
. Additionally, one-time severance and restructuring costs of $2.2 million were recorded in the three months ended
April 3, 2017
.
Domestic Company Stores.
Total revenues for the Domestic Company Stores segment
increased
$0.1 million
in the three months ended
April 3, 2017
compared to the three months ended
March 28, 2016
, primarily due to an increase in the number of Company-owned stores year-over-year, partially offset by a decline in comparable store sales of
9.9%
.
Adjusted
EBITDA
for the Domestic Company Stores segment decreased
$0.6 million
in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, as a result of increased costs for labor and occupancy, partially offset by a slight increase in revenue.
International.
Total revenues for the International segment
decreased
for the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, primarily due to a decrease in franchise and development fees as a result of fewer new stores opening in the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
.
Adjusted
EBITDA
for the International segment
increased
for the three months ended
April 3, 2017
, compared to the three months ended
March 28, 2016
, primarily due to reductions in selling, general and administrative costs and a decrease in franchise and development fees as indicated previously.
|
|
Liquidity and Capital Resources
|
Our primary sources of liquidity are cash flows from operating activities and proceeds from the incurrence of debt, which together are sufficient to fund our operations, tax payments, capital expenditures, interest, fees, and principal payments on our debt as well as support our growth strategy. If the need arises, we may seek additional funding. Our ability to obtain additional financing will depend on many factors, including prevailing market conditions, our financial condition, and our ability to negotiate favorable terms and conditions. Financing may not be available on terms that are acceptable or favorable to us, if at all.
As of
April 3, 2017
, we had
Cash and cash equivalents
of
$0.4 million
and
$20.0 million
of available borrowings under a revolving credit facility, of which
$4.4 million
was drawn. As of
April 3, 2017
, we had
$109.6 million
of outstanding indebtedness. Principal payments under our
Senior Credit Facility
are due on the last day of each fiscal quarter through the life of the
Senior Credit Facility
. We believe that our cash flows from operations, available cash and cash equivalents, and available borrowings under our revolving credit facility will be sufficient to meet our liquidity needs for at least the next 12 months.
As of
April 3, 2017
, we were in compliance with all of our covenants and other obligations under our
Senior Credit Facility
.
Cash Flows
The following table presents a summary of cash flows from operating, investing, and financing activities for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 3, 2017
|
|
March 28, 2016
|
Cash flows from operating activities
|
$
|
(486
|
)
|
|
$
|
1,433
|
|
Cash flows from investing activities
|
(1,052
|
)
|
|
(5,488
|
)
|
Cash flows from financing activities
|
(82
|
)
|
|
(2,331
|
)
|
Total cash flows
|
$
|
(1,620
|
)
|
|
$
|
(6,386
|
)
|
Cash Flows from Operating Activities
Net cash
used
by operating activities of
$0.5 million
for the
three
months ended
April 3, 2017
, resulted primarily from a net
loss
of
$5.4 million
, adjusted for items such as depreciation and amortization and changes in operating assets and liabilities.
Cash Flows from Investing Activities
Net cash
used
by investing activities was
$1.1 million
for the
three
months ended
April 3, 2017
, compared to net cash
used
of
$5.5 million
for the
three
months ended
March 28, 2016
. The
$4.4 million
decrease
in cash
used
by investing activities was due primarily to a year-over-year decrease of
$4.6 million
in capital expenditures for property, plant, and equipment, primarily relating to the opening of Company-owned stores and development of our new e-commerce and online ordering platform during the
three
months ended
March 28, 2016
.
Cash Flows from Financing Activities
Net cash
used
by financing activities was
$0.1 million
for the
three
months ended
April 3, 2017
, compared to net cash
used
of
$2.3 million
for the
three
months ended
March 28, 2016
. The
$2.2 million
decrease
in net cash
used
by financing activities was primarily due to an increase in borrowings under our revolving credit facility during the
three
months ended
April 3, 2017
.
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|
Critical Accounting Policies
|
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate our judgments and estimates including those related to revenue recognition, impairment of goodwill and intangible assets, income taxes, advertising expense, and share-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The accounting policies we believe to be most critical to understanding our financial results and condition and that require complex and subjective management judgments and estimates are identified and described in our annual consolidated financial statements and the notes included in our Annual Report on Form 10-K for the fiscal year ended
January 2, 2017
.
JOBS Act
We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startup Act of 2012 (the “
JOBS Act
”). For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, reduced disclosure obligations relating to the presentation of financial statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. We have availed ourselves of these reduced reporting and disclosure requirements in our existing filings and expect to continue to avail ourselves of the reduced reporting and disclosure requirements available to emerging growth companies in future filings. We could be an “emerging growth company” until the end of our 2019 fiscal year.
In addition, an emerging growth company can delay its adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of this extended transition period, and as a result, we plan to comply with any new or revised accounting standards on the relevant dates on which non-emerging growth companies must adopt the standards. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As of
April 3, 2017
, there have been no material changes in our market risk exposure from that disclosed in our Annual Report on Form 10-K for the fiscal year ended
January 2, 2017
. For a discussion of our market risk exposure, please see “Item 7A. Quantitative and Qualitative Disclosure About Market Risk” contained in our Annual Report on Form 10-K for the fiscal year ended
January 2, 2017
.
Item 4. Controls and Procedures
|
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Evaluation of Disclosure Controls and Procedures
|
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, pursuant to Rule
13a-15 under the Securities Exchange Act of 1934 (the “
Exchange Act
”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the
Exchange Act
is recorded, processed, summarized and reported within the time periods specified in
SEC
rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
|
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Changes in Internal Control over Financial Reporting
|
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act
) that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.