Notes to Unaudited Condensed Consolidated Financial Statements
|
|
Note 1 — Description of Business and Basis of Presentation
|
Description of Business
Papa Murphy’s Holdings, Inc. (“Papa Murphy’s” or the “Company”), together with its subsidiaries, is a franchisor and operator of a Take ‘N’ Bake pizza chain. The Company franchises the right to operate Papa Murphy’s Take ‘N’ Bake pizza franchises and operates Papa Murphy’s Take ‘N’ Bake pizza stores owned by the Company. As of
April 1, 2019
, the Company had
1,422
stores consisting of
1,384
domestic stores (
1,278
franchised stores and
106
Company-owned stores) across
37
states, plus
38
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
December 31, 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
2019
and
2018
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
2019
and
2018
are references to fiscal years ending
December 30, 2019
and ended
December 31, 2018
, respectively.
Recently Issued Accounting 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.
|
|
Note 2 — Prepaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 1, 2019
|
|
December 31, 2018
|
Prepaid media production costs
|
$
|
605
|
|
|
$
|
724
|
|
Prepaid software and support
|
687
|
|
|
469
|
|
Prepaid occupancy related costs
|
135
|
|
|
136
|
|
Prepaid insurance
|
134
|
|
|
160
|
|
Taxes receivable
|
—
|
|
|
61
|
|
POS software licenses for resale
|
368
|
|
|
368
|
|
Assets held for sale
|
200
|
|
|
257
|
|
Advertising cooperative assets, restricted
|
46
|
|
|
(24
|
)
|
Other
|
268
|
|
|
22
|
|
Total prepaid expenses and other current assets
|
$
|
2,443
|
|
|
$
|
2,173
|
|
|
|
Note 3 — Property and Equipment
|
Property and equipment are net of accumulated depreciation of
$19.0 million
and
$18.6 million
at
April 1, 2019
, and
December 31, 2018
, respectively. Depreciation expense amounted to
$0.4 million
and
$1.0 million
during the three months ended
April 1, 2019
, and
April 2, 2018
, respectively.
|
|
Note 4 — Intangible Assets
|
Definite-lived intangible assets are net of accumulated amortization of
$34.4 million
and
$33.3 million
as of
April 1, 2019
, and
December 31, 2018
, respectively. Amortization expense amounted to
$1.0 million
and
$1.1 million
during the three months ended
April 1, 2019
, and
April 2, 2018
, respectively.
|
|
Note 5 — Financing Arrangements
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 1, 2019
|
|
December 31, 2018
|
Term loan
|
$
|
77,408
|
|
|
$
|
79,508
|
|
Notes payable
|
—
|
|
|
3,000
|
|
Total principal amount of long-term debt
|
77,408
|
|
|
82,508
|
|
Unamortized debt issuance costs
|
(390
|
)
|
|
(464
|
)
|
Total long-term debt
|
77,018
|
|
|
82,044
|
|
Less current portion
|
(8,400
|
)
|
|
(11,400
|
)
|
Total long-term debt, net of current portion
|
$
|
68,618
|
|
|
$
|
70,644
|
|
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.
On November 6, 2018, the Company extended the term of the
Senior Credit Facility
to
August 2020
and reduced the revolving credit facility from
$20.0 million
to
$7.5 million
. The Company has shown as the current portion of long-term debt an amount equal to the minimum term loan amortization payments of
$2.1 million
due on the last day of each fiscal quarter.
As of
April 1, 2019
, the term loan bears interest at a rate of
6.5%
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
first
quarter of
2019
was
6.5%
.
Notes payable
Papa Murphy’s Company Stores, Inc., a wholly owned subsidiary of Papa Murphy’s Holdings, Inc., had a
$3.0 million
note payable which bore interest at a rate of
5.0%
per annum and matured in
January 2019
. This note was subordinated to the
Senior Credit Facility
and was paid in full in
January 2019
.
|
|
Note 6 — Fair Value Measurement
|
The Company determines the fair value of assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant.
GAAP
defines a fair value hierarchy that prioritizes the assumptions used to measure fair value. The three levels of the fair value hierarchy are defined as follows:
|
|
▪
|
Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
|
|
|
▪
|
Level 2 — Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
|
|
|
▪
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
|
The following table presents information about the fair value of the Company’s financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2019
|
|
December 31, 2018
|
|
|
(in thousands)
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Fair Value Measurement
|
Financial assets
|
|
|
|
|
|
|
|
|
|
Other receivables
(1)
|
505
|
|
|
444
|
|
|
505
|
|
|
439
|
|
|
Level 3
|
|
|
(1)
|
The fair value of other receivables was estimated primarily using a discounted cash flow method based on a discount rate, reflecting the applicable credit spread.
|
Financial instruments not included in the table above consist of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The fair values of cash and cash equivalents, accounts receivable, and accounts payable approximate carrying value because of the short-term nature of the accounts. The fair value of long-term debt approximates carrying value because the borrowings are made with variable market rates and negotiated terms and conditions that are consistent with current market rates.
|
|
Note 7 — Accrued Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 1, 2019
|
|
December 31, 2018
|
Accrued compensation and related costs
|
$
|
2,382
|
|
|
$
|
4,100
|
|
Accrued legal settlement costs
|
—
|
|
|
2,363
|
|
Gift cards payable
|
2,206
|
|
|
2,700
|
|
Accrued interest and non-income taxes payable
|
328
|
|
|
318
|
|
Convention fund balance
|
1,428
|
|
|
1,175
|
|
Advertising cooperative liabilities
|
95
|
|
|
25
|
|
Income taxes payable
|
317
|
|
|
—
|
|
Lease liabilities held for sale
|
706
|
|
|
763
|
|
Other
|
956
|
|
|
945
|
|
Total accrued expenses and other current liabilities
|
$
|
8,418
|
|
|
$
|
12,389
|
|
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 April 1, 2019
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
Franchise royalties
|
$
|
9,179
|
|
|
$
|
—
|
|
|
$
|
3,687
|
|
|
$
|
12,866
|
|
Franchise fees
|
631
|
|
|
—
|
|
|
—
|
|
|
631
|
|
Vendor payments
|
—
|
|
|
—
|
|
|
1,208
|
|
|
1,208
|
|
E-commerce fees
|
713
|
|
|
—
|
|
|
—
|
|
|
713
|
|
Other franchise and brand
|
38
|
|
|
—
|
|
|
693
|
|
|
731
|
|
Company-owned stores
|
—
|
|
|
12,823
|
|
|
—
|
|
|
12,823
|
|
Total revenues
|
10,561
|
|
|
12,823
|
|
|
5,588
|
|
|
28,972
|
|
Intersegment revenues
|
698
|
|
|
—
|
|
|
365
|
|
|
1,063
|
|
Reconciliation to business segment revenues
|
$
|
11,259
|
|
|
$
|
12,823
|
|
|
$
|
5,953
|
|
|
$
|
30,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 2, 2018
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
Franchise royalties
|
$
|
9,461
|
|
|
$
|
—
|
|
|
$
|
3,840
|
|
|
$
|
13,301
|
|
Franchise fees
|
740
|
|
|
—
|
|
|
—
|
|
|
740
|
|
Vendor payments
|
—
|
|
|
—
|
|
|
1,117
|
|
|
1,117
|
|
E-commerce fees
|
546
|
|
|
—
|
|
|
—
|
|
|
546
|
|
Other franchise and brand
|
23
|
|
|
—
|
|
|
463
|
|
|
486
|
|
Company-owned stores
|
—
|
|
|
18,582
|
|
|
—
|
|
|
18,582
|
|
Total revenues
|
10,770
|
|
|
18,582
|
|
|
5,420
|
|
|
34,772
|
|
Intersegment revenues
|
992
|
|
|
—
|
|
|
465
|
|
|
1,457
|
|
Reconciliation to business segment revenues
|
$
|
11,762
|
|
|
$
|
18,582
|
|
|
$
|
5,885
|
|
|
$
|
36,229
|
|
Revenues by geographic location were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 1, 2019
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
United States
|
$
|
10,478
|
|
|
$
|
12,823
|
|
|
$
|
5,588
|
|
|
$
|
28,889
|
|
International
|
83
|
|
|
—
|
|
|
—
|
|
|
83
|
|
Total revenues
|
$
|
10,561
|
|
|
$
|
12,823
|
|
|
$
|
5,588
|
|
|
$
|
28,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 2, 2018
|
(in thousands)
|
Franchise
|
|
Company Stores
|
|
Brand Funds
|
|
Total
|
United States
|
$
|
10,690
|
|
|
$
|
18,582
|
|
|
$
|
5,420
|
|
|
$
|
34,692
|
|
International
|
80
|
|
|
—
|
|
|
—
|
|
|
80
|
|
Total revenues
|
$
|
10,770
|
|
|
$
|
18,582
|
|
|
$
|
5,420
|
|
|
$
|
34,772
|
|
Contract Balances
Changes in the balances of contract liabilities (unearned revenue) during the periods reported were as follows:
|
|
|
|
|
(in thousands)
|
Contract Liabilities
|
Balance at December 31, 2018
|
$
|
9,878
|
|
Revenue recognized that was included in the balance at the beginning of the period
|
(619
|
)
|
Cash received, net of amounts recognized as revenue during the period
|
260
|
|
Balance at April 1, 2019
|
$
|
9,519
|
|
The Company had a refund liability of
$0.5 million
as of each of
April 1, 2019
and
December 31, 2018
. Receivables from contracts with customers included in Accounts receivable, net were
$2.7 million
as of
April 1, 2019
and
$3.1 million
as of
December 31, 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
April 1, 2019
(in thousands):
|
|
|
|
|
|
Fiscal year
|
2019
|
$
|
1,214
|
|
|
2020
|
1,494
|
|
|
2021
|
1,339
|
|
|
2022
|
1,181
|
|
|
2023
|
951
|
|
|
Thereafter
|
3,340
|
|
|
Total
|
$
|
9,519
|
|
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 right of use assets
, current portion of lease liabilities
, and
lease liabilities, net of current portion in
the
Condensed Consolidated Balance Sheets
. The Company currently has no finance leases. The Company’s leases have remaining lease terms of
1.2
to
12.8 years
.
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
|
(in thousands)
|
April 1, 2019
|
|
April 2, 2018
|
Operating lease cost
|
$
|
863
|
|
|
$
|
1,046
|
|
Short-term lease cost
|
12
|
|
|
14
|
|
Variable lease cost
|
3
|
|
|
1
|
|
Sublease income
|
(20
|
)
|
|
(18
|
)
|
Total lease cost
|
$
|
858
|
|
|
$
|
1,043
|
|
Supplemental cash flow information related to leases for the periods reported is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 1, 2019
|
|
April 2, 2018
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
1,155
|
|
|
$
|
1,222
|
|
Right of use assets obtained in exchange for new operating lease liabilities
|
448
|
|
|
—
|
|
Weighted-average remaining lease term of operating leases
|
5.1 years
|
|
|
5.7 years
|
|
Weighted-average discount rate of operating leases
|
6.1
|
%
|
|
6.0
|
%
|
Future minimum lease payments under non-cancelable leases as of
April 1, 2019
are as follows (in thousands):
|
|
|
|
|
|
Fiscal year
|
2019
|
$
|
2,824
|
|
|
2020
|
3,540
|
|
|
2021
|
2,687
|
|
|
2022
|
1,946
|
|
|
2023
|
1,521
|
|
|
Thereafter
|
2,601
|
|
|
Total future minimum lease payments
|
15,119
|
|
|
Less imputed interest
|
(2,313
|
)
|
|
Less lease liabilities held for sale
(1)
|
(1,943
|
)
|
|
Total Lease Liabilities
|
$
|
10,863
|
|
|
|
(1)
|
Lease liabilities held for sale includes
$0.7 million
reported in Accrued expenses and other current liabilities (see
Note 7 — Accrued Expenses and Other Current Liabilities
) and
$1.2 million
reported in Other long-term liabilities in the Company's
Condensed Consolidated Balance Sheets
.
|
As of
April 1, 2019
, the Company had no operating leases that had not yet commenced.
Lease guarantees
The Company is the guarantor for operating leases of
40
franchised stores that have terms expiring on various dates from
June 2019
to
August 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. As of
April 1, 2019
, 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
|
(in thousands)
|
April 1, 2019
|
|
April 2, 2018
|
Provision for income taxes
|
$
|
654
|
|
|
$
|
581
|
|
Income before income taxes
|
2,460
|
|
|
2,161
|
|
Effective income tax rate
|
26.6
|
%
|
|
26.9
|
%
|
The effective income tax rates for the three months ended
April 1, 2019
and
April 2, 2018
include the effect of certain permanent differences between tax reporting purposes and financial reporting purposes and the effect of certain Federal General Business Credits confirmed during the quarter.
|
|
Note 11 — 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
|
|
Performance Vesting
|
|
Unvested, December 31, 2018
|
41,000
|
|
|
30,171
|
|
|
—
|
|
|
$
|
3.79
|
|
Granted
|
—
|
|
|
63,902
|
|
|
63,907
|
|
|
4.75
|
|
Unvested, April 1, 2019
|
41,000
|
|
|
94,073
|
|
|
63,907
|
|
|
$
|
4.41
|
|
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, December 31, 2018
|
803,344
|
|
|
111,290
|
|
|
$
|
7.23
|
|
|
|
|
|
Granted
|
384,818
|
|
|
—
|
|
|
4.75
|
|
|
|
|
|
Exercised
|
(4,500
|
)
|
|
—
|
|
|
3.97
|
|
|
|
|
|
Forfeited
|
(200,399
|
)
|
|
(4,336
|
)
|
|
9.67
|
|
|
|
|
|
Outstanding, April 1, 2019
|
983,263
|
|
|
106,954
|
|
|
$
|
5.91
|
|
|
8.6 years
|
|
$
|
371
|
|
Exercisable, April 1, 2019
|
241,362
|
|
|
—
|
|
|
$
|
8.20
|
|
|
6.9 years
|
|
$
|
79
|
|
Compensation cost
Stock-based compensation expense recognized in connection with the
Incentive Plans
for each of the three months ended
April 1, 2019
and
April 2, 2018
amounted to
$0.2 million
.
As of
April 1, 2019
, total unrecognized share-based compensation expense was
$2.0 million
, with
$1.2 million
associated with time vesting awards,
$0.5 million
associated with market condition awards, and
$0.3 million
associated with performance vesting awards. The remaining weighted average period for unrecognized share-based compensation expense was
2.1 years
as of
April 1, 2019
.
|
|
Note 12 — Brand Marketing Fund
|
The Company manages the Brand Marketing Fund (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
|
(in thousands)
|
April 1, 2019
|
|
April 2, 2018
|
Opening BMF deficit
|
$
|
(5,423
|
)
|
|
$
|
(5,461
|
)
|
Net activity during the period
|
109
|
|
|
(401
|
)
|
Ending BMF deficit
|
$
|
(5,314
|
)
|
|
$
|
(5,862
|
)
|
As of
April 1, 2019
, previously recognized expenses of
$5.3 million
may be recovered in future periods if subsequent
BMF
contributions exceed expenditures.
|
|
Note 13 — 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
|
(in thousands, except per share data)
|
April 1, 2019
|
|
April 2, 2018
|
Earnings:
|
|
|
|
Net income
|
$
|
1,806
|
|
|
$
|
1,580
|
|
Shares:
|
|
|
|
Weighted average common shares outstanding
|
16,956
|
|
|
16,906
|
|
Dilutive effect of restricted equity awards
|
37
|
|
|
39
|
|
Diluted weighted average number of shares outstanding
|
16,993
|
|
|
16,945
|
|
Earnings per share:
|
|
|
|
Basic earnings per share
|
$
|
0.11
|
|
|
$
|
0.09
|
|
Diluted earnings per share
|
$
|
0.11
|
|
|
$
|
0.09
|
|
For the three months ended
April 1, 2019
, and
April 2, 2018
, an aggregated total of
0.4 million
shares and
0.6 million
shares, respectively, have been excluded from the diluted
EPS
calculation because their effect would have been anti-dilutive.
|
|
Note 14 — 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
twelve
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.
One
franchise owner group remains in the case. Trial with the remaining franchise owner group has been postponed indefinitely due to pending discovery.
As before, the Company believes the allegations in this litigation lack merit and, for the remaining plaintiff, the Company will continue to vigorously defend its interests, including by asserting a number of affirmative defenses and, where appropriate, counterclaims. The Company provides no assurance that it will be successful in its defense of the remaining lawsuit; however, the Company does not currently expect the cost of resolving it to have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
The Company is named the defendant in a putative collective action filed by plaintiff Amanda Cottle on January 8, 2019, in the United States District Court for the Middle District of Florida. The lawsuit alleges that the Company violated the FLSA by failing to pay proper overtime wages to the plaintiff, a store manager. Ms. Cottle asks that the court certify the putative class and that unpaid wages and liquidated damages under the FLSA, as well as interest and fees, be awarded to her and each class member. The Company believes the allegations in this litigation lack merit and will vigorously defend its interests in the matter. The Company provides no assurance that it will be successful in its defense of this lawsuit; however, the Company does not currently expect the cost of resolving it to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
In January 2019, the United States District Court for the Western District of Washington issued the final order and mandate releasing all claims relating to the putative class action lawsuit filed against us by plaintiff John Lennartson on May 7, 2015, alleging the Company failed to comply with the requirements of the Telephone Consumer Protection Act when it sent SMS text messages to consumers.
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 15 — Segment Information
|
The Company 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
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
income
before income taxes:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 1, 2019
|
|
April 2, 2018
|
Revenues
|
|
|
|
Franchise segment
|
$
|
11,259
|
|
|
$
|
11,762
|
|
Brand Funds segment
|
5,953
|
|
|
5,885
|
|
Intersegment eliminations
|
(1,063
|
)
|
|
(1,457
|
)
|
Franchise related
|
16,149
|
|
|
16,190
|
|
Company Stores segment
|
12,823
|
|
|
18,582
|
|
Total
|
$
|
28,972
|
|
|
$
|
34,772
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 1, 2019
|
|
April 2, 2018
|
Segment Adjusted EBITDA
|
|
|
|
Franchise
|
$
|
6,083
|
|
|
$
|
7,287
|
|
Company Stores
|
(15
|
)
|
|
1,074
|
|
Brand Funds
|
112
|
|
|
(238
|
)
|
Total reportable segments adjusted EBITDA
|
6,180
|
|
|
8,123
|
|
Corporate and unallocated
|
(702
|
)
|
|
(987
|
)
|
Depreciation and amortization
|
(1,478
|
)
|
|
(2,141
|
)
|
Interest expense, net
|
(1,397
|
)
|
|
(1,292
|
)
|
CEO transition and restructuring costs
(1)
|
204
|
|
|
(244
|
)
|
E-commerce transition costs
(2)
|
—
|
|
|
(358
|
)
|
Strategic alternatives
(3)
|
(188
|
)
|
|
—
|
|
Litigation settlement and reserves
(4)
|
(159
|
)
|
|
(940
|
)
|
Income Before Income Taxes
|
$
|
2,460
|
|
|
$
|
2,161
|
|
|
|
(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 non-recurring costs incurred to complete the transition of our e-commerce platform to a third party developed and hosted solution.
|
|
|
(3)
|
Reflects costs associated with the exploration of strategic alternatives and negotiation of the definitive merger agreement.
|
|
|
(4)
|
Accruals made for litigation settlements and associated legal costs.
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
April 1, 2019
|
|
December 31, 2018
|
Total Assets
|
|
|
|
Franchise
|
$
|
113,793
|
|
|
$
|
120,611
|
|
Company Stores
|
37,235
|
|
|
38,177
|
|
Brand Funds
|
835
|
|
|
873
|
|
Other
(1)
|
87,132
|
|
|
87,063
|
|
Total
|
$
|
238,995
|
|
|
$
|
246,724
|
|
|
|
(1)
|
Other assets which are not allocated to the individual segments primarily include trade names and trademarks and taxes receivable.
|
|
|
Note 16 — Subsequent Events
|
On April 10, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MTY Franchising USA, Inc. (“Parent”) and MTY Columbia Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of Parent, providing for the acquisition of the Company by Parent in an all-cash transaction, consisting of a tender offer at a purchase price of
$6.45
per share in cash (the “Offer”) for all of the Company’s outstanding shares of common stock, par value
$0.01
per share (the “Common Stock”), followed by a subsequent merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent.
The foregoing description of the Merger Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, a copy of which is attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated April 11, 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
December 31, 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
2019
is a 52-week period ending on
December 30, 2019
, and fiscal year
2018
was a 52-week period ended on
December 31, 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 sections entitled “Risk Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended
December 31, 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, resolution of litigation and claims, expansion and growth opportunities, our obligations with respect to lease guarantees, the risks and uncertainties associated with the Merger, 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
December 31, 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
April 1, 2019
, compared to the three months ended
April 2, 2018
, declined
16.7%
from
$34.8 million
to
$29.0 million
. The decline in total revenues was due to (i) a decline in Company-owned store sales attributable to the refranchising of 29 and closure of ten Company-owned stores since April 2, 2018, and (ii) a decline in royalties and advertising fees due to negative comparable store sales, as noted below, and a net decline of 43 franchise stores since April 2, 2018 (8 stores opened, 80 stores closed, and 29 stores refranchised).
Comparable store sales in
2019
compared to
2018
for selected segments were as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2019
|
|
April 2, 2018
|
Franchise
|
(3.1
|
)%
|
|
(4.0
|
)%
|
Company Stores
|
(9.0
|
)%
|
|
(2.7
|
)%
|
Total
|
(3.5
|
)%
|
|
(3.9
|
)%
|
Comparable store sales for the
three
months ended
April 1, 2019
were lower compared to the same period in the prior year primarily as a result of
continued competitive headwinds and both convenience and relevance gaps.
We evaluate the performance of our business using a variety of operating and performance metrics. Set forth below is a description of our key operating metrics.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2019
|
|
April 2, 2018
|
Store average weekly sales
|
$
|
10,790
|
|
|
$
|
10,874
|
|
Comparable store sales
|
(3.5
|
)%
|
|
(3.9
|
)%
|
Comparable stores
|
1,413
|
|
|
1,469
|
|
System-wide sales (in thousands)
|
$
|
200,332
|
|
|
$
|
213,757
|
|
System-wide stores
|
1,422
|
|
|
1,504
|
|
Adjusted EBITDA (in thousands)
|
$
|
5,478
|
|
|
$
|
7,136
|
|
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
1,422
stores as of
April 1, 2019
, of which
92.5%
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
three months ended April 1, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
|
|
|
|
|
|
|
|
Domestic
|
|
International
|
|
Total Franchise
|
|
Company Stores
|
|
Total
|
Store count at December 31, 2018
|
1,294
|
|
|
37
|
|
|
1,331
|
|
|
106
|
|
|
1,437
|
|
Openings
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Closings
|
(16
|
)
|
|
—
|
|
|
(16
|
)
|
|
—
|
|
|
(16
|
)
|
Store count at April 1, 2019
|
1,278
|
|
|
38
|
|
|
1,316
|
|
|
106
|
|
|
1,422
|
|
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
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
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
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
income
to Adjusted
EBITDA
for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 1, 2019
|
|
April 2, 2018
|
Net Income
|
$
|
1,806
|
|
|
$
|
1,580
|
|
Depreciation and amortization
|
1,478
|
|
|
2,141
|
|
Provision for income taxes
|
654
|
|
|
581
|
|
Interest expense, net
|
1,397
|
|
|
1,292
|
|
EBITDA
|
$
|
5,335
|
|
|
$
|
5,594
|
|
CEO transition and restructuring costs
(1)
|
(204
|
)
|
|
244
|
|
E-commerce transition costs
(2)
|
—
|
|
|
358
|
|
Strategic alternatives
(3)
|
188
|
|
|
—
|
|
Litigation settlement and reserves
(4)
|
159
|
|
|
940
|
|
Adjusted EBITDA
|
$
|
5,478
|
|
|
$
|
7,136
|
|
|
|
(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 non-recurring costs incurred to complete the transition of our e-commerce platform to a third party developed and hosted solution.
|
|
|
(3)
|
Reflects costs associated with the exploration of strategic alternatives and negotiation of the definitive merger agreement.
|
|
|
(4)
|
Accruals made for litigation settlements and associated legal costs.
|
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
|
(in thousands)
|
April 1, 2019
|
|
April 2, 2018
|
Revenues
|
|
|
|
Franchise segment
|
$
|
11,259
|
|
|
$
|
11,762
|
|
Brand Funds segment
|
5,953
|
|
|
5,885
|
|
Intersegment eliminations
|
(1,063
|
)
|
|
(1,457
|
)
|
Franchise related
|
16,149
|
|
|
16,190
|
|
Company Stores segment
|
12,823
|
|
|
18,582
|
|
Total
|
$
|
28,972
|
|
|
$
|
34,772
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 1, 2019
|
|
April 2, 2018
|
Segment Adjusted EBITDA
|
|
|
|
Franchise
|
$
|
6,083
|
|
|
$
|
7,287
|
|
Company Stores
|
(15
|
)
|
|
1,074
|
|
Brand Funds
|
112
|
|
|
(238
|
)
|
Total reportable segments adjusted EBITDA
|
6,180
|
|
|
8,123
|
|
Corporate and unallocated
|
(702
|
)
|
|
(987
|
)
|
Adjusted EBITDA
|
5,478
|
|
|
7,136
|
|
Depreciation and amortization
|
(1,478
|
)
|
|
(2,141
|
)
|
Interest expense, net
|
(1,397
|
)
|
|
(1,292
|
)
|
CEO transition and restructuring costs
(1)
|
204
|
|
|
(244
|
)
|
E-commerce transition costs
(2)
|
—
|
|
|
(358
|
)
|
Strategic alternatives
(3)
|
(188
|
)
|
|
—
|
|
Litigation settlement and reserves
(4)
|
(159
|
)
|
|
(940
|
)
|
Income Before Income Taxes
|
$
|
2,460
|
|
|
$
|
2,161
|
|
|
|
(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 non-recurring costs incurred to complete the transition of our e-commerce platform to a third party developed and hosted solution.
|
|
|
(3)
|
Reflects costs associated with the exploration of strategic alternatives and negotiation of the definitive merger agreement.
|
|
|
(4)
|
Accruals made for litigation settlements and associated legal costs.
|
The following table sets forth our results of operations in dollars and as a percentage of total revenues for the
three
months ended
April 1, 2019
, and
April 2, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2019
|
|
April 2, 2018
|
(dollars in thousands)
|
$
|
|
Total % of
Revenues
|
|
$
|
|
Total % of
Revenues
|
Revenues
|
|
|
|
|
|
|
|
Franchise related
|
$
|
16,149
|
|
|
55.7
|
%
|
|
$
|
16,190
|
|
|
46.6
|
%
|
Company-owned stores
|
12,823
|
|
|
44.3
|
%
|
|
18,582
|
|
|
53.4
|
%
|
Total revenues
|
28,972
|
|
|
100.0
|
%
|
|
34,772
|
|
|
100.0
|
%
|
Costs and Expenses
|
|
|
|
|
|
|
|
Store operating costs:
|
|
|
|
|
|
|
|
Cost of food and packaging
(1)
|
4,194
|
|
|
14.5
|
%
|
|
6,126
|
|
|
17.6
|
%
|
Compensation and benefits
(1)
|
4,181
|
|
|
14.4
|
%
|
|
5,631
|
|
|
16.2
|
%
|
Advertising
(1)
|
928
|
|
|
3.2
|
%
|
|
1,252
|
|
|
3.6
|
%
|
Other store operating costs
(1)
|
2,509
|
|
|
8.7
|
%
|
|
3,103
|
|
|
8.9
|
%
|
Selling, general, and administrative
|
11,759
|
|
|
40.5
|
%
|
|
13,013
|
|
|
37.4
|
%
|
Depreciation and amortization
|
1,478
|
|
|
5.1
|
%
|
|
2,141
|
|
|
6.2
|
%
|
Loss on disposal or impairment of property and equipment
|
21
|
|
|
0.1
|
%
|
|
2
|
|
|
0.0
|
%
|
Total costs and expenses
|
25,070
|
|
|
86.5
|
%
|
|
31,268
|
|
|
89.9
|
%
|
Operating Income
|
3,902
|
|
|
13.5
|
%
|
|
3,504
|
|
|
10.1
|
%
|
Interest expense, net
|
1,397
|
|
|
4.8
|
%
|
|
1,292
|
|
|
3.8
|
%
|
Other expense, net
|
45
|
|
|
0.2
|
%
|
|
51
|
|
|
0.1
|
%
|
Income Before Income Taxes
|
2,460
|
|
|
8.5
|
%
|
|
2,161
|
|
|
6.2
|
%
|
Provision for income taxes
|
654
|
|
|
2.3
|
%
|
|
581
|
|
|
1.7
|
%
|
Net Income
|
$
|
1,806
|
|
|
6.2
|
%
|
|
$
|
1,580
|
|
|
4.5
|
%
|
|
|
(1)
|
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
months ended
April 1, 2019
, and
April 2, 2018
.
|
Revenues
Total revenues.
In the three months ended
April 1, 2019
, total revenues
decreased
compared to the three months ended
April 2, 2018
, primarily due to a decline in the number of Company-owned and franchise stores period-over-period and a decline in comparable store sales of
3.5%
, partially offset by increases in e-commerce fee revenues.
Franchise revenues.
Franchise revenues
decreased
in the three months ended
April 1, 2019
, compared to the three months ended
April 2, 2018
, primarily due to a decline in Franchise comparable store sales of
3.1%
and a net decline of
43
franchise stores period-over-period, partially offset by increases in e-commerce fee revenues.
Company-owned stores revenue.
Company-owned stores revenue
decreased
in the three months ended
April 1, 2019
, compared to the three months ended
April 2, 2018
, primarily due to a reduction in the number of Company-owned stores period-over-period due to the refranchising of 29 and closure of ten Company-owned stores since
April 2, 2018
, and a decline in comparable store sales of
9.0%
.
Costs and Expenses
Total costs and expenses.
Total costs and expenses
decreased
in the three months ended
April 1, 2019
, compared to the three months ended
April 2, 2018
, primarily due to the aforementioned reduction in the number of Company-owned stores period-over-period.
Store operating costs.
Store operating costs as a percentage of total revenues
increased
in the three months ended
April 1, 2019
, compared to the three months ended
April 2, 2018
. The following table presents the components of store operating costs as a percentage of Company-owned store sales for the periods reported:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2019
|
|
April 2, 2018
|
Store operating costs as a % of Company-owned store sales:
|
|
|
Cost of food and packaging
|
32.7
|
%
|
|
33.0
|
%
|
Compensation and benefits
|
32.6
|
%
|
|
30.3
|
%
|
Advertising
|
7.2
|
%
|
|
6.7
|
%
|
Occupancy and other store operating costs
|
19.6
|
%
|
|
16.7
|
%
|
Total store operating costs
|
92.1
|
%
|
|
86.7
|
%
|
Total store operating costs as a percentage of Company-owned store sales
increased
by
540
basis points overall in the
three
months ended
April 1, 2019
, compared to the
three
months ended
April 2, 2018
, 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 as a percentage of Company-owned store sales declined during the
three
months ended
April 1, 2019
, compared to the
three
months ended
April 2, 2018
, primarily due to decreases in commodity prices and the closing of ten stores since
April 2, 2018
that had lower sales and higher food costs as a percentage of store sales than the system average.
|
|
|
•
|
Compensation and benefits.
Compensation and benefits costs as a percentage of Company-owned store sales increased during the
three
months ended
April 1, 2019
, compared to the
three
months ended
April 2, 2018
, primarily due to minimum wage increases in markets where we have Company-owned stores.
|
|
|
•
|
Advertising costs.
Advertising costs as a percentage of Company-owned store sales increased in the
three
months ended
April 1, 2019
, compared to the
three
months ended
April 2, 2018
, primarily due to increased levels of spending on advertising during the
first
quarter ended
April 1, 2019
.
|
|
|
▪
|
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
months ended
April 1, 2019
compared to the
three
months ended
April 2, 2018
was primarily a result of the refranchising of 29 and closure of ten Company-owned stores that had lower occupancy costs as a percentage of store sales than the remaining portfolio of Company-owned stores.
|
Selling, general, and administrative.
Selling, general, and administrative costs
decreased
in the three months ended
April 1, 2019
, compared to the three months ended
April 2, 2018
, primarily as a result of reduced spending on compensation and benefits in the three months ended
April 1, 2019
, and legal settlement costs recorded in the three months ended
April 2, 2018
.
Depreciation and amortization.
Depreciation and amortization
decreased
in the
three
months ended
April 1, 2019
, compared to the
three
months ended
April 2, 2018
, due to a reduction in our depreciable asset base as a result of having fewer Company-owned stores period-over-period.
Interest expense, net.
Interest expense, net
increased
in the three months ended
April 1, 2019
, compared to the three months ended
April 2, 2018
, due to increased average interest rates, partially offset by a reduction in the total amount of debt outstanding period-over-period.
Income taxes.
The provision for income taxes
increased
in the
three
months ended
April 1, 2019
, compared to the
three
months ended
April 2, 2018
, primarily due to higher income before income taxes period-over-period.
The effective tax rate for the three months ended
April 1, 2019
, was
26.6%
compared to
26.9%
for the three months ended
April 2, 2018
. The effective income tax rate
decreased
primarily due to slight changes in certain permanent tax differences.
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
decreased
$0.5 million
in the
three
months ended
April 1, 2019
, compared to the
three
months ended
April 2, 2018
, primarily due to a reduction in royalty revenues and franchise fee revenues, partially offset by increases in e-commerce fee revenues.
Adjusted
EBITDA
for the Franchise segment
decreased
$1.2 million
in the
three
months ended
April 1, 2019
, compared to the
three
months ended
April 2, 2018
, primarily due to the aforementioned decreases in revenues and increased legal expenditures.
Company Stores.
Total revenues for the Domestic Company Stores segment
decreased
$5.8 million
in the
three
months ended
April 1, 2019
, compared to the
three
months ended
April 2, 2018
, primarily due to a reduction in the number of Company-owned stores period-over-period and a decline in comparable store sales of
9.0%
.
Adjusted
EBITDA
for the Domestic Company Stores segment
decreased
$1.1 million
in the
three
months ended
April 1, 2019
, compared to the
three
months ended
April 2, 2018
, primarily as a result of the aforementioned decline in revenues at Company-owned stores.
Brand Funds.
Total revenues for the Brand Funds segment
increased
$0.1 million
for the
three
months ended
April 1, 2019
, compared to the
three
months ended
April 2, 2018
, primarily as a result of increased revenues from vendor payments, partially offset by a decline in comparable domestic store sales of
3.6%
and fewer domestic stores period-over-period.
Adjusted
EBITDA
from the Brand Funds segment
increased
$0.4 million
for the three months ended
April 1, 2019
, compared to the three months ended
April 2, 2018
, primarily due to decreased advertising spending period-over-period and the aforementioned increase in revenues.
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 each of the
three
months ended
April 1, 2019
and
April 2, 2018
, and a fund surplus of
$1.4 million
and
$0.6 million
as of
April 1, 2019
and
April 2, 2018
, respectively.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 1, 2019
|
|
April 2, 2018
|
Opening BMF deficit
|
$
|
(5,423
|
)
|
|
$
|
(5,461
|
)
|
Net activity during the period
|
109
|
|
|
(401
|
)
|
Ending BMF deficit
|
$
|
(5,314
|
)
|
|
$
|
(5,862
|
)
|
|
|
Liquidity and Capital Resources
|
Our primary sources of liquidity are cash flows from operating activities and proceeds from the incurrence of debt, which together are sufficient to fund our operations, tax payments, capital expenditures, interest, fees, and principal payments on our debt as well as support our growth strategy. If the need arises, we may seek additional funding. Our ability to obtain additional financing will depend on many factors, including prevailing market conditions, our financial condition, and our ability to negotiate favorable terms and conditions. Financing may not be available on terms that are acceptable or favorable to us, if at all.
As of
April 1, 2019
, we had
Cash and cash equivalents
of
$0.4 million
and
$7.5 million
of available borrowings under a revolving line of credit, of which
none
was drawn. As of
April 1, 2019
, we had
$77.4 million
of outstanding indebtedness. Principal payments under our
Senior Credit Facility
are due on the last day of each fiscal quarter through the life of the
Senior Credit Facility
. We believe that our cash flows from operations, available cash and cash equivalents, and available borrowings under our revolving credit facility will be sufficient to meet our liquidity needs for at least the next 12 months.
As of
April 1, 2019
, we were in compliance with all of our covenants and other obligations under our
Senior Credit Facility
.
Cash Flows
The following table presents a summary of cash flows from operating, investing, and financing activities for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 1, 2019
|
|
April 2, 2018
|
Cash flows from operating activities
|
$
|
(52
|
)
|
|
$
|
4,252
|
|
Cash flows from investing activities
|
(266
|
)
|
|
(7
|
)
|
Cash flows from financing activities
|
(5,082
|
)
|
|
(4,900
|
)
|
Total cash flows
|
$
|
(5,400
|
)
|
|
$
|
(655
|
)
|
Cash Flows from Operating Activities
Net cash
used
by operating activities of
$0.1 million
for the
three
months ended
April 1, 2019
, resulted primarily from net income of
$1.8 million
, adjusted for items such as settlement of accrued liabilities, depreciation and amortization, and changes in operating assets and liabilities. The
$4.3 million
decrease
for the
three months ended April 1, 2019
, compared to the
three months ended April 2, 2018
, was primarily driven by settlement of the TCPA litigation.
Cash Flows from Investing Activities
Net cash
used
by investing activities was
$0.3 million
for the
three
months ended
April 1, 2019
, compared to net cash
used
of
$7,000
for the
three
months ended
April 2, 2018
. The
$0.3 million
increase
in cash
used
by investing activities was due primarily to a period-over-period
increase
of
$0.2 million
in capital expenditures for property, plant, and equipment.
Cash Flows from Financing Activities
Net cash
used
by financing activities was
$5.1 million
for the
three
months ended
April 1, 2019
, compared to net cash
used
of
$4.9 million
for the
three
months ended
April 2, 2018
. The
$0.2 million
increase
in net cash
used
by financing activities was primarily due to higher mandatory principal payments on our long-term debt during the
three
months ended
April 1, 2019
.
|
|
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
December 31, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a “smaller reporting company”, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
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Evaluation of Disclosure Controls and Procedures
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Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “
Exchange Act
”). Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the
Exchange Act
is recorded, processed, summarized and reported within the time periods specified in
SEC
rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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Changes in Internal Control over Financial Reporting
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There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act
) that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.