Notes to Unaudited Condensed Consolidated Financial Statements
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Note 1 — Description of Business and Basis of Presentation
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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
October 1, 2018
, the Company had
1,460
stores consisting of
1,420
domestic stores (
1,307
franchised stores and
113
Company-owned stores) across
37
states, plus
40
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 1, 2018
.
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. 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 years
2018
and
2017
are 52-week years. 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
2018
and
2017
are references to fiscal years ending
December 31, 2018
and ended
January 1, 2018
, respectively.
Recently Issued Accounting Standards
Recently Adopted Accounting Standards
Revenue from Contracts with Customers
The Company adopted ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“
ASU 2014-09
”) as of January 2, 2018. The Company adopted the new standard using the full retrospective method and elected applicable practical expedients on adoption. Accordingly, previously reported financial information has been restated to reflect the application of the new standard to all comparative periods presented.
Adoption of
ASU 2014-09
had a material impact on the Company’s
interim unaudited
condensed consolidated financial statements
. The most significant impacts relate to the: (i) accounting for franchise and development fees, and (ii) accounting for the Company’s advertising fund (the "Brand Marketing Fund" or "
BMF
") and Convention Fund (with the
BMF
, the “
Brand Funds
”). Specifically, under the new standard the Company recognizes franchise fees ratably over the life of the contract rather than at the time the store is opened or a successive contract commences. Revenue related to the Company’s franchise
royalties, which are based on a percentage of franchise sales, and revenue from Company-owned stores remain substantially unchanged.
The Company has determined that
ASU 2014-09
requires a gross presentation on the Company’s
Condensed Consolidated Statements of Operations
for revenues and related expenses of the
BMF
and Convention Fund, or
Brand Funds
. These funds exist solely for the purpose of promoting the Papa Murphy’s brand in the U.S. While this change materially affects the gross amount of reported revenues and expenses, the effect generally is an offsetting increase to both revenues and expenses with no net effect on reported
Operating Income (Loss)
and
Net (Loss) Income
.
Refer to
Impacts to Reported Results
below for more detailed effects of adoption on the Company’s financial statements and refer to
Note 10 — Revenue
for more information on our accounting for revenue.
Leases
The Company early adopted ASU No. 2016-02,
Leases
(Topic 842) (“
ASU 2016-02
”) as of January 2, 2018, concurrent with the adoption of the new revenue standard. The Company adopted this standard using the modified retrospective approach and elected the available practical expedients on adoption. Accordingly, previously reported financial information has been restated to reflect the application of the new standard to all comparative periods presented.
Adoption of the new standard has had a material impact on the Company’s
interim unaudited
condensed consolidated financial statements
. The most significant impacts related to the (i) recognition of right-of-use ("
ROU
") assets and lease liabilities for operating leases, and (ii) changes in occupancy costs and impairment losses related to prior year store closures and impairments.
ROU
assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. A loss is recognized when the
ROU
asset is impaired in connection with the impairment of a store’s assets due to economic or other factors.
Refer to
Impacts to Reported Results
below for more detailed effects of adoption on the Company’s financial statements and refer to
Note 11 — Leases
for more information on our accounting for leases.
Other standards adopted
In August 2016, the
FASB
issued ASU No. 2016-15,
Statement of Cash Flows (Topic 320)
(“
ASU 2016-15
”), which clarifies the presentation of certain cash receipts and cash payments in the statement of cash flows. The Company adopted the standard on January 2, 2018. Adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.
In preparation for the adoption of the above standards, the Company implemented internal controls and key system functionality to enable the preparation of financial information in accordance with the standards.
Recent Accounting Pronouncements Not Yet Adopted
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.
Impacts to Reported Results
Adoption of the standards related to revenue recognition and leases affected the Company’s previously reported results as follows:
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Statement of Operations
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Three Months Ended October 2, 2017
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(unaudited)
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(in thousands, except earnings per share)
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As Reported
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New Revenue Standard Adjustment
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New Lease Standard Adjustment
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As Adjusted
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Total revenues
(1)
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$
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26,825
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$
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6,866
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$
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—
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$
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33,691
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Store operating costs
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16,647
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(357
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)
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(338
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)
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15,952
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Selling, general, and administrative
(1)
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5,596
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6,929
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(8
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)
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12,517
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Loss on disposal or impairment of property and equipment
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4,327
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—
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1,926
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6,253
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(Benefit from) provision for income taxes
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(1,575
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)
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109
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(585
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)
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(2,051
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)
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Net (loss) income
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(1,869
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)
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185
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(994
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)
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(2,678
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)
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Diluted (loss) earnings per share
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(0.11
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)
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0.01
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(0.06
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)
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(0.16
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)
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(1)
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Recognition of advertising revenue and expense on a gross basis instead of a net basis by the
Brand Funds
comprised
$6.6 million
of the revenue adjustment and
$6.9 million
of the expense adjustment under the revenue standard. The revenue adjustment due to the change in method of recognizing franchise and development fees was
$0.3 million
.
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Statement of Operations
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Nine Months Ended October 2, 2017
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(unaudited)
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(in thousands, except earnings per share)
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As Reported
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New Revenue Standard Adjustment
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New Lease Standard Adjustment
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As Adjusted
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Total revenues
(1)
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$
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87,920
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$
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22,051
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$
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—
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$
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109,971
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Store operating costs
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54,855
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(1,165
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)
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(1,270
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)
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52,420
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Selling, general, and administrative
(1)
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26,216
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22,860
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(34
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)
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49,042
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Loss on disposal or impairment of property and equipment
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15,377
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—
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2,453
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17,830
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(Benefit from) provision for income taxes
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(7,384
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)
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132
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(426
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)
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(7,678
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)
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Net (loss) income
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(13,471
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)
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224
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(723
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)
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(13,970
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)
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Diluted (loss) earnings per share
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(0.80
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)
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0.01
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(0.04
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(0.83
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(1)
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Recognition of advertising revenue and expense on a gross basis instead of a net basis by the
Brand Funds
comprised
$21.7 million
of the revenue adjustment and
$22.9 million
of the expense adjustment under the revenue standard. The revenue adjustment due to the change in method of recognizing franchise and development fees was
$0.4 million
.
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Balance Sheet
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January 1, 2018
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(in thousands)
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As Reported
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New Revenue Standard Adjustment
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New Lease Standard Adjustment
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As Adjusted
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Prepaid expenses and other current assets
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$
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2,671
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$
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—
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$
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(390
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)
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$
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2,281
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Operating lease right of use assets
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—
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—
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16,331
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16,331
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Unearned franchise and development fees
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1,702
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9,899
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—
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11,601
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Accrued expenses and other current liabilities
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13,139
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(507
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)
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(250
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)
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12,382
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Lease liabilities
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—
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—
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19,678
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19,678
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Deferred tax liability, net
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24,457
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(2,319
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)
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(313
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)
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21,825
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Other long-term liabilities
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3,922
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—
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(2,218
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)
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1,704
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Accumulated deficit
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(18,613
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)
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(7,073
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)
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(956
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)
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(26,642
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)
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Adoption of the revenue recognition and lease standards did not materially affect cash from or used in operating, financing, or investing cash flows on the Company’s
Condensed Consolidated Statements of Cash Flows
.
Segment Definitions
As a result of changes in the Company’s executive management responsibilities, effective January 2, 2018, the Company changed its reportable segments by combining its domestic and international franchise business into a single Franchise
segment and separating its
Brand Funds
into a separate reportable segment. No changes were made to the Company’s Company Stores segment. Management believes this change better reflects the priorities and decision making analysis around the allocation of the Company’s resources. Prior period results for the affected segments have been retrospectively revised to reflect this change. See
Note 17 — Segment Information
for additional information.
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Note 2 — Prepaid Expenses and Other Current Assets
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Prepaid expenses and other current assets consist of the following:
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October 1, 2018
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January 1, 2018
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(in thousands)
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(unaudited)
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(as adjusted)
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Prepaid media production costs
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$
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718
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$
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376
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Prepaid software and support
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713
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223
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Prepaid occupancy related costs
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271
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159
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Prepaid insurance
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376
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377
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Taxes receivable
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129
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182
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POS software licenses for resale
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368
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364
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Assets held for sale
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241
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432
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Advertising cooperative assets, restricted
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71
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4
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Other
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77
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164
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Total prepaid expenses and other current assets
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$
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2,964
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$
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2,281
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Note 3 — Property and Equipment
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Property and equipment are net of accumulated depreciation of
$18.2 million
and
$21.9 million
at
October 1, 2018
, and
January 1, 2018
, respectively. Depreciation expense amounted to
$0.6 million
and
$1.2 million
during the three months ended
October 1, 2018
, and
October 2, 2017
, respectively. Depreciation expense amounted to
$2.4 million
and
$4.8 million
during the
nine
months ended
October 1, 2018
, and
October 2, 2017
, respectively.
On
April 23, 2018
, the Company completed the sale and refranchise of
two
Company-owned stores in Arkansas. On
May 21, 2018
and
June 25, 2018
, respectively, the Company completed the sale and refranchise of
ten
Company-owned stores in the Denver, Colorado area and
ten
stores in the Colorado Springs, Colorado area. On
October 1, 2018
the Company completed the sale and refranchise of
seven
stores in the Dallas, Texas area. The aggregate sale price for the
29
stores was
$7.7 million
, paid in cash and a long-term receivable of
$0.4 million
. The Company recognized a pre-tax loss from these dispositions of
$1.1 million
. The Company recorded a contingent liability for marketing expenditures of
$1.5 million
, of which
$0.4 million
is recorded as accrued expenses and other current liabilities and
$1.1 million
is recorded as other long-term liabilities on the Company's
Condensed Consolidated Balance Sheets
. In connection with the sale, the buyers paid
$450,000
in franchise fees. These dispositions did not meet the criteria for accounting as a discontinued operation.
The following summarizes changes to the Company’s goodwill, by reportable segment:
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(in thousands)
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Company Stores
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Franchise
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Total
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Balance at January 1, 2018
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$
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26,205
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$
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81,546
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$
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107,751
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Allocated to assets held for sale
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(833
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)
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—
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(833
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)
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Disposition
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(5,155
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)
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—
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(5,155
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)
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Balance at October 1, 2018
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$
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20,217
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$
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81,546
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$
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101,763
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There is
no
goodwill associated with the Brand Funds segment. The Company has determined that during the three months ended
October 1, 2018
, there were no triggering events that would require an updated impairment review. The goodwill disposal is from the sale of Company-owned stores to franchise owners (see
Note 4 — Divestitures
).
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Note 6 — Intangible Assets
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Definite-lived intangible assets are net of accumulated amortization of
$33.4 million
and
$30.2 million
as of
October 1, 2018
, and
January 1, 2018
, respectively. Amortization expense amounted to
$1.1 million
during each of the three months ended
October 1, 2018
, and
October 2, 2017
. Amortization expense amounted to
$3.3 million
and
$3.5 million
during the
nine
months ended
October 1, 2018
, and
October 2, 2017
, respectively.
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Note 7 — Financing Arrangements
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Long-term debt consists of the following:
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(in thousands)
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October 1, 2018
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January 1, 2018
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Term loan
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$
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81,800
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$
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92,900
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Notes payable
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3,000
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3,000
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Total principal amount of long-term debt
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84,800
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95,900
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Unamortized debt issuance costs
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(273
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)
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(506
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)
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Total long-term debt
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84,527
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95,394
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Less current portion
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(3,000
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)
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(8,400
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)
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Total long-term debt, net of current portion
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$
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81,527
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$
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86,994
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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
October 1, 2018
, the term loan bears interest at a rate of
5.5%
per annum based on the LIBOR rate option plus the applicable margin.
The weighted average interest rate for all borrowings under the
Senior Credit Facility
for the
third
quarter of
2018
was
5.4%
.
On November 6, 2018, PMI Holdings, Inc. entered into a second amendment to its
Senior Credit Facility
. The amendment, among other things, extends the term of the
Senior Credit Facility
by twelve months to
August 2020
and reduces the revolving credit facility from
$20.0 million
to
$7.5 million
(see
Note 18 — Subsequent Events
). With an amended maturity date of over one year from
October 1, 2018
, balances outstanding under the amended
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.
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 a rate of
5.0%
per annum and matures in
December 2018
. This note is subordinated to the
Senior Credit Facility
.
On October 25, 2018, Papa Murphy's Company Stores, Inc. entered into a second amendment to the note payable which extends the maturity date of the note to January 2019 (see
Note 18 — Subsequent Events
).
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Note 8 — Fair Value Measurement
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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:
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▪
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Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
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▪
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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.
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▪
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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.
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The following table presents information about the fair value of the Company’s financial instruments:
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|
|
October 1, 2018
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|
January 1, 2018
|
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(in thousands)
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Carrying Value
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Fair Value
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Carrying Value
|
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Fair Value
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Fair Value Measurement
|
Financial assets
|
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Notes receivable
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
97
|
|
|
$
|
88
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|
Level 3
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Other receivables
(1)
|
391
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|
|
335
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|
|
—
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|
|
—
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|
Level 3
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(1)
|
The fair value of notes receivable and other receivables were estimated primarily using a discounted cash flow method based on a discount rate, reflecting the applicable credit spread. The notes receivable were paid in full as of
October 1, 2018
.
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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.
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Note 9 — Accrued Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities consist of the following:
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|
October 1, 2018
|
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January 1, 2018
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(in thousands)
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(unaudited)
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(as adjusted)
|
Accrued compensation and related costs
|
$
|
3,447
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$
|
3,902
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Accrued legal settlement costs
|
2,700
|
|
|
3,940
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Gift cards payable
|
1,898
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|
2,676
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Accrued interest and non-income taxes payable
|
384
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|
|
461
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Convention fund balance
|
765
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|
841
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Advertising cooperative liabilities
|
116
|
|
|
60
|
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Lease liabilities held for sale
|
758
|
|
|
—
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Other
|
856
|
|
|
502
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Total accrued expenses and other current liabilities
|
$
|
10,924
|
|
|
$
|
12,382
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Accrued legal settlement costs decreased since
January 1, 2018
due to
$1.8 million
in payments to partially settle the TCPA class action lawsuit and
$3.2 million
in payments to settle franchise litigation claims that reduced the
$3.7 million
accrual for legal settlement costs related to the franchise litigation recorded in the current year. Both lawsuits are discussed in more detail in
Note 16 — Commitments and Contingencies
. Included in
Accounts receivable, net
is an insurance receivable equal to 75% of the anticipated settlement of the franchise owner lawsuit.
The Company owns and franchises Papa Murphy’s Take ‘N’ Bake pizza stores. Revenue is recognized upon the transfer of control of promised goods or services to customers in an amount that reflects the consideration the Company expects to receive for those goods or services. The following are the principal activities from which the Company earns revenue:
Company-owned Stores Revenue
Company-owned stores revenue consists
of retail sales of food through Company-owned stores located in the United States. Company-owned stores revenue is recognized when the food items are delivered to or carried out by customers. Customer payments are generally collected at the time of sale. Sales taxes collected from customers are remitted to the appropriate taxing authority and are not recognized as revenue.
Franchise Revenues
The franchise arrangement between the Company and each franchise owner of a Papa Murphy’s Take ‘N’ Bake pizza store is documented in the form of a franchise agreement and, in select cases, a development agreement. The franchise arrangement requires the Company as franchisor to perform various activities to support the Papa Murphy’s Take ‘N’ Bake pizza brand and does not involve the direct transfer of goods and services to the franchise owner as a customer. Activities performed by the Company are highly interrelated with the franchise license and are considered to represent a single performance obligation, which is the transfer of the franchise license. The nature of the Company’s promise in granting the franchise license is to provide the franchise owner with access to the brand’s intellectual property over the term of the franchise arrangement.
The transaction price in a standard franchise arrangement consists of (a) franchise/development fees; (b) continuing franchise fees (royalties); and (c) advertising fees. Since the Company considers the franchise license to be a single performance obligation, no allocation of the transaction price under a standard agreement is performed for revenue recognition purposes. However, if additional separate and distinct goods or services are included with a franchise arrangement and are deemed to be additional performance obligations, the total transaction price of the contract is allocated to each performance obligation based on the stand-alone selling price of each performance obligation.
Franchise revenues are recognized by the Company from the following different sources:
|
|
•
|
Royalty revenues.
Royalty revenues, which include advertising fees from domestic franchise stores, are based on a percentage of sales and are recognized when the food items are delivered to or carried out by customers. Payments for domestic royalties and advertising fees are generally due and collected within seven days of the prior week end date. Payments for international royalties are due and collected within 30 days of month-end.
|
|
|
•
|
Franchise and development fees.
Franchise and development fees are paid in advance of a store opening, typically when entering into a new franchise or development agreement. Fees allocated to the franchise license are recognized as revenue on a straight-line basis over the term of each respective franchise store agreement. Initial franchise agreement terms are typically ten years while successive agreement terms are typically five years. The Company has determined that these fees, which are paid in advance of when they are recognized as revenue, do not contain a significant financing component.
|
|
|
•
|
E-commerce fees.
E-commerce fees include point-of-sale (“
POS
”) support fees and transaction fees for purchases made through the Company’s e-commerce platform.
POS
support fees are due quarterly in advance and recognized as revenue over the respective quarter. Transaction fees are recognized when the food items purchased from a store are delivered to or carried out by customers and are due and collected within seven days of the prior week end date.
|
|
|
•
|
Vendor payments.
Vendor payments are received from vendors that supply franchised and Company-owned stores with products and are typically based on the volume of product purchased by the stores. Revenues from the sale of products are recognized when product is shipped from a distribution center to a store. Payments are due and collected within 30 days after month-end.
|
|
|
•
|
Marketing kits.
The Company charges domestic stores for marketing materials shipped to stores one to three times per quarter. These products are sold at cost and the revenues from their sale are recognized when the product is shipped by the vendors producing the kits. Payments are due and collected within 30 days of shipment.
|
The timing of revenue recognition may differ from the timing of payment from customers. We record a receivable when revenue is recognized in advance of payment, and a contract liability (“unearned revenue”), when revenue is recognized subsequent to payment. Unearned revenue consists mainly of franchise and development fees paid in advance. A refund liability is recorded when it is known that an amount previously received will be refunded instead of recognized as revenue. The Company does not incur a significant amount of contract acquisition costs in conducting its franchising activities and has not capitalized any such costs.
Revenue by Category
The following series of tables present revenue disaggregated by several categories for the periods reported.
Revenues by contract type were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 1, 2018
|
|
(unaudited)
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
Franchise royalties
|
$
|
8,279
|
|
|
$
|
—
|
|
|
$
|
3,362
|
|
|
$
|
11,641
|
|
Franchise fees
|
756
|
|
|
—
|
|
|
—
|
|
|
756
|
|
Vendor payments
|
—
|
|
|
—
|
|
|
1,312
|
|
|
1,312
|
|
E-commerce fees
|
602
|
|
|
—
|
|
|
—
|
|
|
602
|
|
Other franchise and brand
|
29
|
|
|
—
|
|
|
1,532
|
|
|
1,561
|
|
Company-owned stores
|
—
|
|
|
12,958
|
|
|
—
|
|
|
12,958
|
|
Total revenues
|
9,666
|
|
|
12,958
|
|
|
6,206
|
|
|
28,830
|
|
Intersegment revenues
|
695
|
|
|
—
|
|
|
346
|
|
|
1,041
|
|
Reconciliation to business segment revenues
|
$
|
10,361
|
|
|
$
|
12,958
|
|
|
$
|
6,552
|
|
|
$
|
29,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 2, 2017
|
|
(as adjusted)
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
Franchise royalties
|
$
|
8,539
|
|
|
$
|
—
|
|
|
$
|
5,050
|
|
|
$
|
13,589
|
|
Franchise fees
|
563
|
|
|
—
|
|
|
—
|
|
|
563
|
|
Vendor payments
|
—
|
|
|
—
|
|
|
1,038
|
|
|
1,038
|
|
E-commerce fees
|
435
|
|
|
—
|
|
|
—
|
|
|
435
|
|
Other franchise and brand
|
21
|
|
|
—
|
|
|
525
|
|
|
546
|
|
Company-owned stores
|
—
|
|
|
17,520
|
|
|
—
|
|
|
17,520
|
|
Total revenues
|
9,558
|
|
|
17,520
|
|
|
6,613
|
|
|
33,691
|
|
Intersegment revenues
|
52
|
|
|
—
|
|
|
387
|
|
|
439
|
|
Reconciliation to business segment revenues
|
$
|
9,610
|
|
|
$
|
17,520
|
|
|
$
|
7,000
|
|
|
$
|
34,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 1, 2018
|
|
(unaudited)
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
Franchise royalties
|
$
|
26,462
|
|
|
$
|
—
|
|
|
$
|
10,740
|
|
|
$
|
37,202
|
|
Franchise fees
|
2,216
|
|
|
—
|
|
|
—
|
|
|
2,216
|
|
Vendor payments
|
—
|
|
|
—
|
|
|
3,265
|
|
|
3,265
|
|
E-commerce fees
|
1,664
|
|
|
—
|
|
|
—
|
|
|
1,664
|
|
Other franchise and brand
|
64
|
|
|
—
|
|
|
2,465
|
|
|
2,529
|
|
Company-owned stores
|
—
|
|
|
47,519
|
|
|
—
|
|
|
47,519
|
|
Total revenues
|
30,406
|
|
|
47,519
|
|
|
16,470
|
|
|
94,395
|
|
Intersegment revenues
|
2,480
|
|
|
—
|
|
|
1,203
|
|
|
3,683
|
|
Reconciliation to business segment revenues
|
$
|
32,886
|
|
|
$
|
47,519
|
|
|
$
|
17,673
|
|
|
$
|
98,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 2, 2017
|
|
(as adjusted)
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
Franchise royalties
|
$
|
27,674
|
|
|
$
|
—
|
|
|
$
|
16,319
|
|
|
$
|
43,993
|
|
Franchise fees
|
2,101
|
|
|
—
|
|
|
—
|
|
|
2,101
|
|
Vendor payments
|
—
|
|
|
—
|
|
|
3,493
|
|
|
3,493
|
|
E-commerce fees
|
1,421
|
|
|
—
|
|
|
—
|
|
|
1,421
|
|
Other franchise and brand
|
67
|
|
|
—
|
|
|
1,886
|
|
|
1,953
|
|
Company-owned stores
|
—
|
|
|
57,010
|
|
|
—
|
|
|
57,010
|
|
Total revenues
|
31,263
|
|
|
57,010
|
|
|
21,698
|
|
|
109,971
|
|
Intersegment revenues
|
169
|
|
|
—
|
|
|
1,233
|
|
|
1,402
|
|
Reconciliation to business segment revenues
|
$
|
31,432
|
|
|
$
|
57,010
|
|
|
$
|
22,931
|
|
|
$
|
111,373
|
|
Revenues by geographic location were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 1, 2018
|
|
(unaudited)
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
United States
|
$
|
9,589
|
|
|
$
|
12,958
|
|
|
$
|
6,206
|
|
|
$
|
28,753
|
|
International
|
77
|
|
|
—
|
|
|
—
|
|
|
77
|
|
Total revenues
|
$
|
9,666
|
|
|
$
|
12,958
|
|
|
$
|
6,206
|
|
|
$
|
28,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 2, 2017
|
|
(as adjusted)
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
United States
|
$
|
9,463
|
|
|
$
|
17,520
|
|
|
$
|
6,613
|
|
|
$
|
33,596
|
|
International
|
95
|
|
|
—
|
|
|
—
|
|
|
95
|
|
Total revenues
|
$
|
9,558
|
|
|
$
|
17,520
|
|
|
$
|
6,613
|
|
|
$
|
33,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 1, 2018
|
|
(unaudited)
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
United States
|
$
|
30,168
|
|
|
$
|
47,519
|
|
|
$
|
16,470
|
|
|
$
|
94,157
|
|
International
|
238
|
|
|
—
|
|
|
—
|
|
|
238
|
|
Total revenues
|
$
|
30,406
|
|
|
$
|
47,519
|
|
|
$
|
16,470
|
|
|
$
|
94,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 2, 2017
|
|
(as adjusted)
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
United States
|
$
|
30,962
|
|
|
$
|
57,010
|
|
|
$
|
21,698
|
|
|
$
|
109,670
|
|
International
|
301
|
|
|
—
|
|
|
—
|
|
|
301
|
|
Total revenues
|
$
|
31,263
|
|
|
$
|
57,010
|
|
|
$
|
21,698
|
|
|
$
|
109,971
|
|
Contract Balances
Changes in the balances of contract liabilities (unearned revenue) during the periods reported were as follows:
|
|
|
|
|
(in thousands)
|
Contract Liabilities
|
Balance at January 1, 2018
|
$
|
11,151
|
|
Revenue recognized that was included in the balance at the beginning of the period
|
(2,129
|
)
|
Cash received, net of amounts recognized as revenue during the period
|
1,449
|
|
Contract refunds
|
(305
|
)
|
Balance at October 1, 2018
|
$
|
10,166
|
|
The Company had a refund liability of
$0.5 million
as of each of
October 1, 2018
and
January 1, 2018
. Receivables from contracts with customers included in Accounts receivable, net were
$2.6 million
as of
October 1, 2018
and
$3.8 million
as of
January 1, 2018
, respectively.
The following table includes estimated franchise fee revenue expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of
October 1, 2018
(in thousands):
|
|
|
|
|
|
Fiscal year
|
2018
|
$
|
410
|
|
|
2019
|
1,598
|
|
|
2020
|
1,458
|
|
|
2021
|
1,299
|
|
|
2022
|
1,135
|
|
|
Thereafter
|
4,266
|
|
|
Total
|
$
|
10,166
|
|
The Company leases the property for its corporate headquarters, Company-owned stores, and certain office equipment. The Company is not a party to leases for franchise locations except for two locations that operate under a sublease and a few leases assigned to franchisees when stores were refranchised wherein it remains secondarily liable (see
Lease guarantees
below). The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease
ROU
assets
, current portion of operating lease liabilities
, and operating
lease liabilities in
the
Condensed Consolidated Balance Sheets
. The Company currently has no finance leases.
ROU
assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of the Company’s leases do not provide an implicit rate of return, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Operating lease
ROU
assets also exclude lease incentives received. The Company has lease agreements with lease and non-lease components, which are accounted for separately. For certain equipment leases, such as copiers, the Company accounts for the lease and non-lease components as a single lease component.
Lease terms for Company-owned stores are generally five years with one or more five-year renewal options and generally require the Company to pay a proportionate share of real estate taxes, insurance, common area, and other operating costs in addition to a base or fixed rent. The Company’s leases have remaining lease terms of
0.5
to
10.2 years
. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Economic performance of a store is the primary factor used to estimate whether an option to extend a lease term will be exercised or not.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The components of lease expense for the periods reported are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
Operating lease cost
|
$
|
818
|
|
|
$
|
1,150
|
|
|
$
|
2,903
|
|
|
$
|
3,609
|
|
Short-term lease cost
|
11
|
|
|
5
|
|
|
36
|
|
|
16
|
|
Variable lease cost
|
2
|
|
|
5
|
|
|
8
|
|
|
26
|
|
Sublease income
|
(16
|
)
|
|
(17
|
)
|
|
(42
|
)
|
|
(53
|
)
|
Total lease cost
|
$
|
815
|
|
|
$
|
1,143
|
|
|
$
|
2,905
|
|
|
$
|
3,598
|
|
Supplemental cash flow information related to leases for the periods reported is as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
3,303
|
|
|
$
|
3,655
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
505
|
|
|
213
|
|
Weighted-average remaining lease term of operating leases
|
4.8 years
|
|
|
6.1 years
|
|
Weighted-average discount rate of operating leases
|
4.5
|
%
|
|
4.8
|
%
|
Future minimum lease payments under non-cancelable leases as of
October 1, 2018
are as follows (in thousands):
|
|
|
|
|
|
Fiscal year
|
2018
|
$
|
765
|
|
|
2019
|
4,500
|
|
|
2020
|
3,736
|
|
|
2021
|
2,626
|
|
|
2022
|
1,865
|
|
|
Thereafter
|
3,382
|
|
|
Total future minimum lease payments
|
16,874
|
|
|
Less imputed interest
|
(2,839
|
)
|
|
Less lease liabilities held for sale
(1)
|
(2,340
|
)
|
|
Total Lease Liabilities
|
$
|
11,695
|
|
|
|
(1)
|
Lease liabilities held for sale includes
$0.8 million
reported in Accrued expenses and other current assets (see
Note 9 — Accrued Expenses and Other Current Liabilities
) and
$1.5 million
reported in Other long-term liabilities in the Company's
Condensed Consolidated Balance Sheets
.
|
As of
October 1, 2018
, the Company had no operating leases that had not yet commenced.
Lease guarantees
The Company is the guarantor for operating leases of
37
franchised stores that have terms expiring on various dates from
October 2018
to
April 2025
. 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. For the nine months ended
October 1, 2018
, the Company was required to perform under one of these guarantees when a franchisee declared bankruptcy and defaulted on its obligations. As a result, the Company recorded a loss contingency of
$170,000
for the nine months ended
October 1, 2018
. As of
October 1, 2018
, the Company does not believe it probable that it would be required to perform under any of the remaining guarantees.
Information on the Company’s income taxes for the periods reported is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
(Benefit from) provision for income taxes
|
$
|
(159
|
)
|
|
$
|
(2,051
|
)
|
|
$
|
970
|
|
|
$
|
(7,678
|
)
|
(Loss) income before income taxes
|
(798
|
)
|
|
(4,729
|
)
|
|
3,297
|
|
|
(21,648
|
)
|
Effective income tax rate
|
19.9
|
%
|
|
43.4
|
%
|
|
29.4
|
%
|
|
35.5
|
%
|
The effective income tax rate for the three months ended
October 1, 2018
includes the effect of certain permanent differences between tax reporting purposes and financial reporting purposes and the relative impact of those differences on a small quarterly (loss) income before income taxes. The effective tax rate for the three months ended
October 2, 2017
, includes the effect of certain Federal General Business Credits confirmed during the quarter.
The effective income tax rate for the
nine
months ended
October 1, 2018
includes the effect of certain permanent differences between tax reporting purposes and financial reporting purposes. The effective tax rate for the
nine
months ended
October 2, 2017
, includes the effect of a discrete adjustment for the share-based compensation expense recorded for vesting restricted common shares.
|
|
Note 13 — 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 1, 2018
|
34,898
|
|
|
40,354
|
|
|
$
|
3.44
|
|
Granted
|
41,000
|
|
|
—
|
|
|
5.33
|
|
Vested
|
(28,898
|
)
|
|
—
|
|
|
4.60
|
|
Repurchased
|
—
|
|
|
(754
|
)
|
|
0.19
|
|
Unvested, October 1, 2018
|
47,000
|
|
|
39,600
|
|
|
$
|
3.97
|
|
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 1, 2018
|
949,115
|
|
|
158,127
|
|
|
$
|
7.60
|
|
|
|
|
|
Granted
|
210,700
|
|
|
—
|
|
|
5.12
|
|
|
|
|
|
Exercised
|
(20,000
|
)
|
|
—
|
|
|
3.99
|
|
|
|
|
|
Forfeited
|
(79,104
|
)
|
|
(578
|
)
|
|
9.26
|
|
|
|
|
|
Outstanding, October 1, 2018
|
1,060,711
|
|
|
157,549
|
|
|
$
|
7.12
|
|
|
8.0 years
|
|
$
|
428
|
|
Exercisable, October 1, 2018
|
372,169
|
|
|
—
|
|
|
$
|
9.55
|
|
|
6.6 years
|
|
$
|
103
|
|
Compensation cost
Stock-based compensation expense recognized in connection with the
Incentive Plans
for the three months ended
October 1, 2018
and
October 2, 2017
amounted to
$0.2 million
and
$0.1 million
, respectively. Stock-based compensation expense recognized in connection with the
Incentive Plans
for the
nine
month periods ended
October 1, 2018
and
October 2, 2017
amounted to
$0.6 million
and
$0.5 million
, respectively.
As of
October 1, 2018
, total unrecognized stock-based compensation expense was
$1.5 million
, with
$1.2 million
associated with time vesting awards and
$0.3 million
associated with market condition awards. The remaining weighted average period for unrecognized stock-based compensation expense was
2.2 years
as of
October 1, 2018
.
|
|
Note 14 — Brand Marketing Fund
|
The Company manages the
BMF
on behalf of all Papa Murphy’s stores in the United States. The Company is committed under its franchise and other agreements to spend revenues of the
BMF
on marketing, creative efforts, media support, or related purposes specified in the agreements. Contributions to the
BMF
are recognized as revenue, while expenditures are included in selling, general, and administrative expenses. Expenditures of the
BMF
are primarily amounts paid to third-parties, but may also include personnel expenses and allocated costs. At each reporting date, to the extent contributions to the
BMF
exceed expenditures on a cumulative basis, the excess contributions are recorded in accrued expenses in the Company’s
Condensed Consolidated Balance Sheets
. While no profit is recognized on amounts received by the
BMF
, when expenditures exceed contributions to the
BMF
on a cumulative basis, income from operations and net income may be affected due to the timing of when revenues are received and expenses are incurred.
Information on the Company’s
BMF
balances for the periods reported is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
Opening BMF deficit
|
$
|
(5,877
|
)
|
|
$
|
(6,604
|
)
|
|
$
|
(5,461
|
)
|
|
$
|
(1,071
|
)
|
Net activity during the period
|
461
|
|
|
1,718
|
|
|
45
|
|
|
(3,815
|
)
|
Ending BMF deficit
|
$
|
(5,416
|
)
|
|
$
|
(4,886
|
)
|
|
$
|
(5,416
|
)
|
|
$
|
(4,886
|
)
|
As of
October 1, 2018
, previously recognized expenses of
$5.4 million
may be recovered in future periods if subsequent
BMF
contributions exceed expenditures.
|
|
Note 15 — 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 common shares underlying such securities would have an anti-dilutive effect.
The following table sets forth the computations of basic and diluted
EPS
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
(in thousands, except per share data)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
Earnings:
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(639
|
)
|
|
$
|
(2,678
|
)
|
|
$
|
2,327
|
|
|
$
|
(13,970
|
)
|
Shares:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
16,945
|
|
|
16,882
|
|
|
16,924
|
|
|
16,863
|
|
Dilutive effect of restricted equity awards
(1)
|
—
|
|
|
—
|
|
|
39
|
|
|
—
|
|
Diluted weighted average number of shares outstanding
|
16,945
|
|
|
16,882
|
|
|
16,963
|
|
|
16,863
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
$
|
(0.04
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
Diluted (loss) earnings per share
|
$
|
(0.04
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
|
|
(1)
|
The Company’s securities that provide a right to receive common stock in the future such as stock options and restricted stock were not included in the computation of diluted EPS for the three months ended October 1, 2018 and the three and nine months ended October 2, 2017, as the effect of including these shares in the calculation would have been anti-dilutive.
|
For the three months ended
October 1, 2018
, and
October 2, 2017
, an aggregated total of
0.6 million
shares and
0.8 million
shares, respectively, have been excluded from the diluted
EPS
calculation because their effect would have been anti-dilutive. For the
nine
months ended
October 1, 2018
, and
October 2, 2017
, an aggregated total of
0.6 million
shares and
1.0 million
shares, respectively, have been excluded from the diluted
EPS
calculation because their effect would have been anti-dilutive.
|
|
Note 16 — Commitments and Contingencies
|
Legal proceedings
The Company is from time to time involved in litigation, certain other claims and arbitration matters arising in the ordinary course of business. The Company accrues a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of the probability of a loss and the determination as to whether a loss is reasonably estimable. These accruals are reviewed at least quarterly and adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal counsel and technical experts and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility (within the meaning of Accounting Standards Codification (“ASC”) 450) that losses could exceed amounts already accrued, if any, and the additional loss or range of loss is able to be estimated, the Company discloses the additional loss or range of loss.
In some instances, the Company is unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have on its business. There are many reasons that the Company cannot make these assessments, including, among others, one or more of the following: the early stages of a proceeding; damages sought that are unspecified, unsupportable, unexplained or uncertain; discovery not having been started or incomplete; the complexity of the facts that are in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation.
The Company currently is subject to litigation with a group of its franchise owners. In January 2014,
six
franchise owner groups claimed that the Company misrepresented its sales volumes, made false representations to them and charged excess advertising fees, among other things. The Company engaged in mediation with these franchise owners, which is required under the terms of their franchise agreements, in order to address and resolve their claims, but was unable to reach a settlement agreement. On April 4, 2014, a total of
12
franchise owner groups, including those franchise owners that previously made the allegations described above, filed a lawsuit against the Company in the Superior Court in Clark County, Washington, making essentially the same allegations for violation of the Washington Franchise Investment Protection Act, fraud, negligent misrepresentation and breach of contract, and seeking declaratory and injunctive relief, as well as monetary damages. Based on motions filed by the Company in that lawsuit, the court ruled on July 9, 2014, that certain of the plaintiffs’ claims under the anti-fraud and nondisclosure provisions of the Washington Franchise Investment Protection Act should be dismissed and that certain other claims in the case would need to be more specifically alleged. The court also ruled that the
six
franchise owner groups who had not mediated with the Company prior to filing the lawsuit must mediate with the Company in good faith, and that their claims shall be stayed until they have done so.
On June 18, 2014, an additional
16
franchise owner groups, represented by the same counsel as the plaintiffs described above, filed a lawsuit in the Superior Court in Clark County, Washington making essentially the same allegations as made in the lawsuit described above and seeking declaratory and injunctive relief, as well as monetary damages. The court consolidated the two lawsuits into a single case and ordered that the plaintiffs in the new lawsuit, none of whom had mediated with the Company prior to filing the lawsuit, must do so, and that their claims be stayed until they have completed mediating with the Company in good faith.
In October 2014, the Company engaged in mediation with the
22
franchise owner groups who had not previously done so. As a result of that mediation and other efforts, the Company reached resolution with
13
of the franchise owner groups involved in the consolidated lawsuits, and their claims have either been dismissed or dismissal is pending.
In February 2015, the remaining franchise owner groups in the consolidated lawsuits filed an amended complaint, removing some claims, amending some claims, adding claims and naming some of the Company’s former and current franchise sales staff as additional individual defendants. In September 2016, the remaining
15
franchise owner groups in the consolidated lawsuits filed an amended complaint to add a claim under the Washington Consumer Protection Act based on substantially the same allegations as the prior claims, to re-plead claims under the Washington Franchise Investment Protection Act that had previously been dismissed.
In June 2017, the parties moved for summary judgment. The Company moved for summary judgment against
two
of the remaining franchise owner groups, the board of directors members moved for summary judgment on all claims against them, and the plaintiffs moved for summary judgment against all defendants on their Washington Consumer Protection Act and Washington Franchise Investment Protection Act claims. A hearing on the summary judgment motions was held on October 13, 2017.
In July 2017, the Company engaged in mediation with the remaining
15
franchise owner groups in the consolidated lawsuits. As a result of that mediation and other efforts, the Company reached resolutions with
six
of the remaining franchise owner groups, and their claims have been dismissed.
In April 2018, the Company reached resolution with
four
of the remaining franchise owner groups, conditioned upon dismissal of their claims.
In June 2018, the Company reached resolution with an additional franchise owner group.
On June 29, 2018, the Court granted the Company’s motion to strike the remaining franchise owner groups’ jury demand. The Court denied the Company’s motion for separate trials, because at the time of the hearing there were only
two
franchise owner groups remaining in the case, based on tentative settlements with
two
other groups.
In July 2018, the Company entered into final settlements with
two
of the aforementioned franchise owner groups.
In September 2018, the Company entered into a final settlement with an additional franchise owner group.
There is
one
group remaining in the case, with a trial scheduled to start in the spring of 2019 in the Superior Court in Clark County, Washington.
The Company is named as a defendant in a putative class action lawsuit filed by plaintiff John Lennartson on May 7, 2015, in the United States District Court for the Western District of Washington. The lawsuit alleges the Company failed to comply with the requirements of the Telephone Consumer Protection Act (“TCPA”) when it sent SMS text messages to consumers. Mr. Lennartson asks that the court certify the putative class and that statutory damages under the TCPA be awarded to plaintiff and each class member. On October 14, 2016, the Federal Communications Commission (“FCC”) granted the Company a limited waiver from the TCPA’s written consent requirements for certain text messages that it sent up through October 16, 2013 to individuals who, like Mr. Lennartson, provided written consent prior to October 16, 2013. On October 20, 2016, the Company filed a motion for summary judgment seeking dismissal. On October 27, 2016, Mr. Lennartson filed a motion seeking to extend the time to respond to the summary judgment motion on the basis that he intends to appeal the FCC’s waiver. On November 4, 2016, the Court granted Mr. Lennartson’s motion to continue his response to the Company’s summary judgment motion until he could complete his appeal of the FCC’s waiver order. In addition, on January 9, 2017, Mr. Lennartson filed an amended complaint adding additional plaintiffs, some of whom provided consent after October 16, 2013, and who are therefore differently situated from Mr. Lennartson, as well as additional Washington state law claims. On October 27, 2017, plaintiffs moved to certify their putative class, which the Company opposed, and on November 22, 2017, the Company moved for summary judgment on all of plaintiffs’ claims. The Court issued a stay of the case for 30 days while the parties pursued settlement negotiations. On April 23, 2018, the parties entered into a Settlement Agreement and Release and plaintiffs filed a Motion and Memorandum for Preliminary Approval of Settlement with the Court. The Court gave preliminary approval to the settlement on May 16, 2018, in its Preliminary Approval Order Approving Settlement, Certifying Settlement Class, Approving Notice Plan, and Setting Fairness Hearing. The Court gave final approval to the settlement on September 28, 2018, in its Amended Final Order Approving Class Action Settlement, which resulted in the settlement and release of all claims, subject to appeal.
In addition to the foregoing, the Company is subject to routine legal proceedings, claims and litigation in the ordinary course of its business. The Company may also engage in future litigation with franchise owners to enforce the terms of franchise agreements and compliance with brand standards as determined necessary to protect the Company’s brand, the consistency of products and the customer experience. Lawsuits require significant management attention and financial resources and the outcome of any litigation is inherently uncertain. The Company does not, however, currently expect that the costs to resolve these routine matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
|
|
Note 17 — Segment Information
|
As a result of changes in the Company’s executive management responsibilities, effective January 2, 2018, the Company changed its reportable segments by combining its domestic and international franchise business into a single Franchise segment and separating its Brand Funds business into a separate reportable segment. No changes were made to the Company’s Company Stores segment. Management believes this change better reflects the priorities and decision making analysis around the allocation of the Company’s resources. Prior period results for the affected segments have been retrospectively revised to reflect this change.
The Company now has the following reportable segments: (i) Franchise; (ii) Company Stores; and (iii) Brand Funds. The Franchise segment includes operations with respect to franchised stores and derives its revenues primarily from franchise and development fees and franchise royalties from franchised stores. The Company Stores segment includes operations with respect to Company-owned stores and derives its revenues from retail sales of pizza and side items to the general public. The Brand Funds segment includes the
Brand Marketing Fund
and the Company’s Convention Fund.
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, adjusted
EBITDA
and assets for each of the Company’s reportable segments and include a reconciliation of segment adjusted
EBITDA
to
(loss) income
before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
Revenues
|
|
|
|
|
|
|
|
Franchise segment
|
$
|
10,361
|
|
|
$
|
9,610
|
|
|
$
|
32,886
|
|
|
$
|
31,432
|
|
Brand Funds segment
|
6,552
|
|
|
7,000
|
|
|
17,673
|
|
|
22,931
|
|
Intersegment eliminations
|
(1,041
|
)
|
|
(439
|
)
|
|
(3,683
|
)
|
|
(1,402
|
)
|
Franchise related
|
15,872
|
|
|
16,171
|
|
|
46,876
|
|
|
52,961
|
|
Company Stores segment
|
12,958
|
|
|
17,520
|
|
|
47,519
|
|
|
57,010
|
|
Total
|
$
|
28,830
|
|
|
$
|
33,691
|
|
|
$
|
94,395
|
|
|
$
|
109,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
|
(unaudited)
|
|
(as adjusted)
|
Segment Adjusted EBITDA
|
|
|
|
|
|
|
|
Franchise
|
$
|
5,617
|
|
|
$
|
4,778
|
|
|
$
|
18,664
|
|
|
$
|
19,208
|
|
Company Stores
|
(462
|
)
|
|
312
|
|
|
529
|
|
|
1,637
|
|
Brand Funds
|
461
|
|
|
1,718
|
|
|
297
|
|
|
(3,814
|
)
|
Total reportable segments adjusted EBITDA
|
5,616
|
|
|
6,808
|
|
|
19,490
|
|
|
17,031
|
|
Corporate and unallocated
|
(950
|
)
|
|
(1,262
|
)
|
|
(3,108
|
)
|
|
(5,801
|
)
|
Depreciation and amortization
|
(1,662
|
)
|
|
(2,336
|
)
|
|
(5,677
|
)
|
|
(8,359
|
)
|
Interest expense, net
|
(1,254
|
)
|
|
(1,305
|
)
|
|
(3,842
|
)
|
|
(3,818
|
)
|
CEO transition and restructuring costs
(1)
|
(27
|
)
|
|
(190
|
)
|
|
(390
|
)
|
|
(2,519
|
)
|
E-commerce impairment and transition costs
(2)
|
—
|
|
|
—
|
|
|
(350
|
)
|
|
(9,124
|
)
|
Store divestitures, closures, and impairments
(3)
|
(2,521
|
)
|
|
(5,981
|
)
|
|
(1,797
|
)
|
|
(8,595
|
)
|
Litigation settlement and reserves
(4)
|
—
|
|
|
(463
|
)
|
|
(1,029
|
)
|
|
(463
|
)
|
(Loss) Income Before Income Taxes
|
$
|
(798
|
)
|
|
$
|
(4,729
|
)
|
|
$
|
3,297
|
|
|
$
|
(21,648
|
)
|
|
|
(1)
|
Represents non-recurring management transition and restructuring costs in connection with the recruitment of a new Chief Executive Officer and other executive positions.
|
|
|
(2)
|
Represents impairment charges on the write-down of our e-commerce platform based on the decision to move to a third-party developed and hosted solution and non-recurring costs incurred to complete the transition.
|
|
|
(3)
|
For 2018, represents primarily net losses on the refranchising of Company-owned stores primarily from the recording of contingent liabilities for committed marketing support expenditures in addition to impairments for Company-owned stores held for sale. For 2017, represents primarily non-cash charges associated with the impairment and disposal of store assets upon the decision to close stores.
|
|
|
(4)
|
Accruals made for litigation settlements.
|
|
|
|
|
|
|
|
|
|
|
October 1, 2018
|
|
January 1, 2018
|
(in thousands)
|
(unaudited)
|
|
(as adjusted)
|
Total Assets
|
|
|
|
Franchise
|
$
|
119,366
|
|
|
$
|
121,179
|
|
Company Stores
|
38,838
|
|
|
53,226
|
|
Brand Funds
|
492
|
|
|
509
|
|
Other
(1)
|
87,131
|
|
|
87,201
|
|
Total
|
$
|
245,827
|
|
|
$
|
262,115
|
|
|
|
(1)
|
Other assets which are not allocated to the individual segments primarily include trade names and trademarks and taxes receivable.
|
|
|
Note 18 — Subsequent Events
|
Senior secured credit facility
On November 6, 2018, PMI Holdings, Inc. entered into a second amendment to its
Senior Credit Facility
. The amendment, among other things, extends the term of the
Senior Credit Facility
by twelve months to
August 2020
and reduces the revolving credit facility from
$20.0 million
to
$7.5 million
. In addition, the amendment increases the maximum leverage ratio, requires continuation of quarterly
$2.1 million
installment payments through the new maturity date, and increases the applicable interest rate margins.
Notes payable
On October 25, 2018, Papa Murphy's Company Stores, Inc. signed a second amendment to its note payable which extends the maturity date of the note to January 2019.
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 1, 2018
. 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
2018
is a 52-week period ending on
December 31, 2018
, and fiscal year
2017
was a 52-week period ended on
January 1, 2018
.
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 1, 2018
. 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,
shift in mix of marketing efforts,
resolution of litigation and claims, expansion and growth opportunities, the mix of new store openings, our refranchising initiative, the reduction in the number of Company-owned stores, adoption of new accounting standards and the estimated effect of those new standards, our qualification as an “emerging growth company,” 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 1, 2018
. 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
October 1, 2018
, compared to the three months ended
October 2, 2017
, declined
14.4%
from
$33.7 million
to
$28.8 million
. Total revenues for the
nine months ended October 1, 2018
, compared to the
nine months ended October 2, 2017
, declined
14.2%
from
$110.0 million
to
$94.4 million
. In both comparative periods, the declines in total revenues were due to (i) a decline in Company-owned store sales attributable to the refranchising of 29 and closure of six Company-owned stores since October 2, 2017, and (ii) a decline in royalties and advertising fees due to negative comparable store sales as noted below and a net decline of 47 franchise stores since October 2, 2017 (14 stores opened, 90 stores closed, and 29 stores refranchised).
Comparable store sales in
2018
compared to
2017
for selected segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
Franchise
|
(1.8
|
)%
|
|
(4.2
|
)%
|
|
(2.7)%
|
|
(4.2)%
|
Company Stores
|
(6.9
|
)%
|
|
(2.7
|
)%
|
|
(4.5)%
|
|
(6.6)%
|
Total
|
(2.1
|
)%
|
|
(4.1
|
)%
|
|
(2.9)%
|
|
(4.5)%
|
Comparable store sales for the
three and nine
months ended
October 1, 2018
were lower compared to the same periods in the prior year primarily as a result of
continued competitive headwinds and both convenience and relevance gaps.
Refranchising
In recent years, we had focused our financial resources on accelerating the build out of several markets with Company-owned stores. Consistent with our current strategy, we are now working to refranchise a significant number of our Company-owned stores to experienced and well-capitalized franchisees who can further grow these markets. During the
nine months ended October 1, 2018
, we refranchised
29
Company-owned stores, 20 in Colorado, seven in Texas, and two in Arkansas. Our target is to continue reducing the number of Company-owned stores to no more than 50 stores by 2020.
Store Development
During the
three and nine
months ended
October 1, 2018
, our franchise owners opened
two
and
eight
stores, respectively, and we did not open any Company-owned stores. While we operate some stores as Company-owned stores, we expect the majority of our new store expansion to continue to come from new franchised store openings.
E-commerce
On March 15, 2018, as previously announced, we completed our switchover to a third-party’s e-commerce platform to accelerate progress on our convenience strategy. We have seen positive results to date as the average transaction amount continues to be about 20% higher for online orders than for in-store orders. We strategically use online-only promotions communicated through text and email messaging. The new platform enables online and mobile ordering to be fully integrated with third-party marketplace and delivery services, where available. As part of the transition, we incurred
$350,000
in non-recurring conversion costs during the
nine months ended October 2, 2017
.
Accounting Standards
We adopted the new accounting standards for revenue recognition and leases effective January 2, 2018. These new standards had a material impact on our
condensed consolidated financial statements
. Beginning in fiscal year 2018, our financial results reflect adoption of the standards with prior periods restated accordingly. For the
three and nine
months ended
October 2, 2017
, the retrospective adoption of the revenue and lease standards decreased our net income by $809,000 and $499,000 and decreased our earnings per diluted share by $0.05 and $0.03, respectively. Refer to
Recently Adopted Accounting Standards
under
Note 1 — Description of Business and Basis of Presentation
(Part I, Item 1 of this Form 10-Q) for further discussion.
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
|
|
Nine Months Ended
|
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
Store average weekly sales
|
$
|
9,660
|
|
|
$
|
9,593
|
|
|
$
|
10,225
|
|
|
$
|
10,235
|
|
Comparable store sales
|
(2.1
|
)%
|
|
(4.1
|
)%
|
|
(2.9
|
)%
|
|
(4.5
|
)%
|
Comparable stores
|
1,442
|
|
|
1,483
|
|
|
1,442
|
|
|
1,483
|
|
System-wide sales (in thousands)
|
$
|
184,163
|
|
|
$
|
192,903
|
|
|
$
|
594,062
|
|
|
$
|
623,049
|
|
System-wide stores
|
1,460
|
|
|
1,542
|
|
|
1,460
|
|
|
1,542
|
|
Adjusted EBITDA (in thousands)
|
$
|
4,666
|
|
|
$
|
5,546
|
|
|
$
|
16,382
|
|
|
$
|
11,230
|
|
Average Weekly Sales
Average Weekly Sales (“
AWS
”) consists of the average weekly sales of stores over a specified period of time.
AWS
is calculated by dividing the total net sales of our system-wide stores for the relevant time period by the number of weeks these stores were open in such time period. This measure allows management to assess changes in customer traffic and spending patterns in our 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 includes 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
1,460
stores as of
October 1, 2018
, of which
92.3%
are franchised, located in
37
states plus Canada and the Middle East. The following table presents the changes in the number of stores in our system for the
nine months ended October 1, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
|
|
|
|
|
|
|
|
Domestic
|
|
International
|
|
Total Franchise
|
|
Company Stores
|
|
Total
|
Store count at January 1, 2018
|
1,338
|
|
|
40
|
|
|
1,378
|
|
|
145
|
|
|
1,523
|
|
Openings
|
7
|
|
|
1
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Closings
|
(67
|
)
|
|
(1
|
)
|
|
(68
|
)
|
|
(3
|
)
|
|
(71
|
)
|
Net transfers
(1)
|
29
|
|
|
—
|
|
|
29
|
|
|
(29
|
)
|
|
—
|
|
Store count at October 1, 2018
|
1,307
|
|
|
40
|
|
|
1,347
|
|
|
113
|
|
|
1,460
|
|
|
|
(1)
|
Net transfers are the number of franchised stores acquired by us, less the number of Company-owned stores refranchised. During this period, the Company refranchised 29 Company-owned stores and did not acquire any franchised stores.
|
EBITDA
and Adjusted EBITDA
To supplement our interim unaudited
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.
Adjusted
EBITDA
is calculated as net
(loss) income
before interest expense, income taxes, depreciation, and amortization (“
EBITDA
”) as adjusted for the effects of items that we do not consider indicative of our operating performance. Adjusted
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
, and our calculation of Adjusted
EBITDA
may not be comparable to that reported by other companies.
Adjusted
EBITDA
is a non-
GAAP
financial measure. Management believes that this financial measure, when viewed with our results of operations in accordance with
GAAP
and our reconciliation of Adjusted
EBITDA
to net
(loss) income
, provides additional information to investors about certain material or unusual items that we do not expect to continue at the same level in the future. By providing this non-
GAAP
financial measure, we believe we are enhancing investors’ understanding of our business and our results of operations, and assisting investors in evaluating how well we are executing strategic initiatives. We believe Adjusted
EBITDA
is used by investors as a supplemental measure to evaluate the overall operating performance of companies in our industry.
Management uses Adjusted
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.
|
Adjusted
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:
|
|
▪
|
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.
|
To address these limitations, we reconcile Adjusted
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 Adjusted
EBITDA
.
The following table provides a reconciliation of our net
(loss) income
to Adjusted
EBITDA
for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
Net (Loss) Income
|
$
|
(639
|
)
|
|
$
|
(2,678
|
)
|
|
$
|
2,327
|
|
|
$
|
(13,970
|
)
|
Depreciation and amortization
|
1,662
|
|
|
2,336
|
|
|
5,677
|
|
|
8,359
|
|
(Benefit from) provision for income taxes
|
(159
|
)
|
|
(2,051
|
)
|
|
970
|
|
|
(7,678
|
)
|
Interest expense, net
|
1,254
|
|
|
1,305
|
|
|
3,842
|
|
|
3,818
|
|
EBITDA
|
$
|
2,118
|
|
|
$
|
(1,088
|
)
|
|
$
|
12,816
|
|
|
$
|
(9,471
|
)
|
CEO transition and restructuring costs
(1)
|
27
|
|
|
190
|
|
|
390
|
|
|
2,519
|
|
E-commerce impairment and transition costs
(2)
|
—
|
|
|
—
|
|
|
350
|
|
|
9,124
|
|
Store divestitures, closures, and impairments
(3)
|
2,521
|
|
|
5,981
|
|
|
1,797
|
|
|
8,595
|
|
Litigation settlement and reserves
(4)
|
—
|
|
|
463
|
|
|
1,029
|
|
|
463
|
|
Adjusted EBITDA
|
$
|
4,666
|
|
|
$
|
5,546
|
|
|
$
|
16,382
|
|
|
$
|
11,230
|
|
|
|
(1)
|
Represents non-recurring management transition and restructuring costs in connection with the recruitment of a new Chief Executive Officer and other executive positions.
|
|
|
(2)
|
Represents impairment charges on the write-down of our e-commerce platform based on the decision to move to a third-party developed and hosted solution and non-recurring costs incurred to complete the transition.
|
|
|
(3)
|
For 2018, represents primarily net losses on the refranchising of Company-owned stores primarily from the recording of contingent liabilities for committed marketing support expenditures in addition to impairments for Company-owned stores held for sale. For 2017, represents primarily non-cash charges associated with the impairment and disposal of store assets upon the decision to close stores.
|
|
|
(4)
|
Accruals made for litigation settlements.
|
As a result of changes in our executive management responsibilities, effective January 2, 2018 we changed our reportable segments by combining our domestic and international franchise business into a single Franchise segment and separating the Brand Funds business into a separate reportable segment. Management believes this change better reflects the priorities and decision-making analysis around the allocation of our resources. Prior period results for the affected segments have been retrospectively revised to reflect this change.
We operate in three business segments: Franchise, Company Stores, and Brand Funds. Our Franchise segment consists of our franchised stores, our Company Stores segment consists of our Company-owned stores, and our Brand Funds segment consists of our
BMF
and our Convention Fund.
Our Chief Operating Decision Maker (“CODM”) 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. 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.
The following tables set forth our revenues and segment adjusted
EBITDA
for each of our segments for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
Revenues
|
|
|
|
|
|
|
|
Franchise segment
|
$
|
10,361
|
|
|
$
|
9,610
|
|
|
$
|
32,886
|
|
|
$
|
31,432
|
|
Brand Funds segment
|
6,552
|
|
|
7,000
|
|
|
17,673
|
|
|
22,931
|
|
Intersegment eliminations
|
(1,041
|
)
|
|
(439
|
)
|
|
(3,683
|
)
|
|
(1,402
|
)
|
Franchise related
|
15,872
|
|
|
16,171
|
|
|
46,876
|
|
|
52,961
|
|
Company Stores segment
|
12,958
|
|
|
17,520
|
|
|
47,519
|
|
|
57,010
|
|
Total
|
$
|
28,830
|
|
|
$
|
33,691
|
|
|
$
|
94,395
|
|
|
$
|
109,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
Segment Adjusted EBITDA
|
|
|
|
|
|
|
|
Franchise
|
$
|
5,617
|
|
|
$
|
4,778
|
|
|
$
|
18,664
|
|
|
$
|
19,208
|
|
Company Stores
|
(462
|
)
|
|
312
|
|
|
529
|
|
|
1,637
|
|
Brand Funds
|
461
|
|
|
1,718
|
|
|
297
|
|
|
(3,814
|
)
|
Total reportable segments adjusted EBITDA
|
5,616
|
|
|
6,808
|
|
|
19,490
|
|
|
17,031
|
|
Corporate and unallocated
|
(950
|
)
|
|
(1,262
|
)
|
|
(3,108
|
)
|
|
(5,801
|
)
|
Adjusted EBITDA
|
4,666
|
|
|
5,546
|
|
|
16,382
|
|
|
11,230
|
|
Depreciation and amortization
|
(1,662
|
)
|
|
(2,336
|
)
|
|
(5,677
|
)
|
|
(8,359
|
)
|
Interest expense, net
|
(1,254
|
)
|
|
(1,305
|
)
|
|
(3,842
|
)
|
|
(3,818
|
)
|
CEO transition and restructuring costs
(1)
|
(27
|
)
|
|
(190
|
)
|
|
(390
|
)
|
|
(2,519
|
)
|
E-commerce impairment and transition costs
(2)
|
—
|
|
|
—
|
|
|
(350
|
)
|
|
(9,124
|
)
|
Store divestitures, closures, and impairments
(3)
|
(2,521
|
)
|
|
(5,981
|
)
|
|
(1,797
|
)
|
|
(8,595
|
)
|
Litigation settlement and reserves
(4)
|
—
|
|
|
(463
|
)
|
|
(1,029
|
)
|
|
(463
|
)
|
(Loss) Income Before Income Taxes
|
$
|
(798
|
)
|
|
$
|
(4,729
|
)
|
|
$
|
3,297
|
|
|
$
|
(21,648
|
)
|
|
|
(1)
|
Represents non-recurring management transition and restructuring costs in connection with the recruitment of a new Chief Executive Officer and other executive positions.
|
|
|
(2)
|
Represents impairment charges on the write-down of our e-commerce platform based on the decision to move to a third-party developed and hosted solution and non-recurring costs incurred to complete the transition.
|
|
|
(3)
|
For 2018, represents primarily net losses on the refranchising of Company-owned stores primarily from the recording of contingent liabilities for committed marketing support expenditures in addition to impairments for Company-owned stores held for sale. For 2017, represents primarily non-cash charges associated with the impairment and disposal of store assets upon the decision to close stores.
|
|
|
(4)
|
Accruals made for litigation settlements.
|
The following table sets forth our results of operations in dollars and as a percentage of total revenues for the
three and nine
months ended
October 1, 2018
, and
October 2, 2017
.
Prior year numbers have been adjusted to reflect the impacts of adopting
ASU 2014-09
(the new revenue accounting standard) and
ASU 2016-02
(the new lease accounting standard). See
Recently Adopted Accounting Standards
under
Note 1 — Description of Business and Basis of Presentation
for more information on these two standards and a reconciliation of results as previously reported to adjusted results as presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
(dollars in thousands)
|
$
|
|
Total % of
Revenues
|
|
$
(1)
|
|
Total % of
Revenues
|
|
$
|
|
Total % of
Revenues
|
|
$
(1)
|
|
Total % of
Revenues
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise related
|
$
|
15,872
|
|
|
55.1
|
%
|
|
$
|
16,171
|
|
|
48.0
|
%
|
|
$
|
46,876
|
|
|
49.7
|
%
|
|
$
|
52,961
|
|
|
48.2
|
%
|
Company-owned stores
|
12,958
|
|
|
44.9
|
%
|
|
17,520
|
|
|
52.0
|
%
|
|
47,519
|
|
|
50.3
|
%
|
|
57,010
|
|
|
51.8
|
%
|
Total revenues
|
28,830
|
|
|
100.0
|
%
|
|
33,691
|
|
|
100.0
|
%
|
|
94,395
|
|
|
100.0
|
%
|
|
109,971
|
|
|
100.0
|
%
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of food and packaging
(2)
|
4,216
|
|
|
14.6
|
%
|
|
5,858
|
|
|
17.3
|
%
|
|
15,657
|
|
|
16.5
|
%
|
|
19,376
|
|
|
17.7
|
%
|
Compensation and benefits
(2)
|
4,341
|
|
|
15.1
|
%
|
|
5,478
|
|
|
16.3
|
%
|
|
15,183
|
|
|
16.1
|
%
|
|
17,735
|
|
|
16.1
|
%
|
Advertising
(2)
|
1,147
|
|
|
4.0
|
%
|
|
1,604
|
|
|
4.8
|
%
|
|
3,700
|
|
|
3.9
|
%
|
|
5,055
|
|
|
4.6
|
%
|
Other store operating costs
(2)
|
2,720
|
|
|
9.4
|
%
|
|
3,012
|
|
|
8.9
|
%
|
|
8,925
|
|
|
9.5
|
%
|
|
10,255
|
|
|
9.3
|
%
|
Selling, general, and administrative
|
11,710
|
|
|
40.6
|
%
|
|
12,517
|
|
|
37.2
|
%
|
|
36,146
|
|
|
38.4
|
%
|
|
49,042
|
|
|
44.6
|
%
|
Depreciation and amortization
|
1,662
|
|
|
5.8
|
%
|
|
2,336
|
|
|
6.9
|
%
|
|
5,677
|
|
|
6.0
|
%
|
|
8,359
|
|
|
7.6
|
%
|
Loss on disposal or impairment of property and equipment
|
2,521
|
|
|
8.7
|
%
|
|
6,253
|
|
|
18.6
|
%
|
|
1,808
|
|
|
1.9
|
%
|
|
17,830
|
|
|
16.2
|
%
|
Total costs and expenses
|
28,317
|
|
|
98.2
|
%
|
|
37,058
|
|
|
110.0
|
%
|
|
87,096
|
|
|
92.3
|
%
|
|
127,652
|
|
|
116.1
|
%
|
Operating Income (Loss)
|
513
|
|
|
1.8
|
%
|
|
(3,367
|
)
|
|
(10.0
|
)%
|
|
7,299
|
|
|
7.7
|
%
|
|
(17,681
|
)
|
|
(16.1
|
)%
|
Interest expense, net
|
1,254
|
|
|
4.4
|
%
|
|
1,305
|
|
|
3.8
|
%
|
|
3,842
|
|
|
4.0
|
%
|
|
3,818
|
|
|
3.5
|
%
|
Other expense, net
|
57
|
|
|
0.2
|
%
|
|
57
|
|
|
0.2
|
%
|
|
160
|
|
|
0.2
|
%
|
|
149
|
|
|
0.1
|
%
|
(Loss) Income Before Income Taxes
|
(798
|
)
|
|
(2.8
|
)%
|
|
(4,729
|
)
|
|
(14.0
|
)%
|
|
3,297
|
|
|
3.5
|
%
|
|
(21,648
|
)
|
|
(19.7
|
)%
|
(Benefit from) provision for income taxes
|
(159
|
)
|
|
(0.6
|
)%
|
|
(2,051
|
)
|
|
(6.1
|
)%
|
|
970
|
|
|
1.0
|
%
|
|
(7,678
|
)
|
|
(7.0
|
)%
|
Net (Loss) Income
|
$
|
(639
|
)
|
|
(2.2
|
)%
|
|
$
|
(2,678
|
)
|
|
(7.9
|
)%
|
|
$
|
2,327
|
|
|
2.5
|
%
|
|
$
|
(13,970
|
)
|
|
(12.7
|
)%
|
|
|
(1)
|
Prior year numbers have been adjusted to reflect the impacts of adopting
ASU 2014-09
(the new revenue accounting standard) and
ASU 2016-02
(the new lease accounting standard). See Recently Adopted Accounting Standards under
Note 1 — Description of Business and Basis of Presentation
for more information on these two standards and a reconciliation of results as previously reported to adjusted results as presented above.
|
|
|
(2)
|
Please see the table presented under
Costs and Expenses
below, which presents Company-owned store expenses as a percentage of Company-owned store sales for the
three and nine
months ended
October 1, 2018
, and
October 2, 2017
.
|
Revenues
Total revenues.
In the three months ended
October 1, 2018
, total revenues
decreased
compared to the three months ended
October 2, 2017
, primarily due to (a) a decline in comparable store sales of
2.1%
, (b) a decline in the number of Company-owned and franchise stores period-over-period; and (c) the elimination of an incremental advertising fee of 0.85% of sales charged to all franchise stores only in fiscal year 2017 to help fund the test of national advertising in the first quarter of 2017.
In the
nine
months ended
October 1, 2018
, total revenues
decreased
compared to the
nine
months ended
October 2, 2017
, primarily due to (a) a decline in comparable store sales of
2.9%
, (b) a decline in the number of Company-owned and franchise stores period-over-period; and (c) the elimination of an incremental advertising fee of 0.85% of sales charged to all franchise stores only in fiscal year 2017 to help fund the test of national advertising in the first quarter of 2017.
Franchise revenues.
Franchise revenues
decreased
in the three months ended
October 1, 2018
, compared to the three months ended
October 2, 2017
, primarily due to (a) a decline in Franchise comparable store sales of
1.8%
, (b) a net decline of
47
franchise stores period-over-period, and (c) the elimination of an incremental advertising fee of 0.85% of sales charged to all franchise stores only in fiscal year 2017 to help fund the test of national advertising in the first quarter of 2017.
Franchise revenues
decreased
in the
nine
months ended
October 1, 2018
, compared to the
nine
months ended
October 2, 2017
, primarily due to (a) a decline in Franchise comparable store sales of
2.7%
, (b) a net decline of
47
franchise stores period-over-period, and (c) the elimination of an incremental advertising fee of 0.85% of sales charged to all franchise stores only in fiscal year 2017 to help fund the test of national advertising in the first quarter of 2017.
Company-owned stores revenue.
Company-owned stores revenue
decreased
in the three months ended
October 1, 2018
, compared to the three months ended
October 2, 2017
, primarily due to a decline in comparable store sales of
6.9%
and a reduction in the number of Company-owned stores period-over-period due to the refranchising of 29 and closure of six Company-owned stores since
October 2, 2017
.
Company-owned stores revenue
decreased
in the
nine
months ended
October 1, 2018
, compared to the
nine
months ended
October 2, 2017
, primarily due to a decline in comparable store sales of
4.5%
in the
nine
months ended
October 1, 2018
, compared to the
nine
months ended
October 2, 2017
, and a reduction in the number of Company-owned stores period-over-period due to the refranchising of 29 and closure of six Company-owned stores since
October 2, 2017
.
Costs and Expenses
Total costs and expenses.
Total costs and expenses
decreased
in the three months ended
October 1, 2018
, compared to the three months ended
October 2, 2017
, primarily as a result of impairments to our Company-owned store assets recorded in the three months ended
October 2, 2017
.
Total costs and expenses
decreased
in the
nine
months ended
October 1, 2018
, compared to the
nine
months ended
October 2, 2017
, primarily as a result of additional advertising costs incurred during the first quarter of 2017 associated with the national advertising test, impairments to our former e-commerce platform during the second quarter of 2017, and the aforementioned impairments to Company-owned store assets recorded in the three months ended
October 2, 2017
.
Store operating costs.
Store operating costs as a percentage of total revenues
increased
in the three months ended
October 1, 2018
, compared to the three months ended
October 2, 2017
and
decreased
in the
nine
months ended
October 1, 2018
, compared to the
nine
months ended
October 2, 2017
. 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
|
|
Nine Months Ended
|
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
Store operating costs as a % of Company-owned store sales:
|
|
|
|
|
|
|
Cost of food and packaging
|
32.5
|
%
|
|
33.4
|
%
|
|
32.9
|
%
|
|
34.0
|
%
|
Compensation and benefits
|
33.5
|
%
|
|
31.3
|
%
|
|
32.0
|
%
|
|
31.1
|
%
|
Advertising
|
8.9
|
%
|
|
9.2
|
%
|
|
7.8
|
%
|
|
8.9
|
%
|
Occupancy and other store operating costs
|
21.0
|
%
|
|
17.2
|
%
|
|
18.8
|
%
|
|
18.0
|
%
|
Total store operating costs
|
95.9
|
%
|
|
91.1
|
%
|
|
91.5
|
%
|
|
92.0
|
%
|
Total store operating costs as a percentage of Company-owned store sales
increased
by
480
basis points overall and
decreased
by
50
basis points overall, respectively, in the
three and nine
months ended
October 1, 2018
, compared to the
three and nine
months ended
October 2, 2017
, due primarily to the effect of Company-owned store portfolio changes in select markets and as further explained below:
|
|
•
|
Cost of food and packaging.
Food and packaging costs declined during the
three and nine
months ended
October 1, 2018
compared to the
three and nine
months ended
October 2, 2017
primarily due to decreases in commodity prices and the closing of six stores since
October 2, 2017
that had lower sales and higher food costs as a percentage of store sales than the system average.
|
|
|
•
|
Compensation and benefits.
Compensation and benefits increased during the
three and nine
months ended
October 1, 2018
compared to the
three and nine
months ended
October 2, 2017
primarily due to minimum wage increases in markets where we have Company-owned stores.
|
|
|
•
|
Advertising costs.
Advertising costs decreased in the
three and nine
months ended
October 1, 2018
compared to the
three and nine
months ended
October 2, 2017
primarily due to reduced levels of spending on advertising during the
third
quarter ended
October 1, 2018
.
|
|
|
▪
|
Occupancy and other store operating costs.
The increase in occupancy and other store operating costs as a percentage of Company-owned store sales during the
three and nine
months ended
October 1, 2018
, compared to the
three and nine
months ended
October 2, 2017
was primarily a result of gains on the settlement of lease liabilities recorded during the three months ended
October 2, 2017
, partially offset by increased repairs and maintenance expenditures during the three months ended
October 1, 2018
.
|
Selling, general, and administrative.
Selling, general, and administrative costs
decreased
in the three months ended
October 1, 2018
, compared to the three months ended
October 2, 2017
, primarily as a result of reduced spending on compensation and benefits in the three months ended
October 1, 2018
and legal settlement costs recorded in the three months ended
October 2, 2017
.
Selling, general, and administrative costs
decreased
in the
nine
months ended
October 1, 2018
, compared to the
nine
months ended
October 2, 2017
, primarily as a result of Brand Marketing Fund expenses incurred in 2017 associated with our first test of a national media campaign, and severance and restructuring costs incurred in 2017 associated with executive turnover and staff reductions.
Depreciation and amortization.
Depreciation and amortization
decreased
in the
three and nine
months ended
October 1, 2018
, compared to the
three and nine
months ended
October 2, 2017
, due to a reduction in our depreciable asset base as a result of a having fewer Company-owned stores period-over-period and the recording of impairment charges for our former e-commerce platform and Company-owned stores in four markets during 2017.
Interest expense, net.
Interest expense, net
decreased
in the three months ended
October 1, 2018
, compared to the three months ended
October 2, 2017
, due to a reduction in the total amount of debt outstanding period-over-period, partially offset by increased average interest rates. Interest expense, net
increased
in the
nine
months ended
October 1, 2018
, compared to the
nine
months ended
October 2, 2017
, due to increased average interest rates, partially offset by a reduction in the total amount of debt outstanding period-over-period.
Income taxes.
The (benefit from) provision for income taxes
decreased
in the
three and nine
months ended
October 1, 2018
, compared to the
three and nine
months ended
October 2, 2017
, primarily due to the Federal corporate tax rate reduction made by the Tax Cuts and Jobs Act (the “2017 Tax Act”).
The effective tax rate for the three months ended
October 1, 2018
, was
19.9%
compared to
43.4%
for the three months ended
October 2, 2017
. The effective income tax rate
decreased
primarily due to the Federal corporate tax rate reduction made by the 2017 Tax Act.
The effective tax rate for the
nine
months ended
October 1, 2018
, was
29.4%
compared to
35.5%
for the
nine
months ended
October 2, 2017
. The effective income tax rate
decreased
primarily as a result of the Federal corporate tax rate reduction made by the 2017 Tax Act and from the negative impact of a discrete adjustment for share-based compensation expense recorded for vesting restricted common shares recorded earlier in the prior year. Our income taxes have varied from what would be expected from the application of prevailing statutory rates mainly due to the effect of meal and entertainment expenses and share-based compensation expenses.
Segment Results
Franchise.
Total revenues for the Franchise segment
increased
$0.8 million
and
$1.5 million
in the
three and nine
months ended
October 1, 2018
compared to the
three and nine
months ended
October 2, 2017
, respectively, primarily due to a change in intersegment revenues. Starting in fiscal year 2018, a royalty fee, comparable to what is charged to franchised stores, is charged to each Company-owned store. This royalty fee replaces the corporate overhead allocation that was in place through fiscal year 2017. This change increased Franchise intersegment revenues for the
three and nine
months ended
October 1, 2018
by $0.6 million and $2.3 million, respectively, compared to the
three and nine
months ended
October 2, 2017
. This increase in Franchise revenues was partially offset by declines in Franchise royalty revenues of $0.3 million and $1.2 million for the
three and nine
months ended
October 1, 2018
compared to the
three and nine
months ended
October 2, 2017
, respectively, as a result of a decline in Franchise comparable store sales of
1.8%
and
2.7%
, respectively, and a reduction in the number of franchised stores period-over-period.
Adjusted
EBITDA
for the Franchise segment
increased
$0.8 million
and
decreased
$0.5 million
in the
three and nine
months ended
October 1, 2018
, compared to the
three and nine
months ended
October 2, 2017
, respectively, primarily due to the aforementioned changes in the corporate overhead cost allocation methodology and declines in royalty revenues.
Company Stores.
Total revenues for the Domestic Company Stores segment
decreased
$4.6 million
and
$9.5 million
in the
three and nine
months ended
October 1, 2018
compared to the
three and nine
months ended
October 2, 2017
, respectively, primarily due to declines in comparable store sales of
6.9%
and
4.5%
, respectively, and a reduction in the number of Company-owned stores period-over-period.
Adjusted
EBITDA
for the Domestic Company Stores segment
decreased
$0.8 million
and
$1.1 million
in the
three and nine
months ended
October 1, 2018
, respectively, compared to the
three and nine
months ended
October 2, 2017
, primarily as a result of the aforementioned decline in revenues at Company-owned stores, the closure of six underperforming stores since
October 2, 2017
and the aforementioned change to the corporate overhead cost allocation methodology.
Brand Funds.
Total revenues for the Brand Funds segment
decreased
$0.4 million
and
$5.3 million
for the
three and nine
months ended
October 1, 2018
, compared to the
three and nine
months ended
October 2, 2017
, respectively, primarily as a
result of declines in comparable domestic store sales of
2.2%
and
2.8%
, respectively, and fewer domestic stores period-over-period. Additionally, for the
nine
month comparable periods, Brand Funds revenues declined due to the elimination of the incremental advertising fee of 0.85% of sales charged to domestic stores in fiscal year 2017 to partially fund the test of national advertising in the first quarter of 2017.
Adjusted
EBITDA
from the Brand Funds segment
decreased
$1.3 million
for the three months ended
October 1, 2018
, compared to the three months ended
October 2, 2017
, primarily due to advertising spending patterns in 2017 that were heavily weighted toward the first quarter as a result of our test of national advertising and significantly lower during the third quarter of 2017.
Adjusted
EBITDA
from the Brand Funds segment
increased
$4.1 million
for the
nine
months ended
October 1, 2018
, compared to the
nine
months ended
October 2, 2017
, primarily due to the elimination of advertising expenditures associated with our test of national advertising during the
nine
months ended
October 2, 2017
.
The table below shows the net impact of the
BMF
on the Brand Funds segment’s adjusted
EBITDA
and the current fund deficit. The Convention Fund had EBITDA of zero for the
three and nine
months ended
October 1, 2018
and
October 2, 2017
, respectively, and a fund surplus of
$0.8 million
and
$1.1 million
as of
October 1, 2018
and
October 2, 2017
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
|
October 1, 2018
|
|
October 2, 2017
|
Opening BMF deficit
|
$
|
(5,877
|
)
|
|
$
|
(6,604
|
)
|
|
$
|
(5,461
|
)
|
|
$
|
(1,071
|
)
|
Net activity during the period
|
461
|
|
|
1,718
|
|
|
45
|
|
|
(3,815
|
)
|
Ending BMF deficit
|
$
|
(5,416
|
)
|
|
$
|
(4,886
|
)
|
|
$
|
(5,416
|
)
|
|
$
|
(4,886
|
)
|
|
|
Liquidity and Capital Resources
|
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
October 1, 2018
, we had
Cash and cash equivalents
of
$3.4 million
and
$20.0 million
of available borrowings under a revolving line of credit, of which
none
was drawn. As of
October 1, 2018
, we had
$84.8 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
. On November 6, 2018, we entered into a second amendment to our
Senior Credit Facility
that, among other things, extended the term of the
Senior Credit Facility
by twelve months to August 2020 and reduced the revolving line of credit from $20.0 million to $7.5 million. 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
October 1, 2018
, we were in compliance with all of our covenants and other obligations under our
Senior Credit Facility
.
For more information on the second amendment to our
Senior Credit Facility
, see Part II, Item 5 of this Quarterly Report on Form 10-Q.
Cash Flows
The following table presents a summary of cash flows from operating, investing, and financing activities for the periods presented:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(in thousands)
|
October 1, 2018
|
|
October 2, 2017
|
Cash flows from operating activities
|
$
|
5,019
|
|
|
$
|
8,224
|
|
Cash flows from investing activities
|
7,186
|
|
|
(709
|
)
|
Cash flows from financing activities
|
(11,020
|
)
|
|
(8,685
|
)
|
Total cash flows
|
$
|
1,185
|
|
|
$
|
(1,170
|
)
|
Cash Flows from Operating Activities
Net cash
provided
by operating activities of
$5.0 million
for the
nine
months ended
October 1, 2018
, resulted primarily from net income of
$2.3 million
, adjusted for items such as depreciation and amortization, gains and losses on the disposal or impairment of property and equipment, and changes in operating assets and liabilities. The
$3.2 million
decrease
for the
nine months ended October 1, 2018
, compared to the
nine months ended October 2, 2017
, was primarily driven by reduced spending on marketing during the first quarter of 2018 compared to the first quarter of 2017, which included our test of national advertising. This reduction in advertising spend was partially offset by lower advertising fee revenues due to the elimination of an incremental advertising fee of 0.85% of sales charged to all franchise stores only in fiscal year 2017 to help fund the test of national advertising in the first quarter of 2017.
Cash Flows from Investing Activities
Net cash
provided
by investing activities was
$7.2 million
for the
nine
months ended
October 1, 2018
, compared to net cash
used
of
$0.7 million
for the
nine
months ended
October 2, 2017
. The
$7.9 million
increase
in cash
provided
by investing activities was due primarily to
$8.1 million
in proceeds from the sale and refranchising of
29
stores in the
nine
months ended
October 1, 2018
compared to proceeds of
$2.2 million
from the sale and refranchising of
seven
stores for the
nine
months ended
October 2, 2017
, and a period-over-period decrease of
$2.5 million
in capital expenditures for property, plant, and equipment.
Cash Flows from Financing Activities
Net cash
used
by financing activities was
$11.0 million
for the
nine
months ended
October 1, 2018
, compared to net cash
used
of
$8.7 million
for the
nine
months ended
October 2, 2017
. The
$2.3 million
increase
in net cash
used
by financing activities was primarily due to extra payments on our long-term debt and no net borrowings under our revolving credit facility during the
nine
months ended
October 1, 2018
.
|
|
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, leases, and share-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable in 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 1, 2018
.
For a discussion of new accounting standards that have been issued by the FASB and have been adopted during the current year, see
Note 1 — Description of Business and Basis of Presentation
to the
interim unaudited
condensed consolidated financial statements
in Part I, Item 1.
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 chose to “opt out” of this extended transition period, and as a result, we will 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.