Freshworks Annual Report 2017

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549––––––––––––––––––––––––––––––––––––––––––––––––––––––––FORM 10-K––––––––––––––––––––––––––––––––––––––––––––––––––––––––(Mark One)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the fiscal year ended January 1, 2018OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from toCommission file number 001-36432––––––––––––––––––––––––––––––––––––––––––––––––––––––––Papa Murphy’s Holdings, Inc.(Exact name of registrant as specified in its charter)––––––––––––––––––––––––––––––––––––––––––––––––––––––––Delaware 27-2349094(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)8000 NE Parkway Drive, Suite 350, Vancouver, WA 98662(Address of principal executive offices) (Zip Code)(360) 260-7272(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Common Stock, $0.01 par value NASDAQ Global Select Market(Title of Each Class) (Name of Each Exchange on Which Registered)Securities registered pursuant to Section 12(g) of the Act:NONE––––––––––––––––––––––––––––––––––––––––––––––––––––––––Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “acceleratedfiler,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer [ ] Accelerated filer [X]Non-accelerated filer [ ] Smaller reporting company [ ] Emerging growth company [X]If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. [X]Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]. No [X].At July 3, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of voting and non-voting commonstock of the Registrant held by non-affiliates was $52,178,979 based on the last sales price of the Registrant’s common stock as reported by the NASDAQ Global Select Market on thatday.At March 2, 2018, there were 16,971,461 shares of the Registrant’s common stock, $0.01 par value, outstanding.DOCUMENTS INCORPORATED BY REFERENCE:Part III incorporates certain information by reference from the registrant’s definitive proxy statement for the 2018 annual meeting of shareholders, which will be filed no later than 120days after the close of the registrant’s fiscal year ended January 1, 2018.Table of ContentsTABLE OF CONTENTS PART I Item 1.Business3Item 1A.Risk Factors9Item 1B.Unresolved Staff Comments26Item 2.Properties26Item 3.Legal Proceedings28Item 4.Mine Safety Disclosures29 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities30Item 6.Selected Financial Data32Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations34Item 7A.Quantitative and Qualitative Disclosures about Market Risk51Item 8.Financial Statements and Supplementary Data52Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure84Item 9A.Controls and Procedures84Item 9B.Other Information84 PART III Item 10.Directors, Executive Officers and Corporate Governance85Item 11.Executive Compensation85Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters85Item 13.Certain Relationships and Related Transactions, and Director Independence85Item 14.Principal Accountant Fees and Services85 PART IV Item 15.Exhibits and Financial Statement Schedules86 SIGNATURES942Table of ContentsPART IITEM 1. BusinessGeneralPapa Murphy’s Holdings, Inc. is a franchisor and operator of the largest Take ‘N’ Bake pizza chain in the United States. We were founded in 1981and have grown our footprint to a total of 1,523 system-wide stores as of January 1, 2018.We have defined three reportable segments for the Company: Domestic Company Stores, Domestic Franchise and International. Financialinformation about segment operations appears in Selected Financial Data, Management’s Discussion and Analysis of Financial Condition andResults of Operations, and Financial Statements and Supplementary Data in Note 18—Segment Information of the accompanying Notes toConsolidated Financial Statements.We are a Delaware corporation that was organized and acquired a majority of the capital stock of PMI Holdings, Inc., our predecessor, in 2010. InMay 2014, we completed our initial public offering (the “IPO”) and now our common stock trades on the NASDAQ Global Select Market under the“FRSH” ticker symbol. Papa Murphy’s Holdings, Inc. and its subsidiaries are sometimes referred to as the “Company,” “Papa Murphy’s,” or in thefirst person as “we,” “us,” and “our” in this report.We make available, free of charge, the following filings on our corporate website located at www.papamurphys.com as soon as reasonablypracticable after such filings are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”): our annual report onForm 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, any amendments to such reports, and our annual proxystatement. Information contained on our corporate website located at www.papamurphys.com is not part of this annual report on Form 10-K.Our ConceptThe Papa Murphy’s experience is different from traditional pizza restaurants. Our customers:•CREATE their fresh, personally customized pizza with high-quality ingredients;•TAKE their fresh pizza home; and•BAKE their pizza fresh in their ovens, at their convenience, for a home-cooked meal served hot.We were founded on the following core values—Great Quality, Great Value, Great Customer Service—and we strive to deliver on these valuesevery day.•Great Quality: We have continually focused on quality since our founding and we believe customers can taste the difference. Unlike someof our competitors, we do not use pre-shredded, pre-packaged, or frozen cheese and our dough is made from scratch daily, never frozen.•Great Value: We offer a high-quality pizza at a value price point.•Great Customer Service: We train our store crews to greet each customer, to promote the latest new products and to assist eachcustomer in choosing the combination of fresh made pizzas and side items to complete the customer’s meal.We actively target solving the “dinnertime dilemma” by providing a scratch-made, customized, home-baked meal. Our concept has broad appealand is focused on freshness, quality, and convenience.•We make our dough fresh in each store daily, starting with flour, water, and yeast;•We grate our cheese daily from blocks of 100% whole-milk mozzarella cheese;•We slice fresh, never-frozen vegetables by hand;•We feature specialty, premium ingredients;•We use only high-quality meats with no added fillers; and•We provide a convenient, easy, meal-time solution.3Table of ContentsOur stores feature a food-forward design with a store layout that highlights our high-quality, scratch-made pizzas. Pizzas are made fresh to orderand our customers can follow their pizza as it is created.Our menu offers customers the ability to create a customized pizza from a broad selection of crusts, sauces, and topping combinations. Our coremenu offerings include the following:▪Signature pizzas: classic combinations with broad appeal;▪Gourmet Delite pizzas: our artisan thin crust with premium, specialty toppings;▪Stuffed pizzas: two-layer, four-pound pizzas with meats and vegetables stuffed between two layers of dough;▪Fresh Pan pizzas: signature recipes with a thick, buttery crust; and▪“C.Y.O.” or Create Your Own pizzas: customer choice of crust, sauce, and any combination of our cheese, meat, and vegetable toppings.We have developed a loyal and diverse customer base. We attribute our success across a national footprint to the broad appeal of our concept.Our business model resonates across all ages, demographics, and income levels. Finally, we believe our model encourages a stronger emotionalconnection. The active role of ordering and watching the pizza being built gives customers a feeling of ownership: “a pizza” becomes “my pizza.”Efficient, Simple Operating ModelOur stores average just 1,400 square feet in size and do not require ovens, venting hoods, freezers, or dining areas. Our store model offersfranchise owners operating advantages that differentiate us from other restaurant concepts. Our domestic stores:•Focus on creating fresh pizzas for carry out reducing operational complexity for franchise owners and their employees;•Maintain shorter operating hours (typically 11:00 a.m. to 9:00 p.m.) that are attractive to franchise owners and their employees;•Require fewer employees each shift compared to other restaurant concepts, resulting in lower labor costs;•Accept electronic benefit transfer (“EBT”) payment systems (food stamps);•Benefit from local cooperative marketing and consistent creative marketing assets for use in a variety of media channels;•Utilize a centrally-managed, locally customizable, integrated e-commerce platform; and•Receive strong franchisor support through training, operating standards, supply-chain management, and development assistance.Our StrategyOur strategy has four key components: (i) convenience; (ii) relevance; (iii) people; and (iv) process. We believe that successfully implementingthese strategic components will enable us to achieve our growth and profitability targets and leverage our current infrastructure.ConvenienceWe believe convenience is our differentiating attribute because our customers have control over when they order, receive, bake, and serve ourfresh, hot, made to order pizza. Customers decide exactly when their pizza goes into and comes out of their oven for maximum convenience andfreshness. We believe customers want a product that is easy to order, easy to pay for, and easy to obtain.•E-commerce and Online Ordering. We continue to improve our e-commerce platform to provide a consistent and convenient onlineordering experience to consumers. To remain relevant, we must design systems that have the flexibility to advertise and promote specialproducts or promotions as well as provide convenience to the consumer through ease of ordering and payment. We believe our e-commerce platform will enable owners to realize greater efficiencies in store labor costs and provide an easy consumer experiencethrough multiple ordering platforms and integration with third party delivery services.•Expansion of Delivery. Online ordering addresses only half of the convenience cycle. In 2018, we plan to continue expansion of deliverythrough the use of various third party delivery options as they become available in the4Table of Contentsmarkets we serve. Our research indicates a strong demand for delivery from our customers, with more than half indicating they wouldorder more often if delivery was available. We have a unique opportunity with delivery because our pizzas are not baked and customersreceive the same high-quality fresh food when delivered as when they pick up their order in-store.RelevanceAs we strive to provide fresh, hot, and convenient options for the “dinnertime dilemma,” we must ensure that our messaging and brand strategyresonate with consumers in a competitive marketplace. We intend to broaden our marketing messaging and focus on telling the right story to theright audience.•Increased Digital Marketing. We continue to learn which value offers drive traffic by testing a broad range of messages through a varietyof media channels including social media, text, and email. Through this dynamic, strategic shift in media mix, we have begun to captureconsumer ordering and shopping trends in a rapidly changing marketplace. The insights gained from this data enable us to rapidly adapt tochanges in consumer preferences and develop increasingly effective digital marketing campaigns.•Loyalty Program. We are in the early stages of developing a loyalty program on a digital platform intended to increase the frequency ofpurchases.•Improved Messaging. To better communicate the brand’s benefits and differentiation, we are refining our consumer messaging to reach abroader audience across all communication points. Emphasis will be placed on empowering the consumer and providing them with controlover ingredients, quality, and timing.•Targeted Communication. In order to increase the effectiveness of our messaging, we will focus on reaching customers through targetedcommunications and offers.PeopleBy cultivating a culture of teamwork, continuous learning, and development, we expect to improve productivity and performance throughout ourorganization.•Franchisee Relations. Developing and maintaining strong relations with franchise owners are crucial components to our businessstrategy. With 1,483 stores across the United States and 489 domestic franchise owners as of January 1, 2018, we have a diverse baseof owners who can help cultivate ingenuity, entrepreneurship, and community connections that are key to successful store-leveloperations. Engaging with franchise owners from a perspective of cooperation will allow the brand to learn best practices for ensuringquality, value, and service, as well as help all franchise owners execute our strategy locally on a consistent basis.•Field Support. To help our franchise owners operate a profitable business and to protect our brand standards, we deploy teams locatedacross the country to provide support in operations, store technology, and marketing. These teams assist franchise owners by coachingthem on strategies for reaching new audiences, operating their stores with maximum efficiency, and building brand awareness andcommunity engagement locally through offering employment opportunities, providing a high quality convenient meal, and partnering withlocal organizations to give back to the community.ProcessIn order to achieve optimal results, we are focusing efforts on creating an efficient, consistent execution process.•Spending Optimization. We intend to optimize and prioritize our spending to deliver improved store-level financial results. We areprioritizing initiatives that focus on the areas of store operations, growth channels, business reviews, advertising relevance, and real-timesales analytics with the intended result of stabilizing comparable store sales figures and improving profitability.•Consumer Experience. We believe a consistent, high-quality consumer experience in product, service, and advertising is key to buildinga strong brand. In addition, providing franchise owners with access to real-time store performance metrics will allow them to quicklyoptimize their store operations, identify trends in customer patterns, and improve overall store economics.5Table of ContentsOur Industry and CompetitionWith system-wide sales of $847 million in fiscal year 2017, we are the fifth largest pizza chain in the United States as measured by system-widesales and total number of stores. We generally compete on the basis of product quality, variety, price, location, image, convenience, and servicewith regional and local pizza restaurants as well as national chains such as Domino’s Pizza®, Pizza Hut®, Papa John’s®, and Little CaesarsPizza®. According to NPD Crest, the quick service restaurant (“QSR”) pizza market, a subset of the overall pizza category, was about $36 billionin 2017. The top five pizza chains accounted for approximately 50.4% of QSR pizza restaurant sales in 2017 compared to 49.4% in 2016 and47.8% in 2015. We believe the pizza restaurant market continues to be an attractive category due to its size and growth, as well as its fragmentedcompetitive landscape.On a broader scale, we compete with other limited service restaurants (“LSRs”), the overall food service industry, grocery and convenience stores,and online meal kit delivery services. The food service industry, particularly LSRs, are competitive with respect to product quality, price, location,service, and convenience. Many of our competitors have been in existence for longer periods of time and have developed stronger brandawareness in markets where we compete. In these markets, we compete for customers, employees, management personnel, franchisees, and realestate sites suitable for our stores.Suppliers and DistributionWe enter into national supply or pricing agreements with certain key third-party suppliers. We negotiate pricing for our franchised and Company-owned stores with national pricing agreements covering a term of three months to one year. We do not realize any profits from the sale of thesesupplies to franchise owners. We rely on multiple third-party distributors as our primary distributors of cheese, refrigerated items, meat, canned and dry goods, paper anddisposables, and janitorial supplies. Pursuant to our distribution service agreements, we have the right to designate the brands and productssupplied. Supplies are delivered to each store one to two times each week.For our beverage products, we rely on Pepsi-Cola Advertising and Marketing, Inc. (“Pepsi”) as our primary provider of packaged beverageproducts. We have maintained a national distribution relationship with Pepsi since 2004.Intellectual Property and TrademarksWe regard the Papa Murphy’s brand name and associated trademarks as valuable assets. We have a portfolio of 32 trademarks registered with theUnited States Patent and Trademark Office. We have also secured trademark registrations for our brand name in multiple countries outside of theUnited States in which we currently conduct business or may consider conducting business in the future. All of the marks we own cover store-related services and/or food products.Management Information/Technology SystemsOur point-of-sale system (“POS system”) has been customized specifically for Papa Murphy’s stores, and we use this integrated restaurant-leveltechnology for inventory, labor management and cash handling in our domestic stores. Our POS system allows us to track sales data andevaluate store efficiency. Through our POS system we are able to collect, utilize, and disseminate data and information collected by each store togenerate reports and evaluate sales performance in real-time. In addition, we collect monthly store-level profit and loss statements for analysis.We continue to make substantial investments to further develop our e-commerce capabilities and platform, including a new Papa Murphy’s websiteand mobile application ordering system. This ordering channel, fully integrated with our in-store POS system, enables us to gather moreinformation about customer ordering habits, which will enable us to further develop attractive offers and increase sales with digital marketing.6Table of ContentsFranchising OverviewOur store base was 90.5% franchised as of January 1, 2018, with our franchise owners operating a total of 1,378 Papa Murphy’s stores in 39states, Canada, and the Middle East. Through our franchise support, development infrastructure, and screening process, we have successfullybuilt a base of 501 franchise owners with an average store ownership of approximately 2.7 stores per franchise owner. A majority of our franchiseowners owned one store, approximately 73% owned one or two stores, and 21% of all franchised stores were owned by our 10 largest franchiseowners. We believe this highly diversified owner base demonstrates the viability of our store concept across numerous types of owners andoperators, and provides an attractive base of owners with capacity to grow with our brand. We believe the relationships we have with our franchisesystem provide a solid platform for growth.We are dedicated to providing the tools our franchise owners need to succeed before, during, and after a store opening, including assistance withsite selection and development, training, operations, and marketing. We set forth qualification criteria and provide training programs for franchiseowners to ensure that every Papa Murphy’s store meets the same quality and customer service standards to preserve the consistency andreliability of the Papa Murphy’s brand.Our asset-light franchised business model offers us strategic and financial benefits. It enables us to focus Company resources on menuinnovation, marketing, franchise owner training, and operations support to drive the overall success of our brand. Our franchised business modelalso allows us to grow our store base and brand awareness with limited corporate capital investment. Further, our predominantly franchisedbusiness model reduces our exposure to changes in commodity and other operating costs. As a result, our business model is designed to providehigh operating margins and cash flows with low capital expenditures and working capital.EmployeesAs of March 1, 2018, we had 1,753 employees, including 290 salaried employees and 1,463 hourly employees. None of our employees areunionized or covered by a collective bargaining agreement and we consider our current employee relations to be good.SeasonalitySeasonal factors and the timing of holidays cause our revenues to fluctuate from quarter to quarter. We typically follow family eating patterns athome, with our strongest sales levels occurring in the months of September through May and our lowest sales levels occurring in the months ofJune, July, and August. Therefore, our revenues per store are typically higher in the first and fourth quarters and lower in the second and thirdquarters. Additionally, our new store openings have historically been most heavily concentrated in the fourth quarter and we anticipate that newstore openings will continue to be weighted towards the third and fourth quarters. As a result of these factors, our quarterly and annual results ofoperations and comparable store sales may fluctuate significantly. Accordingly, results for any one quarter are not necessarily indicative of resultsto be expected for any other quarter or for any year, and comparable store sales for any particular future period may decrease and materially andadversely affect our business, financial condition, or results of operations.Government RegulationWe, along with our franchise owners, are subject to various federal, state, local, and foreign laws affecting the operation of our respectivebusinesses. Each store is subject to licensing and regulation by a number of governmental authorities, which include zoning, health, safety,sanitation, building, and fire agencies in the jurisdiction in which the store operates. In order to maintain our stores, we may be required to expendfunds to meet certain federal, state, local, and foreign regulations, including regulations that require remodeled stores to be accessible to personswith disabilities. Difficulties in obtaining, or the failure to obtain, required licenses or approvals could delay or prevent the opening of a new store.Our domestic store operations are subject to various federal and state laws governing such matters as minimum wage requirements, benefits,working conditions, citizenship requirements, and overtime. We are also subject to federal and state environmental regulations.7Table of ContentsWe are subject to Federal Trade Commission (“FTC”) rules and to various state and foreign laws that govern the offer and sale of franchises. TheFTC requires us to furnish to prospective franchise owners a franchise disclosure document containing prescribed information. Some states andforeign countries also have disclosure requirements and other laws regulating franchising and the franchisor-franchisee relationship. These lawsregulate various aspects of the franchise relationship, including terminations and the refusal to renew franchises. The failure to comply with theselaws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension of futurefranchise sales, fines, or other penalties or require us to make offers of rescission or restitution, any of which could materially and adversely affectour business, financial condition, and results of operations.8Table of ContentsItem 1A. Risk FactorsAn investment in our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider thefollowing risk factors, as well as the other information in this Annual Report on Form 10-K, in evaluating our business. If any of these risks, as wellas other risks and uncertainties that are not yet identified or that we currently think are immaterial, actually occur, our business, results ofoperations or financial condition could be materially and adversely affected. In such an event, the trading price of our common stock could declineand you could lose part or all of your investment.Risks Relating to Our Business and IndustryThe limited service restaurant pizza category and restaurant sector overall are highly competitive and such competition could adverselyaffect our business, financial condition and results of operations.The restaurant industry in general, and the limited service restaurant pizza category in particular, are highly competitive with respect to price,value, food quality, ambience, convenience, concept, service, and location. A substantial number of restaurant operations compete with us forcustomer traffic, both in store and online. We compete against other major national limited service restaurant pizza chains and regional and localbusinesses, including other chains offering pizza products. We also compete on a broader scale with other international, national, regional, andlocal limited-service restaurants. In addition, we face increasing competition from pizza product and other offerings available at grocery stores andconvenience stores and through home delivery, including from online meal kit delivery services, which offer pre-made ready-to-bake frozen andcarry-out pizzas and other foods that customers may prepare at home. Many of our competitors have significantly greater financial, marketing,personnel, and other resources as well as greater brand recognition than we do and may have lower operating costs, more restaurants, betterlocations, broader delivery options, and more effective marketing than we do. Many of our competitors are well established in markets in which weand our franchise owners operate stores or intend to locate new stores. In addition, many of our competitors emphasize lower-cost value options ormeal packages, home delivery, or have loyalty programs, which provide discounts on certain menu offerings, and they may continue to do so inthe future.We also compete for employees, suitable real estate sites, and qualified franchise owners. If we are unable to compete successfully and maintainor enhance our competitive position, or if customers have a poor experience at a Papa Murphy’s store, whether Company-owned or franchise-owned, we could experience decreased customer traffic, downward pressure on prices, lower demand for our products, reduced margins,diminished ability to take advantage of new business opportunities, and the loss of market share, all of which could have a material and adverseeffect on our business, financial condition, and results of operations.The food service market is affected by consumer preferences and perceptions. Changes in these preferences and perceptions may lessenthe demand for our products, which would reduce sales and harm our business.Food service businesses are affected by changes in consumer tastes, international, national, regional, and local economic conditions, anddemographic trends. For instance, if prevailing health or dietary preferences cause consumers to avoid pizza and other products we offer in favorof foods that are perceived as more healthy, our business, financial condition, and results of operations would be materially and adverselyaffected. In addition, if consumers no longer seek pizza that they can bake at home in favor of pizza that is already baked or can be delivered, ourbusiness, financial condition, and results of operations would be materially and adversely affected. Moreover, because we are primarily dependenton a single product, if consumer demand for pizza in general, and take and bake pizza in particular, should decrease, our business would beadversely affected more than if we had a more diversified menu, as many other food service businesses do.Our business and results of operations depend significantly upon the success of our and our franchise owners’ existing and new stores.Our business and results of operations are significantly dependent upon the success of our franchised and Company-owned stores. We and ourfranchise owners may be adversely affected by:▪declining economic conditions, including downturns in the housing market, increases in unemployment rates, reductions in consumerdisposable income, adverse credit market conditions, increases in fuel prices, drops in consumer confidence, and other events or factorsthat adversely affect consumer spending in the markets that we serve;9Table of Contents▪increased competition in the restaurant industry, particularly in the pizza, casual, and fast-casual dining segments, and from grocerystores, convenience stores, and online meal kit delivery services;▪changes in consumer tastes and preferences;▪demographic trends;▪customers’ budgeting constraints;▪customers’ willingness to accept menu price increases;▪adverse weather conditions;▪our reputation and consumer perception of our concepts’ offerings in terms of quality, price, value, ambiance, and service; and▪customers’ experiences in our stores.In addition, the adverse effects of any of the preceding factors may reduce the attractiveness of new franchise stores to prospective franchiseowners, which could make it more difficult to recruit the qualified franchise owners needed to implement our refranchising initiative. Our Company-owned stores and our franchise owners are also susceptible to increases in certain key operating expenses that are either wholly or partiallybeyond our control, including:▪food costs, particularly for mozzarella cheese and other raw materials, many of which we do not or cannot effectively hedge;▪labor costs, including wages, which are affected by minimum wage requirements, workers’ compensation, health care, and other benefitsexpenses;▪rent expenses and construction, remodeling, maintenance, and other costs under leases for our new and existing stores;▪compliance costs as a result of changes in legal, regulatory, or industry standards;▪energy, water, and other utility costs;▪insurance costs;▪information technology and other logistics costs; and▪litigation expenses.Furthermore, the success of our and our franchise owners’ stores in markets in which we have historically not had a significant number of storesmay be adversely affected by a lack of awareness or acceptance of our brand and the take and bake concept as well as by a lack of existingmarketing efforts and operational execution in these new markets. Stores in new markets may also face challenges related to being new to amarket and having less marketing funds than competitors, which may be due in part to lower store density than competitors. To the extent that weare unable to foster name recognition and affinity for our brand and concept in new markets and implement effective advertising and promotionalprograms, our franchise owners’ and our new stores may not perform as expected and our results of operations could be adversely affected.Our strategic initiatives may not be successful, which may have an adverse effect on our business and results of operations.Our business depends upon our ability to execute on our strategic initiatives in order to stabilize our sales and maintain profitability. Thesestrategic initiatives include improving and expanding our online ordering platform, deploying third-party delivery services and increasing the scopeand effectiveness of our digital marketing. These initiatives may not increase our sales and margins to the degree we expect, or at all. Onlineordering and delivery also introduce new operating procedures to our stores, which, if not implemented properly, could adversely affect theexperience of our customers and be burdensome to our store operators. Our digital marketing strategy relies, in part, on our customers using ouronline ordering platform, which provides us with contact and other information about our customers. If we are not successful in improving andexpanding our online ordering platform, our digital marketing efforts may suffer. In further of our strategic initiatives, we are devoting additionalresources to digital marketing. If our digital marketing efforts are not as effective as traditional forms of marketing, such as television or print, ourresults of operations could be adversely affected.The planned refranchising of a portion of our Company-owned stores could adversely affect our results of operations.We have announced plans to refranchise a significant number of our 145 Company-owned stores (total as of March 1, 2018) by selling the storesand entering into franchise agreements with the buyers. We are targeting to own about 50 Company-owned stores by 2020. Company-owned storesales accounted for 65% of our total revenues in 2017. We expect the proposed refranchising to result in a decrease in our total revenues becauseonce the stores are refranchised we will derive revenue from the collection of a royalty equal to a percentage of net sales rather than from the totalnet sales of food10Table of Contentsand beverages to customers. In addition, refranchising Company-owned stores, and particularly Company-owned stores that have historicallyenjoyed high profit margins, may reduce our operating income.We face many challenges associated with refranchising Company-owned stores, including identifying, recruiting, and contracting with a sufficientnumber of qualified franchise owners, retaining employees during the transition to franchise owner management, and obtaining necessary consentsfrom landlords and other third parties. These challenges may delay, limit, or prevent our planned refranchising, which could materially andadversely affect our ability to improve operating margins, reduce our exposure to changes in commodity and other operating costs, and generatecash to be used to repay debt. In addition, if we fail to manage our refranchising initiative effectively, the initiative could be time-consuming anddistracting for management.If we fail to identify, recruit, and contract with a sufficient number of qualified franchise owners, our ability to refranchise Company-owned stores and open new franchise stores could be materially and adversely affected.The refranchising of Company-owned stores and the opening of additional franchise stores depends, in part, upon the attractiveness of ourfranchise stores to prospective franchise owners and the availability of prospective franchise owners who meet our criteria. Because most of ourfranchise owners open and operate one or two stores, our refranchising initiative requires us to identify, recruit, and contract with a significantnumber of new franchise owners each year. Decreases in system-wide average store sales or comparable store sales in select markets mayreduce the attractiveness of new franchise stores to prospective franchise owners, making it more difficult for us to recruit qualified franchiseowners. We may not be able to identify, recruit, or contract with suitable franchise owners in our target markets on a timely basis or at all. Inaddition, our franchise owners may not have access to the financial or management resources that they need to open the stores contemplated bytheir agreements with us, or they may elect to cease store development for other reasons. If we are unable to recruit suitable franchise owners or iffranchise owners are unable or unwilling to acquire existing Company-owned stores or open new stores, our business, financial condition, andresults of operations could be materially and adversely affected.We may be unable to refinance or generate sufficient cash flow to satisfy our outstanding debt, which would adversely affect ourfinancial condition and results of operations.As of January 1, 2018, we had $95.9 million of outstanding indebtedness, including $92.9 million outstanding under our senior secured creditfacilities, and $20.0 million of availability under a revolving credit facility, and we may, from time to time, incur additional indebtedness. Ourobligations under our senior secured credit facility will mature in August 2019.Our ability to meet our payment obligations under our debt depends on our ability to generate significant cash flows in the future. Interest rates onour senior secured credit facility are based on LIBOR and so increases in LIBOR would increase our payment obligations. If we are unable togenerate sufficient cash flows to service our debt payment obligations, we may need to refinance or restructure our debt, sell assets, reduce ordelay investments in our business, or seek to raise additional capital through the sale of equity securities. Such measures might not besuccessful, and additional debt or equity capital may not be available on acceptable terms or at all. If we are unable to implement one or more ofthese alternatives, we may be unable to meet our debt payment obligations, which would have a material adverse effect on our business, resultsof operations, or financial condition.Our indebtedness may limit our ability to invest in the ongoing needs of our business and if we are unable to comply with our financialcovenants, our liquidity and results of operations could be adversely affected.The agreement governing our senior secured credit facilities places certain conditions on us, including that it:▪requires us to utilize a substantial portion of our cash flow from operations to make payments on our indebtedness, reducing theavailability of our cash flow to fund working capital, capital expenditures, development activity, and other general corporate purposes;▪increases our vulnerability to adverse general economic or industry conditions;▪limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;▪makes us more vulnerable to increases in interest rates, as borrowings under our new senior secured credit facilities are made at variablerates;▪limits our ability to obtain additional financing in the future for working capital or other purposes; and▪places us at a competitive disadvantage compared to our competitors that have less indebtedness.Our senior secured credit facilities place certain limitations on our ability to incur additional indebtedness. However, subject to the qualificationsand exceptions in our senior secured credit facilities, we may be permitted to incur substantial additional indebtedness and may incur obligationsthat do not constitute indebtedness under the terms of the new senior secured credit facilities. The senior secured credit facilities also placecertain limitations on, among other things, our ability to enter11Table of Contentsinto certain types of transactions, financing arrangements and investments, to make certain changes to our capital structure, and to guaranteecertain indebtedness and pay. These restrictions limit or prohibit, among other things, our ability to:▪pay dividends on, redeem or repurchase our stock, or make other distributions;▪incur or guarantee additional indebtedness;▪sell stock in our subsidiaries;▪create or incur liens;▪make acquisitions or investments;▪transfer or sell certain assets or merge or consolidate with or into other companies;▪make certain payments or prepayments of indebtedness subordinated to our obligations under our new senior secured credit facilities; and▪enter into certain transactions with our affiliates.Failure to comply with certain covenants or the occurrence of a change of control under our senior secured credit facilities could result in theacceleration of our obligations under the senior secured credit facilities, which would have an adverse effect on our liquidity, capital resources, andresults of operations.Our senior secured credit facilities also require us to comply with certain financial covenants regarding our leverage ratio, our interest coverageratio, and our fixed charge coverage ratio. Changes with respect to these financial covenants may increase our interest rate and failure to complywith these covenants could result in a default and an acceleration of our obligations under the new senior secured credit facilities, which wouldhave an adverse effect on our liquidity, capital resources, and results of operations.The success of our business continues to depend, to a significant degree, upon the continued contributions of our senior officers andkey employees, both individually and as a group, and the hiring of qualified executives to join our management team.The composition of our senior management team has changed and we anticipate more change in the future as we seek to hire a new ChiefFinancial Officer in 2018, allowing our existing Chief Financial Officer, Mark Hutchens, to focus solely on his new role as Executive Vice Presidentand Chief Operations Officer.The changes in our senior management team have resulted in reallocations of duties and may increase employee uncertainty and causeunintended attrition. If we are not able to successfully manage these changes, it may be more difficult for us to attract and recruit highly skilledemployees and our Company culture may suffer. The loss of any additional senior officers and key employees could have negative effects on ourbusiness and operations.Although we have employment agreements in place with certain senior officers and key employees, we cannot prevent them from terminating theiremployment with us. The loss of the services of our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, other seniorofficers or key employees could have negative effects on our business and operations and could materially and adversely affect our business andplans for future development. We do not believe that we will lose the services of any of our current senior officers and key employees in theforeseeable future; however, we currently have no effective replacement for any of these individuals due to their experience, reputation in theindustry, and special role in our operations. We do not maintain any key man life insurance policies for any of our employees.New information or attitudes regarding diet and health could result in changes in regulations and consumer consumption habits thatcould adversely affect our results of operations.Government regulation and consumer eating habits may affect our business as a result of changes in attitudes regarding diet and health or newinformation regarding the adverse health effects of consuming certain menu offerings. These changes have resulted in, and may continue to resultin, laws and regulations requiring us to disclose the nutritional content of our food offerings, and they have resulted, and may continue to result in,laws and regulations affecting permissible ingredients and menu offerings. For example, to implement the nutrition labeling provisions of thePatient Protection and Affordable Care Act of 2010 (the “PPACA”), the United States Food and Drug Administration (the “FDA”) finalized FoodLabeling; Nutrition Labeling of Standard Menu Items in Restaurants and Similar Retail Food Establishments (“the Menu Labeling Final Rule”), whichrequires covered restaurants, including our stores, to post nutritional information, including calorie disclosures, on their menus and/or menu boardsand to provide additional nutrition information upon request. The Menu Labeling Final Rule is scheduled to take effect in May 2018. While somestates had previously passed state menu labeling laws, the Menu Labeling Final Rule is intended to preempt inconsistent state laws. Anunfavorable report on, or reaction to, our menu ingredients, the size of our portions, or the nutritional content of our menu items could negativelyinfluence the demand for our products and materially and adversely affect our business, financial condition, and results of operations.12Table of ContentsCompliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly andtime-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required to modify ordiscontinue certain menu items, and we may experience higher costs associated with the implementation of those changes. We cannot predict theeffect of the new nutrition labeling requirements under the Menu Labeling Final Rule until it takes effect. The risks and costs associated withnutritional disclosures on our menus could also affect our operations, particularly given differences among applicable legal requirements andpractices within the restaurant industry with respect to testing and disclosure, ordinary variations in food preparation among our own restaurants,and the need to rely on the accuracy and completeness of nutritional information obtained from third-party suppliers.We may also become subject to legislation or regulation seeking to tax and/or regulate high-fat foods, foods with high sugar and salt content, orfoods otherwise deemed “unhealthy”. If we fail to comply with existing or future laws and regulations, we may be subject to governmental or judicialfines or sanctions.Our results of operations and strategy depend in significant part on the success of our franchise owners, and we are subject to a varietyof additional risks associated with our franchise owners, including litigation that has been brought against us by certain franchiseowners.A substantial portion of our revenues comes from royalties generated by our franchise stores. We anticipate that franchise royalties will representa substantial and growing part of our revenues in the future. Accordingly, we are reliant on the performance of our franchise owners in successfullyopening and operating their stores and paying royalties to us on a timely basis, and our reliance on the performance of our franchise ownersincreases as we franchise Company-owned stores. Our franchise system subjects us to a number of risks, any one of which may affect our abilityto collect royalty payments from our franchise owners, may harm the goodwill associated with our brands, and may materially and adversely affectour business and results of operations.•Franchise owner independence. Franchise owners are independent operators, and their employees are not our employees. Accordingly,their actions are outside of our control. Although we have developed criteria to evaluate and screen prospective franchise owners, wecannot be certain that our franchise owners will have the business acumen or financial resources necessary to operate successfulfranchises in their locations and state franchise laws may limit our ability to terminate or modify these franchise agreements. Moreover,despite our training, support, and monitoring, franchise owners may not successfully operate stores in a manner consistent with ourstandards and requirements, or may not hire and adequately train qualified managers and other store personnel. The failure of ourfranchise owners to operate their franchises successfully, and actions taken by their employees, could each have a material and adverseeffect on our reputation, brand, ability to attract prospective franchise owners, business, financial condition, or results of operations.•Franchise agreement termination or non-renewal. Each franchise agreement is subject to termination by us as the franchisor in theevent of a default, generally after expiration of applicable cure periods, although in certain circumstances a franchise agreement may beterminated by us upon notice without an opportunity to cure. The default provisions under the franchise agreements are drafted broadlyand include, among other things, any failure to meet operating standards and actions that may threaten our licensed intellectual property.In addition, each franchise agreement has an expiration date. Upon the expiration of the franchise agreement, we or the franchise ownermay not elect to renew the franchise agreement. If the franchise agreement is renewed, the franchise owner will receive a successivefranchise agreement for an additional term. Such option, however, is contingent on the franchise owner’s execution of the then-currentform of franchise agreement (which may include new obligations, as well as increased franchise fees, royalty payments, advertising fees,and other fees and costs), the satisfaction of certain conditions (including modernization of the restaurant and related operations) and thepayment of a renewal fee. If a franchise owner is unable or unwilling to satisfy any of the foregoing conditions, we may elect not to renewthe expiring franchise agreement, in which event the franchise agreement will terminate upon expiration of the term.•Franchise owner insurance. The franchise agreements require each franchise owner to maintain certain insurance types and levels.Certain extraordinary hazards, however, may not be covered, and insurance may not be available (or may be available only at prohibitivelyexpensive rates) with respect to many other risks. Moreover, any loss incurred could exceed policy limits and any policy payments madeto franchise owners may not be made on a timely basis. Any such loss or delay in payment could have a material and adverse effect on afranchise owner’s ability to satisfy obligations under the franchise agreement, including the ability to make royalty payments and performindemnity obligations. Further, the franchise owner may fail to obtain or maintain the required insurance types and levels, and we may notbe aware of that failure until a loss is incurred.13Table of Contents•Product liability exposure. We require franchise owners to maintain general liability insurance coverage to protect against the risk ofproduct liability and other risks and demand strict franchise owner compliance with health and safety regulations. However, franchiseowners may receive or produce defective food or beverage products, which may materially and adversely affect our brand’s goodwill andour business. Further, a franchise owner’s failure to comply with health and safety regulations, including requirements relating to foodquality or preparation and the sourcing of food from vendors, could subject the franchise owner, and possibly us, to litigation. Anylitigation, including the imposition of fines or damage awards, could adversely affect the ability of a franchise owner to make royaltypayments, or could generate negative publicity, or otherwise adversely affect us.•Franchise owners’ participation in our strategy. Our franchise owners are an integral part of our business. We may be unable tosuccessfully implement our strategy if our franchise owners do not actively participate in such implementation. From time to time,franchise owners have disagreed with or resisted elements of our strategy, including new product initiatives and investments in their storessuch as remodeling, migrating to a new e-commerce platform, and adopting third party delivery. Franchise owners may also fail toparticipate in our marketing initiatives, with respect to financial contributions, time spent on initiatives and the content of marketingmessaging, and implementation of recommended promotions, which could materially and adversely affect their sales trends, averageweekly sales (“AWS”), and results of operations. In addition, the failure of our franchise owners to focus on the fundamentals of restaurantoperations, such as quality, service, and cleanliness, would have a negative effect on our business. It also may be difficult for us tomonitor our international franchise owners’ implementation of our strategy due to our lack of personnel in the markets served by suchfranchise owners.•Franchise owner litigation and conflicts with franchise owners. Franchise owners are subject to a variety of litigation risks, includingcustomer claims, personal-injury claims, environmental claims, employee claims, intellectual property claims, and claims related toviolations of the Americans with Disabilities Act, religious freedom, the Fair Labor Standards Act (“FLSA”), the Employee RetirementIncome Security Act of 1974, as amended, and advertising laws. Each of these claims may increase costs and limit the funds available tomake royalty payments and reduce entries into new franchise agreements. We also may be named in lawsuits against our franchiseowners.In addition, the nature of the franchisor-franchise owner relationship may give rise to conflict. For example, franchise owners haveexpressed a number of concerns and disagreements with our Company, including concern over a lack of franchise owner involvement instrategic decision-making, inadequate assistance in increasing and difficulty maintaining franchise store profitability in a higher costenvironment, disagreement with marketing strategy and initiatives and product launches, concern over the implementation of theCompany’s marketing programs, disagreement with the Company’s expansion strategy and the availability of development incentives,dissatisfaction with food safety measures implemented by the Company, including required purchases and new protocols, anddissatisfaction with costs associated with, and the functionality of, the Company’s online ordering platform. Our senior management teamengages with franchise owner leadership to address these concerns and resolve specific issues raised by the franchise owners. Suchengagement may not result in a satisfactory resolution of the issues, which could materially and adversely affect our ability to strengthenour franchise system and maintain relationships with our franchise owners, damage our reputation and our brand, and materially andadversely affect our results of operations.We currently are subject to litigation with a group of our franchise owners as described in Part I, Item 3. Legal Proceedings. We also maybecome subject to additional litigation with franchise owners in the future. In addition to these and other claims that may be broughtagainst us by franchise owners, we also may engage in future litigation with franchise owners to enforce the terms of our franchiseagreements and compliance with our brand standards as determined necessary to protect our brand, the consistency of our products, andthe customer experience. Any negative outcome of these or any other claims could materially and adversely affect our results ofoperations as well as our ability to expand our franchise system and may damage our reputation and our brand.•Access to credit. Our franchise owners typically finance new operations and new store openings with loans or other forms of credit. If ourfranchise owners are unable to access credit or obtain sufficient credit, if interest rates on loans that our franchise owners use to financeoperations of current stores or to open new stores increase or if franchise owners are unable to service their debt, our franchise ownersmay have difficulty operating their stores or opening new stores, which could materially and adversely affect our results of operations aswell as our ability to expand our franchise system.•Franchise owner bankruptcy. The bankruptcy of a multi-unit franchise owner could negatively affect our ability to collect payments dueunder such franchise owner’s franchise agreement. In a franchise owner bankruptcy, the14Table of Contentsbankruptcy trustee may reject its franchise agreements pursuant to Section 365 under the United States Bankruptcy Code, in which casethere would be no further royalty payments from such franchise owner.Termination of area development agreements (“ADAs”) or master franchise agreements with certain franchise owners could adverselyaffect our revenues.We enter into ADAs with certain domestic franchise owners that plan to open multiple Papa Murphy’s stores in a designated market area and wehave entered into master franchise agreements with third parties to develop and operate stores in Canada and in the Middle East. These franchiseowners are granted certain rights with respect to specified territories, and, at their discretion, these franchise owners may open more stores thanspecified in their agreements. The termination of ADAs or other arrangements with a master franchise owner or a lack of expansion by thesefranchise owners could result in the delay of the development of franchised restaurants or discontinuation or an interruption in the operation of ourbrands in a particular market or markets. We may not be able to find another operator to resume development activities in such market or markets.Any such delay, discontinuation or interruption would result in a delay in, or loss of, royalty income to us by way of reduced sales and couldmaterially and adversely affect our business, financial condition, or results of operations.We are subject to all of the risks associated with leasing space subject to long-term non-cancelable leases.We do not own any of the real property where our Company-owned stores operate. Payments under our operating leases account for a portion ofour operating expenses. Our leases generally have an initial term of five years and generally can be extended only in five-year increments (atincreased rates). All of our leases require a fixed annual rent, although some require the payment of additional rent if store sales exceed anegotiated amount. Generally, our leases are net leases, which require us to pay all of the cost of insurance, taxes, maintenance, and utilities. Wegenerally cannot cancel these leases. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. We alsosublease or assign some of our leases to our franchisees, and will continue to do so in the future, either before or after we have developed a storeat the leased location. When we assign or sublease our leases to franchisees, such as assignments or subleases made in connection withrefranchising Company-owned stores, we are in most instances required to retain ultimate liability to the landlord. If an existing or future store isnot profitable, resulting in its closure (or, in the case of a lease that we have subleased or assigned to a franchisee, the franchisee defaults on thesubleased or assigned lease), we could lose some or all of our development investment as well as be committed to perform our obligations underthe applicable lease. This could include, among other things, paying the base rent for the balance of the lease term. We may also be subject to aclaim by a franchise owner who defaults on a lease that we knew or should have known that the leased location would be unprofitable.In addition, we may fail to negotiate renewals as each of our leases expires, either on commercially acceptable terms or at all, which could causeus to pay increased occupancy costs or to close stores in desirable locations. These potential increased occupancy costs and closed stores couldmaterially and adversely affect our business, financial condition, or results of operations.The effect of negative economic factors, including the availability of credit, on our franchise owners’ and our landlords could negativelyaffect our results of operations.Negative effects on our and our franchise owners’ existing and potential landlords due to the inaccessibility of credit and other unfavorableeconomic factors may adversely affect our business and results of operations. If our or our franchise owners’ landlords are unable to obtainfinancing or remain in good standing under their existing financing arrangements, they may be unable to provide construction funding to us orsatisfy other lease covenants. In addition, if our franchise owners or our landlords are unable to obtain sufficient credit to continue to properlymanage their retail sites, we may experience a drop in the level of quality of such retail locations.Damage to our reputation and the Papa Murphy’s brand and negative publicity relating to our stores, including our franchise stores,could reduce sales at some or all of our other stores and could negatively affect our business, financial condition, and results ofoperations.Our success is dependent in part upon our ability to maintain and enhance the value of the Papa Murphy’s brand, consumers’ connection to ourbrand and positive relationships with our franchise owners. We may, from time to time, be faced with negative publicity relating to food quality,food safety, store facilities, customer complaints or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers’food processing, employee and franchise owner relationships, franchise owner litigation, or other matters, regardless of whether the allegations arevalid or whether we are held to be responsible. The risks associated with such negative publicity cannot be completely eliminated or mitigated andmay materially and adversely affect our business, financial condition, and results of operations and result in damage to our brand. For multi-location food service businesses such as ours, the negative effect of adverse publicity relating to one store or a limited number of stores mayextend far beyond the stores or franchise owners involved to affect some or all of our other stores. The risk of negative publicity is particularlygreat with respect to our franchise stores because we are limited in15Table of Contentsthe manner in which we can regulate them, especially on a real-time basis. A similar risk exists with respect to unrelated food service businesses,if consumers associate those businesses with our own operations.The use of social media platforms and similar devices, including blogs, social media websites, and other forms of Internet-based communicationsthat allow individuals to access a broad audience of consumers and other interested persons has increased markedly. Consumers value readilyavailable information concerning goods and services that they purchase and may act on such information without further investigation orauthentication. The availability of information on social media platforms is virtually immediate, as is its effect. Many social media platformsimmediately publish the content their subscribers and participants’ post, often without filters or checks on the accuracy of the content posted. Theopportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerningour Company may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, each ofwhich may harm our performance, prospects, or business. The harm may be immediate without affording us an opportunity for redress orcorrection. Such platforms also could be used for dissemination of trade secret information, compromising valuable Company assets.Food safety and foodborne illness concerns could have an adverse effect on our business.We cannot guarantee that our supply chain and food safety controls and training will be fully effective in preventing all food safety issues at ourstores, including any occurrences of foodborne illnesses such as salmonella, E. coli, and hepatitis A. In addition, we do not assure you that ourfranchise locations will maintain the high levels of internal controls and training we require at our Company-owned stores. Furthermore, ourfranchise owners and we rely on third-party vendors, making it difficult to monitor food safety compliance and increasing the risk that foodborneillness would affect multiple locations rather than a single store. Some foodborne illness incidents could be caused by third-party vendors andtransporters outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubationperiods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of foodborne illness in any of ourstores or markets or related to types of food products we sell, if publicized on national media outlets or through social media, could negativelyaffect our store sales nationwide. This risk exists even if it were later determined that the illness was wrongly attributed to us or one of our stores.A number of other restaurant chains have experienced incidents related to foodborne illnesses that have had a material and adverse effect on theiroperations. The occurrence of a similar incident at one or more of our stores, or negative publicity or public speculation about an incident, couldmaterially and adversely affect our business, financial condition, or results of operations.Our success depends in part upon effective advertising and marketing campaigns, which may not be successful, and franchise ownersupport of such advertising and marketing campaigns, as well as compliance with the restrictions and obligations imposed by lawsregulating certain marketing practices.We believe the Papa Murphy’s brand is critical to our business. We expend resources in our marketing efforts using a variety of media, includingtelevision advertising, digital and social media, email, and opt-in text messaging. We expect to continue to conduct brand awareness programsand customer initiatives to attract and retain customers. Additionally, some of our competitors have greater financial resources than we do, whichenables them to spend significantly more on marketing and advertising than us. Should our competitors increase spending on marketing andadvertising, or should our advertising and promotions be less effective than our competitors, our business, financial condition, and results ofoperations could be materially and adversely affected.The support of our franchise owners is critical for the success of our advertising and the marketing campaigns we seek to undertake, and thesuccessful execution of these campaigns will depend on our ability to maintain alignment with our franchise owners. Our franchise owners arerequired to spend a minimum of five percent of net sales directly on local advertising or contribute to a local fund managed by franchise owners incertain market areas to fund the purchase of advertising media. Our franchise owners are also required to contribute two percent of their net salesto a fund to support the development of new products, brand development, and national marketing programs. Consequently, a decline in net salesat franchise stores may result in reduced spending on advertising and the development of new products, brand development, and nationalmarketing programs, or may require us, our franchise owners, or other third-parties to contribute additional advertising funds, which we, ourfranchise owners, and other third-parties have done at various times. Although we maintain control over advertising and marketing materials andcan mandate certain strategic initiatives pursuant to our franchise agreements, we need the active support of our franchise owners if theimplementation of these initiatives is to be successful. Additional advertising funds are not contractually required, and we, our franchise ownersand other third-parties may choose to discontinue contributing additional funds in the future. Any significant decreases in our advertising andmarketing funds or financial support for advertising activities could significantly curtail our marketing efforts, which may materially and adverselyaffect our business, financial condition, and results of operations.Further, some of our marketing campaigns involve emails and opt-in text messages. In the United States, the Telephone Consumer Protection Actregulates making phone calls and sending text messages to consumers. The Federal Controlling16Table of Contentsthe Assault of Non-Solicited Pornography and Marketing Act of 2003 (the “CAN-SPAM Act”) regulates commercial email messages and specifiespenalties for the transmission of commercial email messages that do not comply with the law‘s requirements, such as providing an opt-outmechanism for stopping future emails from senders. States and other countries have similar laws related to telemarketing and commercial emails.Failure to comply with obligations and restrictions related to text message and email marketing could subject us to lawsuits, fines, statutorydamages, consent decrees, injunctions, adverse publicity, and other losses that could harm our business. We are currently subject to one suchlawsuit, which is described in Part I, Item 3, Legal Proceedings.We experience the effects of seasonality.Seasonal factors and the timing of holidays cause our revenues to fluctuate from quarter to quarter. We typically follow family eating patterns athome, with our strongest sales levels occurring in the months of September through May, and our lowest sales levels occurring in the months ofJune, July, and August. Therefore, our revenues per store have typically been higher in the first and fourth quarters and lower in the second andthird quarters. Additionally, our new store openings have historically been concentrated in the fourth and first quarters because new franchiseowners may seek to benefit from historically stronger sales levels occurring in these periods. We believe that new store openings will continue tobe weighted towards the fourth quarter. As a result of these factors, our quarterly and annual results of operations and comparable store sales mayfluctuate significantly. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or forany year and comparable store sales for any particular future period may decrease and materially and adversely affect our business, financialcondition, or results of operations.Changes in economic conditions, including effects from recession, adverse weather, and other unforeseen conditions, could materiallyand adversely affect our business, financial condition, and results of operations.The restaurant industry depends on consumer discretionary spending. Volatile economic conditions now or in the future may depress consumerconfidence and discretionary spending. If the economy fails to fully recover for a prolonged period of time or worsens and if our customers haveless discretionary income or reduce the amount they spend on quick service meals, customer traffic could be adversely affected. We believe thatif negative economic conditions persist for a long period of time or become pervasive, consumers might make long-lasting changes to theirdiscretionary spending behavior, including dining out less frequently. Declines in food commodity prices may accelerate these changes inconsumer spending by inducing consumers to purchase more of their meals from grocery and convenience stores. In addition, given ourgeographic concentrations in the West and Midwest, economic conditions in these particular areas of the country could have a disproportionateeffect on our overall results of operations, and regional occurrences such as local strikes, terrorist attacks, increases in energy prices, adverseweather conditions, tornadoes, earthquakes, floods, droughts, fires, or other natural or man-made disasters could materially and adversely affectour business, financial condition, and results of operations. Adverse weather conditions may also affect customer traffic at our stores, and, inmore severe cases, cause temporary store closures, sometimes for prolonged periods. If store sales decrease, our profitability could decline aswe spread fixed costs across a lower level of sales. Reductions in staff levels, asset impairment charges, and potential store closures could resultfrom prolonged negative store sales.Changes in food availability and costs could adversely affect our results of operations.Our profitability and operating margins are dependent in part on our ability to anticipate and react to changes in food costs, particularly the costs ofmozzarella cheese and flour. We are party to national supply agreements for core ingredients with certain key third party suppliers, includingSaputo Cheese Inc. and Davisco Foods, for cheese; Pizza Blends, Inc., for flour and dough mix; Neil Jones Foods Company, for tomatoes usedin sauce; and several suppliers for meat, pursuant to which we lock in pricing for our franchise owners and Company-owned stores. We rely onSysco Corporation as the primary distributor of food and other products to our franchise owners and Company-owned stores. Our pricingarrangements with national suppliers typically have terms from three months to a year, after which the pricing may be renegotiated. Each storepurchases food supplies directly from our approved distributors and produce locally through an approved produce supplier.The type, variety, quality, availability, and price of produce, meat, and cheese are volatile and are subject to factors beyond our control, includingweather, governmental regulation, availability, and seasonality, each of which may affect our and our franchise owners’ food costs or cause adisruption in our supply. For example, cheese pricing is higher in the summer months due to a drop off in milk production in higher temperatures.Our food distributors and suppliers also may be affected by higher costs to produce and transport commodities used in our stores, higher minimumwage and benefit costs, and other expenses that they pass through to their customers, which could result in higher costs for goods and servicessupplied to us. We may not be able to anticipate and react to changing food costs through our purchasing practices and menu price adjustments inthe future. As a result, any increase in the prices charged by suppliers would increase the food costs for our Company-owned stores and for ourfranchise owners and could adversely affect our and their profitability. In addition, because we provide moderately priced food, we may choose notto, or may be unable to, pass along commodity price increases to consumers, and any price increases that are passed along to consumers maymaterially and adversely affect17Table of Contentsstore sales, which would lower revenues generated from Company-owned stores and franchise owner royalties. These potential changes in foodand supply costs and availability could materially and adversely affect our business, financial condition, or results of operations.Decreases in food costs may also affect consumer behavior in ways adverse to us. If our competitors, including grocery stores, are better able topass along commodity price decreases to customers than we are, then we may experience lower demand for our products and loss of marketshare.Our dependence on a sole supplier or a limited number of suppliers for some ingredients could result in disruptions to our business.Sysco Corporation is the primary distributor of our food and other products to our domestic franchise owners and Company-owned stores, and anydisruption to this distribution due to work stoppages, strikes, or other business interruption may materially and adversely affect our franchiseowners and us. The initial term of our Distribution Service Agreement with Sysco expired in August 2007, and now the agreement automaticallyrenews for one-year terms until terminated by either party with written notice one year before the termination date in such notice. Additionally, wedo not have formal long-term arrangements with all of our suppliers, and therefore our suppliers may implement significant price increases or maynot meet our requirements in a timely fashion, or at all. Any material interruptions in our supply chain, such as a material interruption of ingredientsupply due to the failures of third party distributors or suppliers, or interruptions in service by common carriers that ship goods within ourdistribution channels, may result in significant cost increases and reduce store sales. We may not be able to find alternative distributors orsuppliers on a timely basis or at all. Our franchise and Company-owned stores could also be harmed by any prolonged disruption in the supply ofproducts from or to our key suppliers due to weather, crop disease, civil unrest, and other events beyond our control. Insolvency of key supplierscould also negatively affect our business. Our focus on a limited menu would make the consequences of a shortage of a key ingredient, such ascheese or flour, more severe, and affected stores could experience significant reductions in sales during the shortage.Changes in laws related to electronic benefit transfer (“EBT”) systems could adversely affect our results of operations.Because our products are not cooked, we and our franchise owners currently are able to accept EBT payments, or food stamps, at stores in theUnited States. Changes in state and federal laws governing where EBT cards may be used and what they may be used for may limit our ability toaccept such payments and could significantly reduce sales. Reductions in food stamp benefits occurred in November 2013, and further additionalreductions in food stamp benefits are periodically proposed by lawmakers in the U.S. Senate or House of Representatives. In addition, the TrumpAdministration has proposed modifying food stamp benefits so that recipients would receive packages of food in place of a portion of the cashfood stamp benefits they previously received. The recent reductions and potential future reductions in food stamp benefits may reduce sales,which could materially and adversely affect our business, financial condition, and results of operations.Changes in employment laws may adversely affect our business.Various federal and state labor laws govern our relationships with our employees and the relationships of our franchise owners with theiremployees, which may affect our and our franchise owners’ operating costs. These laws include employee classification as exempt/non-exemptfor overtime and other purposes, minimum wage requirements, unemployment tax rates, mandatory health benefits, workers’ compensation rates,immigration status, tax reporting, and other wage and benefit requirements. A substantial number of employees at our franchise and Company-owned stores are paid at rates related to the U.S. federal minimum wage, and increases in the U.S. federal minimum wage, or higher minimumwage rates imposed by states or municipalities, may increase labor costs. Any such increases in labor costs might result in franchise ownersinadequately staffing restaurants. Understaffed restaurants could reduce sales at such restaurants, decrease royalty payments, and adverselyaffect our brands.The U.S. federal government and various states are considering or have already adopted new immigration laws and enforcement programs. Someof these changes may increase obligations for compliance and oversight, which could subject us to additional costs and make the hiring processfor us and our franchise owners more cumbersome, or reduce the availability of potential employees. Although we require all of our employees,including at our Company-owned stores, to provide us with government-specified documentation evidencing their employment eligibility, some ofour employees may, without our knowledge, be unauthorized workers. We currently participate in the “E-Verify” program, an Internet-based, freeprogram run by the United States government to verify employment eligibility, in states in which participation is required and we have implementedthroughout our stores. However, use of the “E-Verify” program does not guarantee that we will properly identify all applicants who are ineligible foremployment. In addition, our franchise owners are responsible for screening any employees they hire. Unauthorized workers are subject todeportation and may subject us or our franchise owners to fines or penalties, and if we are found to be employing unauthorized workers, we couldexperience adverse18Table of Contentspublicity that negatively impacts our brand and may make it more difficult to hire and keep qualified employees. Termination of a significantnumber of employees who were unauthorized employees may disrupt store operations and cause temporary increases in our or our franchiseowners’ labor costs as we train new employees. We could also become subject to fines, penalties, and other costs related to claims that we didnot fully comply with all recordkeeping obligations of federal and state immigration compliance laws.Franchisors may be subject to claims that they are joint employers with their franchisees. This could expose franchisors, including us, to liabilityfor claims by, or based on the acts of, franchisees’ employees. Although we carry insurance policies for a significant portion of our risks andassociated liabilities with respect to workers’ compensation, general liability, employer’s liability, health benefits, and other insurable risks, a claimnot covered by that insurance, or a judgment in excess of our insurance coverage, could materially and adversely affect our business, financialcondition, and results of operations. Regardless of whether any claims that may be brought against us are valid or whether we are ultimatelydetermined to be liable, our business, financial condition, and results of operations could also be adversely affected by negative publicity, litigationcosts resulting from the defense of these claims, and the diversion of time and resources from our operations.If our franchise owners or we face labor shortages, labor disputes, or increased labor costs, our growth and operating results could beadversely affected.Labor is a primary component in the cost of operating our Company-owned stores and for franchise owners. If we or our franchise owners facelabor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, increases in thefederal, state or local minimum wage, or other employee benefits costs (including costs associated with health insurance coverage), our operatingexpenses could increase and our growth could be adversely affected. In addition, our success depends in part upon our franchise owners’ and ourability to attract, motivate, and retain a sufficient number of well-qualified store operators and management personnel, as well as a sufficientnumber of other qualified employees, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in shortsupply in some geographic areas. In addition, restaurants have traditionally experienced relatively high employee turnover rates. Although we havenot yet experienced significant problems in recruiting or retaining employees, our franchise owners’ and our ability to recruit and retain suchindividuals may delay the planned openings of new stores or result in higher employee turnover in existing stores, which could have a material andadverse effect on our business, financial condition, or results of operations.Additionally, while we do not currently have any unionized employees and are not currently subject to any unionization efforts, there is a potentialfor union organizers to engage in efforts to organize our employees or those of our franchise owners. Potential union representation and collectivebargaining agreements may result in increased labor costs that can have an effect on competitiveness, as well as affect our ability to retain well-qualified employees. Labor disputes, as well, may precipitate strikes and picketing that may have an effect on business, including guestpatronage. Further, potential changes in labor laws could increase the likelihood of some or all of our employees being subjected to greaterorganized labor influence, and could have a material and adverse effect on our business, financial condition, or results of operations by imposingrequirements that could potentially increase our costs, reduce our flexibility, and affect our employee culture.Any increase in the cost of labor could adversely affect our business and our growth. Competition for employees could require us or our franchiseowners to pay higher wages, which could result in higher labor costs. In addition, increases in the minimum wage, of which several have beenmandated by governing bodies in some localities in which we or our franchise owners operate stores, would increase our labor costs. Moreover,costs associated with workers’ compensation are rising, and these costs may continue to rise in the future. We may be unable to increase ourmenu prices in order to pass these increased labor costs on to consumers, in which case our margins would be negatively affected, which couldmaterially and adversely affect our business, financial condition, or results of operations.The effect of changes to healthcare laws in the United States may increase the number of employees who choose to participate in ourhealthcare plans, which may significantly increase our healthcare costs and negatively affect our results of operations and our franchiseowners.In 2010, the PPACA was signed into law in the United States to require health care coverage for many uninsured individuals and expand coveragefor those already insured. We offer and subsidize comprehensive healthcare coverage, primarily for our salaried employees. The healthcare reformlaw requires us to offer healthcare benefits to all full-time employees (including full-time hourly employees) that meet certain minimumrequirements of coverage and affordability, or face penalties. We offer hourly employees who qualify as full-time employees under the PPACA theoption of enrolling in our health care coverage during our annual open enrollment period, but the number of such employees electing to so enroll islow. If the number of full-time hourly employees electing to enroll in our health care coverage increases significantly, we may incur substantialadditional expense, or, if the benefits we offer do not meet applicable requirements, we may incur penalties. It is also possible that by makingchanges or failing to make changes in the healthcare plans offered by us, we will become less competitive in the market for our labor. Finally,implementing the requirements of healthcare reform is likely to19Table of Contentsimpose additional administrative costs. The U.S. Congress may also consider repealing all or a portion of the PPACA and it is uncertain what, ifany, new laws and regulations would replace the repealed portions of the PPACA. The costs and other effects of these new healthcarerequirements, and any proposed repeal or modifications of such requirements, are still being determined, but they may significantly increase ourhealthcare coverage costs and could materially and adversely affect our business, financial condition, or results of operations.Restaurant companies have been the target of class actions and other litigation alleging, among other things, violations of federal andstate law. We could be party to litigation that could adversely affect us by distracting management, increasing our expenses, orsubjecting us to material money damages and other remedies.We are subject to lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. In recent years, a number ofrestaurant companies have been subject to claims by customers, employees, franchise owners, and others regarding issues such as food safety,personal injury and premises liability, employment-related claims, harassment, discrimination, disability, compliance with advertising laws(including the Telephone Consumer Protection Act), and other operational issues common to the foodservice industry. A number of these lawsuitshave resulted in the payment of substantial damages by the defendants. For example, on May 8, 2015, we were named as a defendant in aputative class action lawsuit claiming a violation of the Telephone Consumer Protection Act. Specific information regarding the lawsuit is includedin Part 1, Item 3, Legal Proceedings.Although we have historically experienced very few customer lawsuits, our customers occasionally allege we caused an illness or injury theysuffered at or after a visit to our stores, or that we have problems with food quality or operations. We are also subject to a variety of other claimsarising in the ordinary course of our business, including personal injury claims, contract claims, and claims alleging violations of laws regardingworkplace and employment matters, equal opportunity, discrimination, and similar matters and may become subject to class action or otherlawsuits related to these or different matters in the future. We may also be named as a defendant in any such claims brought against any of ourfranchise owners. An adverse judgment or settlement, related to any litigation claim, that is not insured or is in excess of our insurance coveragecould have an adverse effect on our business, financial condition, or results of operations. Regardless of whether any claims that may be broughtagainst us are valid or whether we are ultimately determined to be liable, our business, financial condition, and results of operations could also beadversely affected by negative publicity, litigation costs resulting from the defense of these claims, and the diversion of time and resources fromour operations.In addition, the restaurant industry has been subject to a growing number of claims based on the nutritional content of food products sold anddisclosure and advertising practices. We may also be subject to this type of proceeding in the future and, even if we are not, publicity about thesematters (particularly directed at the limited service or fast casual segments of the industry) may harm our reputation and could materially andadversely affect our business, financial condition, or results of operations.Opening new stores in existing markets may negatively affect sales at existing stores.Although our core strategy is to focus on stabilizing same store sales and maintain profitability by maximizing customer convenience, deliveringeffective marketing messages to our customers, cultivating a culture of teamwork, continuous learning, and development, and creating anefficient, consistent execution process, we may from time to time open new franchise stores, including new franchise stores in our existingmarkets. Expansion in existing markets may be affected by local economic and market conditions. Further, the customer target area of our storesvaries by location, depending on a number of factors, including population density, other local retail and business attractions, area demographics,and geography. As a result, the opening of a new store in or near markets in which stores already exist could adversely affect the sales of theseexisting stores. We and our franchise owners may selectively open new stores in and around areas of existing stores. Competition for salesbetween our stores may become significant in the future as we continue to expand our operations and could affect sales growth, which couldmaterially and adversely affect our business, financial condition, or results of operations.Our expansion into international markets exposes us to a number of risks that may differ in each country where we have franchisestores.We currently have franchise stores in Canada and the United Arab Emirates and may continue to grow internationally. Our international operationsare in early stages and historically have not been profitable and have achieved lower margins than our domestic stores. We expect this financialperformance to continue in the near-term. Our financial condition and results of operations may be adversely affected if global markets in which ourfranchise stores compete are affected by changes in political, economic or other factors. These factors, over which neither our franchise ownersnor we have control, may include:•recessionary or expansive trends in international markets;20Table of Contents•changing labor conditions and difficulties in staffing and managing our foreign operations;•increases in the taxes we pay and other changes in applicable tax laws;•legal and regulatory changes, and the burdens and costs of our compliance with a variety of foreign laws;•changes in inflation rates;•changes in exchange rates and the imposition of restrictions on currency conversion or the transfer of funds;•difficulty in protecting our brand, reputation and intellectual property;•difficulty in collecting our royalties and longer payment cycles;•expropriation of private enterprises;•anti-American sentiment and the identification of the Papa Murphy’s brand as an American brand;•restrictions on immigration and international travel;•political and economic instability and civil unrest; and•other external factors.Furthermore, because of the differences in foreign laws concerning proprietary rights, our intellectual property rights may not receive the samedegree of protection in foreign countries as they would in the United States. This could have an adverse effect on our ability to successfullyexpand into other jurisdictions in the future.Any acquisitions, partnerships, or joint ventures that we make could disrupt our business and harm our financial condition.From time to time, we may evaluate potential strategic acquisitions of existing stores or complementary businesses as well as partnerships orjoint ventures with third parties, including potential franchisors, to facilitate our refranchising initiative and growth, particularly our internationalexpansion. We may not be successful in identifying acquisition, partnership, and joint venture candidates. In addition, we may not be able tocontinue the operational success of any stores we acquire or successfully finance or integrate any businesses that we acquire or with which weform a partnership or joint venture. We may have potential write-offs of acquired assets and an impairment of any goodwill recorded as a result ofacquisitions. Furthermore, the integration of any acquisition may divert management’s time and resources from our core business and disrupt ouroperations or may result in conflicts with our business.Any acquisition, partnership, or joint venture may not be successful, may reduce our cash reserves, may negatively affect our earnings andfinancial performance, and, to the extent financed with stock or the proceeds of debt, may be dilutive to our stockholders or increase our alreadyhigh levels of indebtedness. We do not ensure that any acquisition, partnership, or joint venture we make will not have a material and adverseeffect on our business, financial condition, and results of operations.Security breaches of confidential customer information in connection with our electronic processing of credit and debit cardtransactions may adversely affect our business.The majority of our store sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit anddebit card information of their customers has been stolen. We may in the future become subject to lawsuits or other proceedings for purportedlyfraudulent transactions arising out of the actual or alleged theft of our customers’ credit or debit card information. In addition, most states haveenacted legislation requiring notification of security breaches involving personal information, including credit and debit card information. Any suchclaim, proceeding, or mandatory notification could cause us to incur significant unplanned expenses, which could have an adverse impact on ourfinancial condition and results of operations. Further, adverse publicity resulting from these allegations could harm our reputation and couldmaterially and adversely affect our business, financial condition, and results of operations.System security risks, data breaches, and cyber attacks could disrupt our operations.We manage and store various proprietary information and sensitive or confidential data relating to our business, including sensitive and personallyidentifiable information related to our suppliers, customers, and franchise owners. Breaches of our security measures through hacking, fraud, orother forms of deception, or the accidental loss, inadvertent disclosure, or unapproved dissemination of proprietary information or sensitive orconfidential data about us, our suppliers, our customers, our employees, or our franchise owners, could expose us, our customers, our suppliers,and our franchise owners to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand andreputation, or otherwise harm our business. In addition, our current data protection measures might not protect us against increasingly21Table of Contentssophisticated and aggressive threats and the cost and operational consequences of implementing further data protection measures could besignificant.Information technology system failures or breaches of our network security could interrupt our operations and adversely affect ourbusiness.We rely on our computer systems and network infrastructure across our operations, including POS system processing at our stores. Our ability toeffectively and efficiently manage our operations depends upon our ability to protect our computer equipment and systems against damage fromphysical theft, fire, power loss, telecommunications failure, or other catastrophic events, as well as from internal and external security breaches,viruses, worms, and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes aninterruption in our operations could materially and adversely affect our business, reputation, financial condition, and results of operations andsubject us to litigation or actions by regulatory authorities. Remediation of such problems could also result in significant, unplanned expenditures.An increasingly significant portion of our retail sales depends on the continuing operation of our information technology and communicationssystems, including our online ordering platform, POS system, and our credit card processing systems. Our information technology, communicationsystems, and electronic data may be vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss,telecommunications failures, computer viruses, loss of data, unauthorized data breaches, or other attempts to harm our systems. Additionally, werely on data centers that are also subject to break-ins, sabotage, and intentional acts of vandalism that could cause disruptions in our ability toserve our customers and protect customer data. Some of our systems are not fully redundant, and our disaster recovery planning cannot accountfor all eventualities. The occurrence of a natural disaster, intentional sabotage, or other unanticipated problems could result in lengthy interruptionsin our service. Any errors or vulnerabilities in our systems, or damage to or failure of our systems, could result in interruptions in our services andnon-compliance with certain regulations, which could materially and adversely affect our business, reputation, financial condition, and results ofoperations.We may not be able to adequately protect our intellectual property, which could harm the value of our brand and adversely affect ourbusiness.Our ability to implement our business plan successfully depends in part on our ability to build brand recognition in the markets served by ourstores using our trademarks and other proprietary intellectual property, including our brand names and logos. If our efforts to protect our intellectualproperty are inadequate, or if any third party misappropriates, dilutes, infringes, or otherwise violates our intellectual property, the value of ourbrand may be harmed, which could have a material adverse effect on our business and might prevent our brand from achieving or maintainingmarket acceptance. We may also face the risk of claims that we have infringed third parties’ intellectual property rights.We also rely on trade secrets and proprietary know-how to protect our brand. Our methods of safeguarding this information may not be adequate.Moreover, we may face claims of misappropriation or infringement of a third party’s rights that could interfere with our use of this information. Wedo not maintain confidentiality agreements with all of our team members. Even with respect to the confidentiality agreements we have, we do notassure you that those agreements will provide meaningful protection, or that adequate remedies will be available in the event of an unauthorizeduse or disclosure of our proprietary information. If competitors independently develop or otherwise obtain access to our trade secrets or proprietaryknow-how, the appeal of our stores could be reduced and our business could be harmed.We are subject to extensive government regulation and requirements issued by other groups and our failure to comply with existing orincreased regulations could adversely affect our business and operating results.We are subject to numerous federal, state, local, and foreign laws and regulations, as well as requirements issued by other groups, including thosedescribed elsewhere in this section and those relating to:▪the preparation, sale, and labeling of food;▪building and zoning requirements;▪environmental laws;▪compliance with securities laws and NASDAQ listed company rules;▪working and safety conditions;▪sales taxes or other transaction taxes;▪compliance with the Payment Card Industry Data Security Standards and similar requirements; and22Table of Contents▪compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules promulgated thereunder.In addition, restaurants located in the United States must comply with Title III of the Americans with Disabilities Act. Although we believe newerrestaurants meet the Americans with Disabilities Act construction standards and, further, that most franchise owners have historically been diligentin the remodeling of older restaurants, a finding of noncompliance with the Americans with Disabilities Act could result in the imposition ofinjunctive relief, fines, awards of damages, or additional capital expenditures to remedy such noncompliance. In addition, the Americans withDisabilities Act may also require modifications to guest-facing technologies, including our website, to provide service to, or make reasonableaccommodations for, disabled persons.We are also subject to Federal Trade Commission rules and to various state and foreign laws that govern the offer and sale of franchises.Additionally, these laws regulate various aspects of the franchise relationship, including terminations and the refusal to renew franchises. Thefailure to comply with these laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporarysuspension on future franchise sales, fines or other penalties, or require us to make offers of rescission or restitution, any of which couldmaterially and adversely affect our business, financial condition, and results of operations.Some of the jurisdictions where we have franchise and Company-owned stores do not assess sales tax on our pizzas. Accordingly, we maybenefit from a pricing advantage over some pizza chain competitors in these jurisdictions. If these jurisdictions were to impose sales tax on ourproducts, these stores may experience a decline in sales due to the loss of this pricing advantage. In addition, our stores may be subject tounanticipated sales tax assessments. These sales tax assessments could result in losses to our franchise owners or franchise stores going out ofbusiness, which could adversely affect our number of franchise stores and our results of operations. Changes in sales tax assessments of thistype at the franchise owner level could lead to undercapitalized franchise owners going out of business and loss of royalties at the Company level.Similarly, such tax assessments could impact the profitability of our Company-owned stores. As a result, changes in sales tax assessments couldhave a material and adverse effect on our business, financial condition, and results of operations.Our current insurance coverage may not be adequate, insurance premiums for such coverage may increase and we may not be able toobtain insurance at acceptable rates, or at all.We have retention programs for workers’ compensation, general liability, and owned and non-owned automobile liabilities. These insurance policiesmay not be adequate to protect us from liabilities that we incur in our business. In addition, in the future our insurance premiums may increase andwe may not be able to obtain similar levels of insurance on reasonable terms, or at all. Any substantial inadequacy of, or inability to obtaininsurance coverage, including but not limited to coverage regarding litigation, could materially and adversely affect our business, financialcondition, and results of operations.Changes to accounting rules or regulations may adversely affect our results of operations.Changes to existing accounting rules or regulations may affect our future results of operations or cause the perception that we are more highlyleveraged. Other new accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and mayoccur in the future. For instance, accounting regulatory authorities have indicated that they will require lessees to capitalize all but short-termleases in their financial statements. This change, when implemented, will require us to record significant lease obligations and related right of useassets on our consolidated balance sheet and make other changes to our financial statements. This and other future changes to accounting rulesor regulations, such as announced changes to revenue recognition standards, could materially and adversely affect our business, financialcondition, or results of operations.Risks Relating to Our Company and Our Ownership StructureThe requirements of being a public company may strain our resources and divert resources and management’s attention and thisburden may increase once we are no longer an “emerging growth company.”As a publicly traded company, we incur, and will continue to incur, significant legal, accounting, and other expenses that we were not required toincur prior to our initial public offering in May 2014. This will be particularly so after we are no longer an “emerging growth company” as definedunder the Jumpstart our Business Startups Act (“JOBS Act”).The demands of being a public company, including engagement and communications with stockholders, require a significant commitment ofresources and management oversight that has increased and may continue to increase our costs23Table of Contentsand might place a strain on our systems and resources. As a result, our management’s attention might be diverted from other business concerns.For as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from variousreporting requirements that are applicable to other public companies that are not “emerging growth companies.” These exceptions provide for, butare not limited to, relief from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, less extensive disclosure obligationsregarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements to hold a nonbinding advisoryvote on executive compensation and stockholder approval of any golden parachute payments not previously approved, and an extended transitionperiod for complying with new or revised accounting standards. We may take advantage of these reporting exemptions until we are no longer an“emerging growth company.” We may remain an “emerging growth company” for up to five years following our initial public offering. To the extentwe do not use exemptions from various reporting requirements under the JOBS Act, we may be unable to realize our anticipated cost savings fromthose exemptions. Once we are no longer an “emerging growth company,” we will no longer enjoy the benefits of those exemptions.We have implemented internal controls over financial reporting and processes to evaluate their design and test their effectiveness so thatmanagement can provide the required management assessments under Section 404 of the Sarbanes-Oxley Act (“Section 404”). Section 404requires annual management assessments of the effectiveness of our internal control over financial reporting. Section 404 also generally requiresa report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, underthe JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control overfinancial reporting pursuant to Section 404 until we are no longer an “emerging growth company.”We may encounter problems or delays in implementing improvements in connection with receiving a favorable attestation from our independentregistered public accounting firm. If we are unable to maintain adequate internal control over financial reporting, we may be unable to report ourfinancial information on a timely basis, may suffer adverse regulatory consequences, or violate applicable stock exchange listing rules. Anyrestatement of our financial statements due to a lack of adequate internal controls or otherwise could result in a loss of public confidence in thereliability of our financial statements and sanctions imposed on us by the SEC. Failure to maintain effective internal control over financial reportingcould have a material adverse effect on our business and share price.Our largest stockholders have the power to significantly influence our decisions and their interests may conflict with our or yours in thefuture.On May 4, 2010, affiliates of Lee Equity Partners, LLC (“Lee Equity”) acquired a majority of the capital stock of PMI Holdings Inc., ourpredecessor. Lee Equity is a middle-market private equity investment firm managing more than $1 billion of equity capital. Immediately followingthe consummation of our initial public offering, Lee Equity and its affiliates owned approximately 41% of our outstanding capital stock, and as ofMarch 2, 2018, owns 26% of our outstanding capital stock. Under a stockholder’s agreement that we entered into with Lee Equity in connectionwith our initial public offering, for so long as Lee Equity (or one or more of its affiliates, to the extent assigned thereto), individually or in theaggregate owns (i) 20% or more of the voting power of the issued and outstanding shares of our common stock, Lee Equity will be entitled todesignate two director nominees or (ii) 10% or more of the voting power of the issued and outstanding shares of our common stock, Lee Equity willbe entitled to designate one director nominee, in each case to serve on the Board of Directors (the “Board”) at any meeting of stockholders atwhich directors are to be elected to the extent that Lee Equity does not have a director designee then serving on the Board. In addition to its rightsto designate nominees to the Board, Lee Equity has consent rights with respect to certain significant matters so long as Lee Equity owns 25% ormore of the outstanding shares of our common stock, including among others, certain change of control transactions, issuances of equitysecurities, the incurrence of significant indebtedness, declaration or payments of non-pro rata dividends, significant investments in, or acquisitionsor dispositions of assets, adoption of any new equity-based incentive plan, any material increase in the salary of our Chief Executive Officer,certain amendments to our organizational documents, any material change to our business, or any change to the number of directors serving onour Board. So long as Lee Equity owns 10% or more of our issued and outstanding common stock, Lee Equity will be granted access to ourcustomary non-public information and members of our management team and shall have the ability to share our material non-public informationwith any potential purchaser of us that executes an acceptable confidentiality agreement with us which will include a prohibition on trading onmaterial non-public information. Lee Equity has the right to assign any of its governance and registration rights to its affiliates or to a third party inconnection with the sale by Lee Equity of 10% or more of the issued and outstanding shares of our common stock. As such, Lee Equity hassubstantial influence over us.Lee Equity makes investments in companies in a variety of industries and may, from time to time, acquire and hold interests in businesses thatcompete directly or indirectly with us. Lee Equity may also pursue, for its own accounts, acquisition opportunities that may be complementary toour business, and as a result, those acquisition opportunities may not be24Table of Contentsavailable to us. Our amended and restated certificate of incorporation contains provisions renouncing any interest or expectancy held by ourdirectors affiliated with Lee Equity in certain corporate opportunities. Accordingly, the interests of Lee Equity may supersede ours, causing it or itsaffiliates to compete against us or to pursue opportunities instead of us, for which we have no recourse. Such actions, on the part of Lee Equityand inaction on our part, could have a material adverse effect on our business, financial condition, and results of operations.On December 21, 2017, we entered into a Cooperation Agreement (the “Cooperation Agreement”) with MFP Partners, L.P. (“MFP”) and MisadaCapital Holdings, LLC (“Misada”), among others. As of March 2, 2018, MFP and its affiliates collectively own 14% of our outstanding capital stockand Misada and its affiliates collectively own 9% of our outstanding capital stock. Pursuant to the Cooperation Agreement, MFP and Misada eachhas the right to designate a member of our Board so long as MFP and its affiliates or Misada and its affiliates, as the case may be, continue tobeneficially own at least the lesser of (i) 10% or more of the our outstanding capital stock, and (ii) 1,696,546 shares of our outstanding capitalstock, in the case of MFP, or 848,273 shares of our outstanding capital stock, in the case of Misada, in each case subject to adjustment for stocksplits, reclassifications, combinations, and similar adjustments.Such concentration of ownership among Lee Equity, MFP, and Misada, and the governance and control rights held by Lee Equity, MFP, andMisada, may also have the effect of delaying or preventing a change in control, which may be to the benefit of Lee Equity, MFP, or Misada andtheir affiliates but not in the interest of the Company or other stockholders not affiliated with Lee Equity, MFP, or Misada.Anti-takeover provisions in our organizational documents could make an acquisition of us more difficult, limit attempts by ourstockholders to replace or remove our current management, and adversely affect the market price of our common stock.Provisions in our certificate of incorporation and bylaws may have the effect of discouraging or preventing a change of control or changes in ourmanagement. Our certificate of incorporation and bylaws include provisions that:▪authorize our Board to issue, without further action by the stockholders, up to 15,000,000 shares of undesignated preferred stock;▪require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;▪specify that special meetings of our stockholders can be called only by or at the direction of our Board or, at the request of Lee Equity orits transferee that has privately acquired from Lee Equity at least 10% of our outstanding common stock, so long as Lee Equity or itstransferee owns at least 10% of our outstanding common stock;▪establish an advance notice procedure for stockholder proposals to be brought before an annual or special meeting, including proposednominations of persons for election to our Board;▪establish that our Board is divided into three classes, with each class serving three-year staggered terms;▪prohibit cumulative voting in the election of directors;▪provide that our directors may be removed only for cause by a majority of the remaining members of our Board or the holders of at least66 2/3% of our outstanding voting stock▪empower our Board to cancel, postpone, or reschedule an annual meeting of stockholders, at any time before the holding of the annualmeeting and for any reason; and▪require comprehensive disclosures and affirmations from any individual who has been proposed by a stockholder as a nominee for electionto our Board.These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it moredifficult for stockholders to replace members of our Board, which is responsible for appointing the members of our management, and maydiscourage, delay, or prevent a transaction involving a change in control of our Company that is in the best interest of our minority stockholders.Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our commonstock if they are viewed as discouraging future takeover attempts. In addition, we have opted out of Section 203 of the Delaware GeneralCorporation Law, which would otherwise prohibit us from engaging in any of a broad range of business combinations with any “interestedstockholder” (any stockholder with 15% or more of our outstanding voting stock) for a period of three years following the time that the stockholderbecame an “interested stockholder”, subject to certain exceptions. Our certificate of incorporation contains provisions that have similar effect asSection 203 of the Delaware General Corporations Law, except that they exclude from the definition of “interested stockholder” Lee Equity, and anyperson that has acquired from Lee Equity or any Lee Equity transferee 5% or more of our outstanding voting stock.25Table of ContentsItem 1B. Unresolved Staff CommentsNone.Item 2. PropertiesOur corporate headquarters, located in Vancouver, Washington, houses substantially all of our executive management and employees who provideour primary corporate support functions: legal, marketing, technology, human resources, finance, and research and development. We lease theproperty for the corporate headquarters and all of our 145 Company-owned stores.Our system-wide stores are typically located in neighborhood shopping centers and the average store size is approximately 1,400 square feet. Asof January 1, 2018, we and our franchise owners operated 1,523 stores with 1,483 of these stores located in 39 states (consisting of 1,338franchised and 145 Company-owned stores) plus 14 stores in Canada and 26 stores in the Middle East. Our franchised stores are situated on realproperty owned by franchise owners or leased directly by franchise owners from third party landlords.The map and chart below show the locations of our franchised and Company-owned stores in the United States as of January 1, 2018.26Table of Contents DomesticFranchisedStores Company-OwnedStores TotalAlabama32 — 32Alaska12 — 12Arizona55 — 55Arkansas6 5 11California169 — 169Colorado70 21 91Florida13 12 25Georgia4 — 4Hawaii2 — 2Idaho25 9 34Illinois25 — 25Indiana36 — 36Iowa34 — 34Kansas37 — 37Kentucky16 — 16Louisiana2 — 2Maryland1 — 1Michigan10 10 20Minnesota75 25 100Mississippi2 2 4Missouri50 3 53Montana14 — 14Nebraska13 — 13Nevada25 — 25New Mexico13 6 19North Carolina26 — 26North Dakota13 — 13Ohio1 — 1Oklahoma23 — 23Oregon99 7 106South Carolina2 — 2South Dakota15 — 15Texas85 8 93Tennessee28 19 47Utah60 — 60Virginia4 — 4Washington134 16 150Wisconsin97 2 99Wyoming10 — 10Total1,338 145 1,483Lease ArrangementsWe lease the property for our corporate headquarters and our Company-owned stores and are not a party to the leases for the franchise locationsexcept for two locations that operate under a sublease and leases assigned to franchisees wherein we remain secondarily liable upon the sale of astore. Lease terms for Company-owned stores are generally five years with one or more five-year renewal options and generally require us to pay aproportionate share of real estate taxes, insurance, common area, and other operating costs in addition to a base or fixed rent.27Table of ContentsItem 3. Legal ProceedingsWe currently are subject to litigation with a group of our franchise owners. In January 2014, six franchise owner groups claimed that wemisrepresented our sales volumes, made false representations to them and charged excess advertising fees, among other things. We engaged inmediation with these franchise owners, which is required under the terms of their franchise agreements, in order to address and resolve theirclaims, but we were unable to reach a settlement agreement. On April 4, 2014, a total of 12 franchise owner groups, including those franchiseowners that previously made the allegations described above, filed a lawsuit against us in the Superior Court in Clark County, Washington, makingessentially the same allegations for violation of the Washington Franchise Investment Protection Act, fraud, negligent misrepresentation andbreach of contract and seeking declaratory and injunctive relief, as well as monetary damages. Based on motions filed by us in that lawsuit, thecourt ruled on July 9, 2014, that certain of the plaintiffs’ claims under the anti-fraud and nondisclosure provisions of the Washington FranchiseInvestment Protection Act should be dismissed and that certain other claims in the case would need to be more specifically alleged. The courtalso ruled that the six franchise owner groups who had not mediated with us prior to filing the lawsuit must mediate with us in good faith, and thattheir 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 inthe Superior Court in Clark County, Washington making essentially the same allegations as made in the lawsuit described above and seekingdeclaratory and injunctive relief, as well as monetary damages. The court consolidated the two lawsuits into a single case and ordered that theplaintiffs in the new lawsuit, none of whom had mediated with us prior to filing the lawsuit, must do so, and that their claims be stayed until theyhave completed mediating with us in good faith.In October 2014, we engaged in mediation with the 22 franchise owner groups who had not previously done so. As a result of that mediation andother efforts, we reached resolution with 13 of the franchise owner groups involved in the consolidated lawsuits, and their claims have either beendismissed 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 our former and current franchise sales staff as additional individual defendants. InSeptember 2016, the remaining 15 franchise owner groups in the consolidated lawsuits filed an amended complaint to add a claim under theWashington Consumer Protection Act based on substantially the same allegations as the prior claims, to re-plead claims under the WashingtonFranchise Investment Protection Act that had previously been dismissed, and to dismiss Dan Harmon as a defendant.In June 2017, the parties moved for summary judgment. We 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 againstall defendants on their Washington Consumer Protection Act and Washington Franchise Investment Protection Act claims. A hearing on thesummary judgment motions was held on October 13, 2017. In July 2017, we engaged in mediation with the remaining 15 franchise owner groups in the consolidated lawsuits. As a result of that mediationand other efforts, we reached resolutions with six of the remaining franchise owner groups, and their claims have been dismissed.As before, we believe the allegations in this litigation lack merit and, for those plaintiffs with whom we are unable to reach resolution, we willcontinue to vigorously defend our interests, including by asserting a number of affirmative defenses and, where appropriate, counterclaims. Weprovide no assurance that we will be successful in our defense of these lawsuits; however, we do not currently expect the cost of resolving themto have a material adverse effect on our consolidated financial position, results of operations, or cash flows.We are from time to time involved in litigation, certain other claims and arbitration matters arising in the ordinary course of our business. Weaccrue for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significantjudgment 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 andtechnical experts and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility (within themeaning of Accounting Standards Codification (“ASC”) 450) that losses could exceed amounts already accrued, if any, and the additional loss orrange of loss is able to be estimated, we disclose the additional loss or range of loss.28Table of ContentsIn some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make itdifficult to predict the impact a particular lawsuit will have on our business. There are many reasons that we 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 ofassessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share inany ultimate liability; and/or the often slow pace of litigation.We are named as a defendant in a putative class action lawsuit filed by plaintiff John Lennartson on May 7, 2015, in the United States DistrictCourt for the Western District of Washington. The lawsuit alleges we failed to comply with the requirements of the Telephone Consumer ProtectionAct (TCPA) when we sent SMS text messages to consumers. Mr. Lennartson asks that the court certify the putative class and that statutorydamages under the TCPA be awarded to plaintiff and each class member. On October 14, 2016, the Federal Communications Commission (FCC)granted us a limited waiver from the TCPA’s written consent requirements for certain text messages that we sent up through October 16, 2013 toindividuals who, like Mr. Lennartson, provided written consent prior to October 16, 2013. On October 20, 2016, we filed a motion for summaryjudgment seeking dismissal. On October 27, 2016, Mr. Lennartson filed a motion seeking to extend the time to respond to the summary judgmentmotion 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 hisresponse to our summary judgment motion until he can 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 thereforedifferently situated from Mr. Lennartson, as well as additional Washington state law claims. On October 27, 2017, plaintiffs moved to certify theirputative class, which we opposed, and on November 22, 2017, we moved for summary judgment on all of plaintiffs’ claims. We and the plaintiffshave commenced negotiations regarding the proposed terms of a settlement agreement, and the Court has issued a stay of the case for 30 dayswhile the parties pursue settlement negotiations. Successful completion of these negotiations, in addition to necessary court approvals and otherconditions, would result in the final resolution of the lawsuit; however, we provide no assurance that any final settlement agreement will be reachedby the parties or approved by the Court, or that the lawsuit will be finally resolved. An adverse judgment or settlement related to this lawsuit couldhave a material adverse effect on our consolidated financial position, results of operations, or cash flows.In addition to the foregoing, we are subject to routine legal proceedings, claims, and litigation in the ordinary course of our business. We also mayengage in future litigation with franchise owners to enforce the terms of our franchise agreements and compliance with our brand standards asdetermined necessary to protect our brand, the consistency of our products, and the customer experience. Lawsuits require significantmanagement attention and financial resources and the outcome of any litigation is inherently uncertain. We do not, however, expect that the coststo resolve these routine matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.Item 4. Mine Safety DisclosuresNot applicable.29Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity SecuritiesOur common stock has traded on the NASDAQ Global Select Market under the symbol FRSH since it began trading on May 2, 2014. Our initialpublic offering was priced at $11.00 per share on May 1, 2014. The following table sets forth, for the periods indicated, the highest and lowestintraday sales prices per share of our common stock as reported on the NASDAQ Global Select Market. High LowFiscal Year 2016 First quarter (December 29, 2015 - March 28, 2016)$12.15 $8.45Second quarter (March 29, 2016 - June 27, 2016)$12.96 $6.48Third quarter (June 28, 2016 - September 26, 2016)$7.80 $5.15Fourth quarter (September 27, 2016 - January 2, 2017)$6.88 $3.56Fiscal Year 2017 First quarter (January 3, 2017 - April 3, 2017)$5.33 $3.88Second quarter (April 4, 2017 - July 3, 2017)$6.80 $3.92Third quarter (July 4, 2017 - October 2, 2017)$6.21 $3.50Fourth quarter (October 3, 2017 - January 1, 2018)$6.50 $5.30On March 7, 2018, we had approximately 34 stockholders of record of our common stock. These figures do not include beneficial owners who holdshares in nominee name.The Company did not repurchase any shares during the quarter ended January 1, 2018. The Company does not have any share repurchaseprograms in effect.DividendsNo dividends have been declared or paid on our shares of common stock and we do not intend to pay dividends on our common stock in theforeseeable future. We currently expect to retain all available funds and future earnings, if any, for use in the operation, development andexpansion of our business. However, in the future, we may change this policy and choose to pay dividends. Any future determination to pay cashdividends will be at the discretion of our Board of Directors and will depend on then-existing conditions, including our financial condition, operatingresults, business prospects, capital requirements, results of operations and other factors that our Board of Directors considers relevant.We are a holding company that does not conduct any business operations of our own. As a result, our ability to pay cash dividends on ourcommon stock is dependent upon cash dividends and distributions and other transfers from our subsidiaries. The ability of our subsidiaries to paydividends is restricted by the terms of our senior secured credit facility. For additional information regarding our financial condition and restrictionson the ability of our subsidiaries to pay dividends, see Management’s Discussion and Analysis of Financial Condition and Results of Operationsand Note 9 — Financing Arrangements of the accompanying Notes to Consolidated Financial Statements, respectively.30Table of ContentsPerformance GraphThe following graph demonstrates a comparison of cumulative total returns for Papa Murphy’s common stock, the Standard & Poor’s 500 StockIndex, the NASDAQ Composite Index, and the Standard & Poor’s 400 Restaurants Index over the period from May 1, 2014, (using the price ofwhich our shares of common stock were initially sold to the public) to January 1, 2018. The comparison assumes $100 was invested in PapaMurphy’s common stock on May 1, 2014, and in each of the aforementioned indices. Cumulative total returns for each of the indices assumes thatall dividends were reinvested on the day of issuance.Historical stock price performance should not be relied on as indicative of future stock price performance.31Table of ContentsItem 6. Selected Financial DataWe derived the selected consolidated statements of operations and cash flows data for fiscal years 2017, 2016, and 2015 and the selectedconsolidated balance sheet data as of January 1, 2018, and January 2, 2017, from our audited consolidated financial statements and related notesthereto included in Financial Statements and Supplementary Data. We derived the selected consolidated statements of operations and cash flowsdata for fiscal years 2014 and 2013 and the selected consolidated balance sheet data as of December 28, 2015, December 29, 2014, andDecember 30, 2013, from our audited consolidated financial statements and related notes thereto not included in this report. Fiscal year 2016 wasa 53-week period while all other fiscal years reported were 52-week periods.Our historical results are not necessarily indicative of future operating results. You should read the information set forth below together withManagement’s Discussion and Analysis of Financial Condition and Results of Operations and Financial Statements and Supplementary Data andthe related Notes to Consolidated Financial Statements. FISCAL YEAR(in thousands, except share and per share data)2017 2016 2015 2014 2013Consolidated Statement of Operations Data: Revenues Franchise royalties$37,552 $39,851 $40,243 $39,305 $36,897Franchise and development fees2,220 2,912 4,222 4,531 4,330Company-owned store sales76,868 82,080 74,300 50,598 39,148Other2,021 2,040 1,444 2,965 120Total revenues118,661 126,883 120,209 97,399 80,495Costs and Expenses Store operating costs: Cost of food and packaging25,958 28,347 26,603 19,686 14,700Compensation and benefits23,603 23,746 19,858 12,673 10,687Advertising8,221 8,203 7,888 5,041 3,820Occupancy7,043 6,226 4,750 2,873 2,365Other store operating costs8,102 10,268 7,517 4,434 3,988Selling, general, and administrative33,870 28,108 28,207 29,263 24,180Depreciation and amortization10,452 12,236 10,002 8,052 6,973Loss (gain) on disposal or impairment of property and equipment15,680 101 (251) 72 847Total costs and expenses132,929 117,235 104,574 82,094 67,560Operating (Loss) Income(14,268) 9,648 15,635 15,305 12,935Interest expense, net5,078 4,868 4,523 8,025 10,429Loss on early retirement of debt— — — 4,619 4,029Loss on impairment of investments— — 4,500 — —Other expense, net204 188 133 178 44(Loss) Income Before Income Taxes(19,550) 4,592 6,479 2,483 (1,567)(Benefit from) provision for income taxes(19,543) 1,943 2,068 1,235 1,024Net Income (Loss)(7) 2,649 4,411 1,248 (2,591)Net loss attributable to noncontrolling interests— — 500 — 19Net Income (Loss) Attributable to Papa Murphy’s$(7) $2,649 $4,911 $1,248 $(2,572) Earnings (loss) per common share: Basic (1)$— $0.16 $0.29 $(0.07) $(2.34)Diluted (1)— 0.16 0.29 (0.07) (2.34)Weighted average common stock outstanding: Basic16,870,013 16,743,285 16,653,127 12,101,236 3,847,861Diluted16,870,013 16,773,493 16,870,693 12,101,236 3,847,861 32Table of Contents FISCAL YEAR(in thousands, except share and per share data)2017 2016 2015 2014 2013Consolidated Statement of Cash Flows: Net cash provided by operating activities$15,537 $16,804 $23,743 $15,509 $9,874Net cash used in investing activities(1,648) (19,390) (19,554) (9,527) (15,249)Net cash (used in) provided by financing activities(13,784) (2,212) (2,378) (4,631) 6,613 AS OF(in thousands)January 1, 2018 January 2, 2017 December 28, 2015 December 29, 2014 December 30, 2013Consolidated Balance Sheet Data: Cash and cash equivalents$2,174 $2,069 $6,867 $5,056 $3,705Total current assets9,352 13,116 18,896 14,991 14,521Total assets246,174 273,872 275,471 264,127 258,712Total current liabilities27,846 22,900 24,149 18,558 17,965Total debt (2)95,900 109,679 112,200 115,000 170,000Total Papa Murphy’s Holdings, Inc. shareholders’ equity102,171 101,496 97,656 91,298 33,925Net working capital (3)(18,494) (9,784) (5,253) (3,567) (3,444)(in thousands, except selected operating data, unless otherwise noted)FISCAL YEAR2017 2016 2015 2014 2013Other Financial Data: Capital expenditures (4)3,987 18,010 10,430 4,067 3,037Selected Operating Data: Number of stores at end of period Domestic franchised1,338 1,369 1,369 1,342 1,327Domestic Company-owned145 168 127 91 69International40 40 40 28 22Total1,523 1,577 1,536 1,461 1,418 Number of comparable stores at end of period (5) Domestic franchised1,298 1,298 1,279 1,247 1,226Domestic Company-owned145 136 110 88 68International35 35 28 20 17Total1,478 1,469 1,417 1,355 1,311AWS per store (whole dollars) (6)$10,589 $10,958 $11,651 $11,480 $11,099Comparable store sales growth (decline) (7)(4.0)% (5.2)% 1.9% 4.5% 2.8%System-wide sales (8)$846,864 $898,709 $892,249 $849,682 $785,630System-wide sales growth (decline) (9)(5.8)% 0.7 % 13.6% 8.2% 6.3%(1)Basic and Diluted EPS is a loss for 2014 as a result of cumulative dividends to preferred stockholders prior to our IPO.(2)Represents total outstanding indebtedness, including current portion and excluding unamortized deferred financing costs.(3)Represents total current assets less total current liabilities.(4)Represents cash paid for long-lived asset capital expenditures related to the acquisition of property and equipment and excludes expenditures relating to acquisitions ofbusinesses and the acquisition of property and equipment in accounts payable.(5)A comparable store is a store that has been open for at least 52 weeks from the comparable date, which is the Tuesday following the opening date.(6)AWS consists of the average weekly sales of domestic franchised and Company-owned stores over a specified period of time. AWS is calculated by dividing the total netsales of our system-wide stores for the relevant time period by the number of weeks these same stores were open in such time period.(7)System-wide comparable store sales growth (decline) represents year-over-year sales comparisons for comparable domestic stores.(8)System-wide sales include net sales by all of our system-wide stores.(9)System-wide sales growth represents year-over-year sales comparisons for system-wide sales.33Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Resultsof OperationsThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with Selected FinancialData and Financial Statements and Supplementary Data and the related Notes to Consolidated Financial Statements. To match our operatingcycle, we use a 52- or 53-week fiscal year, ending on the Monday nearest to December 31. Our fiscal quarters each contain 13 operating weeks,with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. Fiscal year 2017 was a 52-week period endedon January 1, 2018; fiscal year 2016 was a 53-week period ended on January 2, 2017; and fiscal year 2015 was a 52-week period ended onDecember 28, 2015.Cautionary Note Regarding Forward-Looking StatementsIn addition to historical information, this discussion and analysis contains “forward-looking statements” within the meaning of the U.S. PrivateSecurities Litigation Reform Act of 1995 that involve risks and uncertainties. Our actual results may differ materially from those anticipated inthese forward-looking statements as a result of certain factors including, but not limited to, those discussed in the section entitled “Risk Factors” inthis Annual Report on Form 10-K. All statements other than statements of historical fact or relating to present facts or current conditions includedin this discussion and analysis are forward-looking statements. Forward-looking statements give our current expectations and projections relatingto our financial condition, results of operations, plans, objectives, future performance, and business. You can identify forward-looking statementsby the fact that they do not relate strictly to historical or current facts. Examples of forward-looking statements include those regarding our futurefinancial or operating results, cash flows, sufficiency of liquidity, prospects for refinancing, operating margins, capital expenditures and workingcapital needs, refranchising initiative and the intended use of proceeds from refranchising, effects of refranchising initiative on operating results,reduction in Company-owned stores, franchise store growth, mix of new store openings, strategic initiatives, trends in average check size foronline orders, growth in online ordering and benefits from utilization of e-commerce platform, plans for delivery and demand for delivery among ourcustomers, plans for a loyalty program, our marketing strategy, effects of national television advertising, rate of increase of selling, general, andadministrative expenses compared to increases in revenue, plans to optimize and prioritize spending, benefits of providing franchise ownersaccess to real-time store performance metrics, business strategies and priorities, market opportunities, future government policies and regulatorychanges, resolution of litigation and claims, expansion and growth opportunities, economies of scale achieved by growth, effects on earnings fromacquisitions, plans for dividend payments, seasonal fluctuations, adoption of new accounting standards and the estimated effects of those newstandards, exposure to foreign currency and interest rate risk, as well as industry trends and outlooks. These statements may include words suchas “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely,” and other words and terms of similarmeaning 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 industryexperience and our perceptions of historical trends, current conditions, expected future developments, and other factors we believe are appropriateunder the circumstances. As you read and consider this discussion and analysis, you should understand that these statements are not guaranteesof performance or results. They involve risks, uncertainties (many of which are beyond our control), and assumptions. Although we believe thatthese forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operatingand financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements. Webelieve these factors include, but are not limited to, those described under the section entitled “Risk Factors” in this Annual Report on Form 10-K.Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual operating andfinancial 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 thatcould 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 ofthem. 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.34Table of ContentsOverviewPapa Murphy’s is a franchisor and operator of the largest Take ‘N’ Bake pizza chain in the United States and the fifth largest pizza chain overall.We operate through a footprint of 1,523 stores, of which 90.5% are franchised, located in 39 states plus Canada and the Middle East.Our financial results are driven largely by system-wide sales at our franchised and Company-owned stores. System-wide sales are driven bychanges in comparable store sales and store counts, which translate into royalty payments from franchise owners, as well as Company-ownedstore revenues. Total revenues can be impacted by the acquisition of franchised stores or the refranchising of Company-owned stores.Our model offers operating advantages that differentiate us from other restaurant concepts. Our domestic stores (i) do not require ovens, ventinghoods, freezers, or dining areas because our customers bake their pizzas at home; (ii) maintain shorter operating hours (typically 11:00 a.m. to9:00 p.m.) that are attractive to franchise owners and their employees; (iii) require fewer employees during each shift compared to other restaurantconcepts, resulting in lower labor costs; and (iv) accept EBT payment systems (food stamps).The relatively moderate initial investments and low operating costs required to own and operate a Papa Murphy’s store create the opportunity forhigh margins and attractive returns. We believe the low cost structure, simple operations, strong brand message supported by high levels ofadvertising spending, and high-quality menu offerings drive attractive store-level economics, which, in turn, drive demand for new stores.2017 ReviewRevenuesTotal revenues declined 6.5% from $127 million in 2016 to $119 million in 2017 due primarily to a decline in the number of franchised andCompany-owned stores and a decline in comparable store sales. In addition, 2016 contained a 53rd week of operations, which contributed anadditional $2.7 million in revenue. System-wide sales declined 5.8% from $899 million in 2016 to $847 million in 2017 as a result of a net reductionof 54 stores during the year and a decline in comparable store sales. Comparable store sales (decline) growth for selected segments during theperiods reported was as follows: Fiscal Year 2017 2016 2015Domestic Franchise(3.8)% (5.0)% 1.9%Domestic Company Stores(5.5)% (7.3)% 1.8%Total domestic stores(4.0)% (5.2)% 1.9%The decline in comparable store sales in 2017 and 2016 resulted from reduced transactions. We believe the reduction in transactions was a resultof suboptimal consumer messaging and inconsistent store-level execution. Comparable store sales growth in 2015 primarily resulted from anincreased average check due to targeted price increases and the launch of our Gourmet Delite product category in the fourth quarter of 2014.Store Development and RefranchisingDuring 2017, we and our franchise owners opened 35 stores, including 31 in the United States. While we operate a small percentage of stores asCompany-owned stores, we expect the majority of our new store expansion to continue to come from new franchised store openings.Through 2016, we have focused our financial resources on accelerating the build out of several markets with Company-owned stores. Consistentwith our strategy, we are now working to refranchise a significant number of our Company-owned stores to experienced and well-capitalizedfranchisees who can further grow these markets. In May 2017, we successfully refranchised seven Company-owned stores pursuant to thisstrategy. Our target is to continue reducing the number of Company-owned stores to no more than 50 stores by 2020.35Table of ContentsE-commerceWe began the system-wide roll-out of an e-commerce platform in early 2016 and have seen positive results to date as the average transactionamount continues to be about 20% higher with online orders than in-store orders. We strategically use online-only promotions communicatedthrough text and email messaging. In June 2017, we announced plans to accelerate our convenience strategy by moving our online orderingsystem to a third-party’s platform, which will also enable online and mobile ordering to be fully integrated with third-party marketplace and deliveryservices, where available. As part of the transition, we recognized a non-cash charge of $9.1 million before taxes related to the impairment of oure-commerce platform in the second quarter of 2017.Store ClosuresIn 2017, a total of 89 stores were closed system-wide, including 16 Company-owned stores. In connection with the Company-owned storeclosures, we recognized asset impairment charges of $2.3 million before taxes and recorded lease loss reserves related to remaining contractuallease obligations of $1.0 million before taxes.Company-owned Store Asset ImpairmentIn the third quarter of 2017, as part of our impairment analysis of the book value of the property and equipment associated with our Company-owned stores, we determined that the book value of our stores in four markets was higher than the fair value of the stores located in thosemarkets. Accordingly, we recognized an asset impairment charge of $4.4 million before taxes during the third quarter of 2017, which impairmentcharge was in addition to the store closure impairment charge described above.National MediaDuring the first quarter of 2017, we tested national advertising for all domestic stores. Several of our markets that historically received notelevision media were provided with a few weeks of national cable advertising. Based upon our analysis, the national advertising did not materiallyaffect our sales trends.Income TaxesIn December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes a number of changes to existingU.S. tax laws that impact the Company, most notably a reduction of the top U.S. corporate income tax rate from 35 percent to 21 percent for taxyears beginning after December 31, 2017. The 2017 Tax Act also provides for the acceleration of depreciation for certain assets placed intoservice after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on executive compensationand limitations on the deductibility of interest. As a result of the 2017 Tax Act, the Company recorded a $12.6 million benefit from income taxes forthe year ended January 1, 2018, and a corresponding $12.6 million decrease in net deferred tax liabilities as of January 1, 2018.Our SegmentsWe operate in three business segments: Domestic Franchise, Domestic Company Stores, and International. Our Domestic Franchise segmentconsists of our domestic franchised stores, which represent the majority of our system-wide stores. Our Domestic Company Stores segmentconsists of our Company-owned stores in the United States. Our International segment consists of our stores outside of the United States, all ofwhich are franchised.We measure the performance of our segments based on segment adjusted EBITDA and allocate resources based primarily on this measure.“EBITDA” is calculated as net income (loss) before interest expense, income taxes, depreciation, and amortization. Segment adjusted EBITDAexcludes certain unallocated and corporate expenses, which include costs related to our board of directors, CEO, CFO, and certain legalexpenses. Although segment adjusted EBITDA is not a measure of financial condition or performance determined in accordance with generallyaccepted accounting principles in the United States (“GAAP”), we use segment adjusted EBITDA to compare the operating performance of oursegments on a consistent basis and to evaluate the performance and effectiveness of our operational strategies. Our calculation of segmentadjusted EBITDA may not be comparable to that reported by other companies.Our measure of segment performance changed beginning in fiscal year 2017. Previously, segment operating income was used as the measure ofsegment performance. Our Chief Operating Decision Maker (“CODM”) now uses segment adjusted36Table of ContentsEBITDA as the primary measure of segment performance to allocate resources. The CODM believes this measure provides an enhanced basis forconsistently measuring segment performance against operational objectives and strategies.The following table presents our revenues, segment adjusted EBITDA, and depreciation and amortization for each of our segments for the periodspresented: Fiscal Year(in thousands)2017 2016 2015Revenues Domestic Franchise$41,421 $44,434 $45,579Domestic Company Stores76,868 82,080 74,300International372 369 330Total$118,661 $126,883 $120,209Segment Adjusted EBITDA Domestic Franchise$24,195 $23,772 $26,142Domestic Company Stores2,751 2,808 5,943International315 300 268Total reportable segments adjusted EBITDA27,261 26,880 32,353Corporate and unallocated(7,417) (5,184) (6,678)Depreciation and amortization(10,452) (12,236) (10,002)Interest expense, net(5,078) (4,868) (4,524)Secondary offering costs(1)— — (345)Loss on Project Pie impairment and disposal(2)— — (4,325)CEO transition and restructuring(3)(2,614) — —E-commerce impairment(4)(9,085) — —Store closures and impairments(5)(7,712) — —Litigation settlements(6)(4,453) — —(Loss) Income Before Income Taxes$(19,550) $4,592 $6,479Depreciation and amortization Domestic Franchise$5,891 $6,606 $5,392Domestic Company Stores4,530 5,599 4,579International31 31 31Total$10,452 $12,236 $10,002(1)Represents costs related to the secondary offering of the Company’s common stock.(2)Represents a $4 million loss recognized upon impairment of Project Pie, LLC, a cost-method investment, and its subsequent disposal, and the write-off as bad debtreceivables totaling $325,000.(3)Represents non-recurring management transition and restructuring costs in connection with the departure of our former Chief Executive Officer and other executivesand the recruitment of a new Chief Executive Officer and other executive positions.(4)Represents impairment of our e-commerce platform based on the decision to move to a third party developed and hosted solution.(5)Represents non-cash charges associated with the disposal or impairment of store assets upon the determination that the book value of certain stores was higherthan the fair value of those stores, plus lease buyouts and reserves for the residual contractual lease obligations on closed stores.(6)Payments and accruals made toward franchisee settlements and litigation reserves.37Table of ContentsKey Operating MetricsWe evaluate the performance of our business using a variety of operating and performance metrics. Set forth below is a summary and descriptionof our key operating metrics. 2017 2016 2015Domestic store average weekly sales (AWS)$10,589 $10,958 $11,651Domestic comparable store sales growth (decline)(4.0)% (5.2)% 1.9%Domestic comparable stores1,443 1,434 1,389System-wide sales (in thousands)$846,864 $898,709 $892,249Number of system-wide stores at period end1,523 1,577 1,536Adjusted EBITDA (in thousands)$19,844 $21,696 $26,174 Average Weekly Sales (AWS)AWS consists of the average weekly sales of domestic franchised and Company-owned stores over a specified period of time. AWS is calculatedby dividing the total net sales of our domestic system-wide stores for the relevant time period by the number of weeks these stores were open insuch time period. This measure allows management to assess changes in customer traffic and spending patterns in our domestic stores.Comparable Store Sales GrowthComparable store sales growth represents the change in year-over-year sales for comparable stores. A comparable store is a store that has beenopen for at least 52 full weeks from the comparable date (the Tuesday following the opening date). Comparable store sales growth reflectschanges in the number of transactions and in customer spend per transaction at existing stores. Customer spend per transaction is affected bychanges in menu prices, sales mix, and the number of items sold per customer.System-Wide SalesSystem-wide sales include net sales by all of our system-wide stores. This measure allows management to assess the health of our brand, ourrelative position to competitors, and assess changes in our royalty revenues.Store Openings, Closures, Acquisitions, and DivestituresWe review the number of new stores, the number of closed stores, and the number of acquired and divested stores to assess growth (decline) insystem-wide sales, royalty revenues, and Company-owned store sales.38Table of ContentsThe following table presents the changes in the number of stores in our system for fiscal 2017, 2016, and 2015. DomesticCompany Stores DomesticFranchise Total Domestic International TotalStore count at 12/29/201491 1,342 1,433 28 1,461Openings18 81 99 12 111Closings(1) (35) (36) — (36)Net transfers19 (19) — — —Store count at 12/28/2015127 1,369 1,496 40 1,536Openings35 69 104 5 109Closings(1) (62) (63) (5) (68)Net transfers7 (7) — — —Store count at 1/2/2017168 1,369 1,537 40 1,577Openings— 31 31 4 35Closings(16) (69) (85) (4) (89)Net transfers(7) 7 — — —Store count at January 1, 2018145 1,338 1,483 40 1,523EBITDA and Adjusted EBITDATo supplement our 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 onany standardized methodology prescribed by GAAP and are not necessarily comparable to similarly-titled measures presented by othercompanies.“Adjusted EBITDA” is calculated as net (loss) income before interest expense, income taxes, depreciation, and amortization (“EBITDA”) asadjusted for the effects of items that we do not consider indicative of our operating performance. Adjusted EBITDA is a supplemental measure ofoperating performance that does not represent and should not be considered as an alternative to net (loss) income, as determined by GAAP, andour 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 operationsin accordance with GAAP and our reconciliation of Adjusted EBITDA to net (loss) income, provides additional information to investors aboutcertain 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, our results of operations, and assisting investors in evaluating how well weare executing strategic initiatives. We believe Adjusted EBITDA is used by investors as a supplemental measure to evaluate the overall operatingperformance 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 asreported 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 principalpayments on our debt;▪Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in thefuture 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 reviewGAAP measures and evaluate individual measures that are not included in Adjusted EBITDA.39Table of ContentsThe following table provides a reconciliation of our net (loss) income to Adjusted EBITDA for the periods presented: Fiscal Year(in thousands)2017 2016 2015Net (Loss) Income$(7) $2,649 $4,411Net loss attributable to noncontrolling interests— — 500Net (Loss) Income Attributable to Papa Murphy’s(7) 2,649 4,911Depreciation and amortization10,452 12,236 10,002Income tax (benefit) provision(19,543) 1,943 2,068Interest expense, net5,078 4,868 4,523EBITDA(4,020) 21,696 21,504Secondary offering costs(1)— — 345Loss on Project Pie impairment and disposal(2)— — 4,325CEO transition and restructuring(3)2,614 — —E-commerce impairment(4)9,085 — —Store closures and impairments(5)7,712 — —Litigation settlements(6)4,453 — —Adjusted EBITDA$19,844 $21,696 $26,174(1)Represents costs related to the secondary offering of the Company’s common stock.(2)Represents a $4 million loss recognized upon impairment of Project Pie, LLC, a cost-method investment, and its subsequent disposal, and the write-off as bad debtreceivables totaling $325,000.(3)Represents non-recurring management transition and restructuring costs plus costs associated with recruitment of a new Chief Executive Officer and Chief FinancialOfficer.(4)Represents impairment of our e-commerce platform based on the decision to move to a third party developed and hosted solution.(5)Represents non-cash charges associated with the disposal or impairment of store assets upon the determination that the book value of certain stores was higherthan the fair value of those stores, plus lease buyouts and reserves for the residual contractual lease obligations on closed stores.(6)Payments and accruals made toward franchisee settlements and litigation reserves.Key Financial DefinitionsRevenuesSubstantially all of our revenues are derived from sales of pizza and other food and beverage products to the general public by Company-ownedstores and the collection of franchise royalties and fees associated with franchise and development rights. Franchise and development feesinclude initial franchise fees charged for opening a new franchised store, successive fees for the renewal of expiring franchise agreements,transfer fees for transferring ownership of a franchise, and deposit forfeitures. “Other revenue,” as used in this report, includes (i) revenues earnedfrom the sublease of real estate under a master lease agreement with a national retailer, (ii) transaction fees from the Company’s online orderingplatform, (iii) fees for customer support services provided to franchisees, and (iv) revenues derived from the resale of POS system licenses tofranchise owners at cost. Lease income is recognized in the period earned, which coincides with the period the expense is due to the masterleaseholder. See Selling, General, and Administrative Costs below for the related offsetting expense to the POS system licenses resold tofranchise owners.Store Operating CostsStore operating costs relate to our Domestic Company Stores segment and consist of cost of food and packaging, compensation and benefits,advertising, occupancy costs, and other store operating costs, including new store pre-opening costs. We expect all of our store operating costs tovary as our store count changes from building, acquiring, closing, and refranchising Company-owned stores. Cost of food and packaging andadvertising can be expected to fluctuate with commodity price changes and increases or decreases in the revenues of our Domestic CompanyStores segment.Selling, General, and Administrative CostsSelling, general, and administrative costs consist of wages, benefits, and other compensation, franchise development expenses, travel, marketing,accounting fees, legal fees, the costs of POS system software licenses sold to franchise40Table of Contentsowners at cost, and other expenses related to the infrastructure required to support our franchised and Company-owned stores. See Revenuesabove for the related offsetting revenue from the POS system software licenses resold to franchise owners. Selling, general, and administrativecosts also include net advertising expenses of an advertising fund we manage on behalf of all domestic stores.Depreciation and AmortizationDepreciation and amortization constitute non-cash charges related to the depreciation of fixed assets, including leasehold improvements andequipment, and the amortization of franchise relationships and reacquired franchise rights relating to our acquisition of certain franchised stores.Results of OperationsThe following table presents our results of operations in dollars and as a percentage of total revenues for the periods reported. Fiscal Year 2017 2016 2015(dollars in thousands)$ Total% ofRevenues $ Total% ofRevenues $ Total% ofRevenuesRevenues Franchise royalties$37,552 31.6 % $39,851 31.4% $40,243 33.5 %Franchise and development fees2,220 1.9 % 2,912 2.3% 4,222 3.5 %Company-owned store sales76,868 64.8 % 82,080 64.7% 74,300 61.8 %Other2,021 1.7 % 2,040 1.6% 1,444 1.2 %Total revenues118,661 100.0 % 126,883 100.0% 120,209 100.0 %Costs and Expenses Store operating costs: Cost of food and packaging (1)25,958 22.0 % 28,347 22.3% 26,603 22.0 %Compensation and benefits (1)23,603 19.9 % 23,746 18.7% 19,858 16.5 %Advertising (1)8,221 6.9 % 8,203 6.5% 7,888 6.6 %Occupancy (1)7,043 5.9 % 6,226 4.9% 4,750 4.0 %Other store operating costs (1)8,102 6.8 % 10,268 8.1% 7,517 6.3 %Selling, general, and administrative33,870 28.5 % 28,108 22.2% 28,207 23.5 %Depreciation and amortization10,452 8.8 % 12,236 9.6% 10,002 8.3 %Loss (gain) on disposal or impairment of property and equipment15,680 13.2 % 101 0.1% (251) (0.2)%Total costs and expenses132,929 112.0 % 117,235 92.4% 104,574 87.0 %Operating (Loss) Income (1)(14,268) (12.0)% 9,648 7.6% 15,635 13.0 %Interest expense, net5,078 4.3 % 4,868 3.9% 4,523 3.8 %Loss on early retirement of debt— — % — —% — — %Loss on impairment of investments— — % — —% 4,500 3.7 %Other expense, net204 0.2 % 188 0.1% 133 0.1 %(Loss) Income Before Income Taxes(19,550) (16.5)% 4,592 3.6% 6,479 5.4 %(Benefit from) provision for income taxes(19,543) (16.5)% 1,943 1.5% 2,068 1.7 %Net (Loss) Income$(7) — % $2,649 2.1% 4,411 3.7 %Net loss attributable to noncontrolling interests— — % — 0.0% 500 0.4 %Net (Loss) Income Attributable to Papa Murphy’s$(7) — % $2,649 2.1% $4,911 4.1 %(1)Please see the table presented in Costs and Expenses below, which presents Company store expenses as a percentage of Company store revenue for 2017,2016, and 2015.41Table of ContentsRevenuesFranchise royalties. The following table presents franchise royalties for the periods reported:(dollars in thousands)2017 Change 2016 Change 2015Franchise royalties$37,552 (5.8)% $39,851 (1.0)% $40,243Percentage of total revenues31.6% 31.4% 33.5%Franchise royalties decreased in 2017 and in 2016 due primarily to decreases in Domestic Franchise comparable store sales of 3.8% and 5.0%,respectively. Franchise royalties in 2017 were also negatively affected by the closure of 73 franchised stores.Franchise and development fees. The following table presents franchise and development fees for the periods reported:(dollars in thousands)2017 Change 2016 Change 2015Franchise and development fees$2,220 (23.8)% $2,912 (31.0)% $4,222Percentage of total revenues1.9% 2.3% 3.5%Franchise and development fees decreased in 2017 due to reductions in initial and successive franchise fees, partially offset by an increase intransfer fees. For 2016, franchise and development fees decreased due to reductions in deposit forfeitures, initial franchise fees, and transfer fees.Company-owned store sales. The following table presents Company-owned store sales for the periods reported:(dollars in thousands)2017 Change 2016 Change 2015Company-owned store sales$76,868 (6.3)% $82,080 10.5% $74,300Percentage of total revenues64.8% 64.7% 61.8%Company-owned store sales decreased in 2017 due to the sale of seven Company-owned stores, the closure of 16 Company-owned stores, and adecline in comparable store sales of 5.5% in the Domestic Company Stores segment.For 2016, Company-owned store sales increased due to the acquisition of 10 stores from franchise owners and the opening of 35 new Company-owned stores, partially offset by a decline in comparable store sales of 7.3% in the Domestic Company Stores segment.Costs and ExpensesStore operating costs. The following table presents store operating costs for the periods reported:(dollars in thousands)2017 Change 2016 Change 2015Store operating costs$72,927 (5.0)% $76,790 15.3% $66,616Percentage of total revenues61.5% 60.5% 55.4%Store operating costs decreased in 2017 primarily as a result of the sale of seven Company-owned stores and the closure of 16 Company-ownedstores during 2017. Store operating costs and the corresponding percentage of total revenues increased in 2016 primarily as a result of the openingof 35 new Company-owned stores and the acquisition of 10 stores from franchise owners during 2016.42Table of ContentsThe following table presents store operating costs as a percentage of Company-owned store sales for the periods reported: Fiscal Year 2017 2016 2015As a % of Company-owned store sales: Cost of food and packaging33.8% 34.5% 35.8%Compensation and benefits30.7% 28.9% 26.7%Advertising10.7% 10.0% 10.6%Occupancy9.2% 7.6% 6.4%Other store operating costs10.5% 12.6% 10.2%Total store operating costs94.9% 93.6% 89.7%Total store operating costs. Total store operating costs as a percentage of Company-owned store sales increased by 130 basis points in 2017compared to 2016 and increased 390 basis points in 2016 compared to 2015, due primarily to the effect of store portfolio changes in selectmarkets and as further explained below:•Occupancy. The increase in occupancy costs as a percentage of Company-owned store sales is primarily a result of lease buyouts orreserves for contractual lease obligations associated with store closures.•Compensation and benefits. Compensation and benefits as a percentage of Company-owned store sales increased primarily due to fixedlabor costs such as store manager salaries representing a larger portion of compensation in lower volume stores. In addition, increases inthe minimum wage have negatively affected several of our established markets.•Other store operating costs. Other store operating costs as a percentage of Company-owned store sales increased in 2016 as a result ofpre-opening costs associated with the opening of 35 Company-owned stores in 2016, compared with 18 openings in 2015 and no openingsin 2017.▪Advertising. The increase in advertising as a percentage of Company-owned store sales in 2017 compared to 2016 was driven primarilyby increased spending on print advertising and Company-owned store contributions to our national advertising campaign. The decrease inadvertising as a percentage of Company-owned store sales in 2016 compared to 2015 was driven by a reduction in spending on printadvertising.Selling, general, and administrative. The following table presents selling, general, and administrative costs for the periods reported:(dollars in thousands)2017 Change 2016 Change 2015Selling, general, and administrative$33,870 20.5% $28,108 (0.4)% $28,207Percentage of total revenues28.5% 22.2% 23.5%Selling, general, and administrative costs increased in 2017 compared to 2016 due primarily to legal settlements and litigation reserves of$4.5 million and severance and restructuring costs of $2.6 million, partially offset by a reduction in employee costs. Selling, general, andadministrative costs decreased in 2016 compared to 2015 primarily due to less deficit spending in the advertising fund and a reduction in employeecosts, partially offset by increased costs for our online ordering system.Depreciation and amortization. The following table presents depreciation and amortization for the periods reported:(dollars in thousands)2017 Change 2016 Change 2015Depreciation and amortization$10,452 (14.6)% $12,236 22.3% $10,002Percentage of total revenues8.8% 9.6% 8.3%Depreciation and amortization decreased in 2017 compared to 2016 primarily due to a reduction in the number of Company-owned stores period-over-period and the impairment of our current e-commerce platform. Depreciation and amortization increased in 2016 compared to 2015 primarilydue to an increase in the number of Company-owned stores and increased capital expenditures on property and equipment for business technologyprojects.43Table of ContentsLoss (gain) on disposal or impairment of property and equipment. The following table presents the Loss (gain) on disposal or impairment ofproperty and equipment for the periods reported:(dollars in thousands)2017 Change 2016 Change 2015Loss (gain) on disposal or impairment of propertyand equipment$15,680 N/M $101 N/M $(251)Percentage of total revenues13.2% 0.1% (0.2)%N/M = Not MeaningfulThe loss recorded in 2017 primarily resulted from an asset impairment charge to our current e-commerce platform of $9.1 million and assetimpairment charges from store closures and the write-down of Company-owned store assets in four markets of $7.7 million in the aggregate,partially offset by gains from the refranchising of Company-owned stores. The loss recorded in 2016 primarily resulted from an asset impairmentcharge of $0.2 million on assets held for sale, partially offset by the gain on the sale of Company-owned stores. The gain recorded in 2015primarily resulted from the sale of Company-owned stores.Interest expense, net. The following table presents net interest expense for the periods reported:(dollars in thousands)2017 Change 2016 Change 2015Interest expense, net$5,078 4.3% $4,868 7.6% $4,523Percentage of total revenues4.3% 3.9% 3.8%Interest expense, net increased in 2017 compared to 2016 as a result of increases in LIBOR lending rates which resulted in a higher weightedaverage interest rate of 4.34% during 2017 compared to 3.77% in 2016, partially offset by a reduction in the balance of outstanding debt throughout2017.Interest expense, net increased in 2016 as a result of a higher weighted average interest rate of 3.77% during 2016 compared to 3.45% in 2015,partially offset by a reduction in the balance of outstanding debt throughout 2016.Income Taxes. The following table presents income taxes for the periods reported:(dollars in thousands)2017 Change 2016 Change 2015(Benefit from) provision for income taxes$(19,543) N/M $1,943 (6.0)% $2,068Percentage of total revenues(16.5)% 1.5% 1.7%Effective tax rateN/M 42.3% 31.9%N/M = Not MeaningfulThe (Benefit from) provision for income taxes decreased in 2017 compared to 2016 due to the corporate tax rate reduction made by the 2017 TaxAct. This tax rate reduction yielded a $12.6 million benefit in 2017. The effective tax rate for 2017 was higher due to a switch to a pre-tax Loss in2017 and a current year benefit created by the 2017 Tax Act corporate tax rate reduction. For 2016, our provision for income taxes decreasedcompared to 2015, primarily due to a decline in Income before Income Taxes, partially offset by an increase in the tax effect of certain permanenttax differences.Segment ResultsDomestic Franchise. The following table presents Domestic Franchise total revenues and Adjusted EBITDA for the periods reported:(dollars in thousands)2017 Change 2016 Change 2015Total revenues$41,421 (6.8)% $44,434 (2.5)% $45,579Percentage of total revenues34.9% 35.0% 37.9%Adjusted EBITDA24,195 1.8 % 23,772 (9.1)% 26,142Total revenues for the Domestic Franchise segment decreased in 2017 compared to 2016 due primarily to a decline in segment comparable storesales of 3.8% and the closure of 73 franchised stores. Total revenues for the Domestic Franchise segment decreased in 2016 compared to 2015due primarily to a decline in segment comparable store sales of 5.0%.44Table of ContentsAdjusted EBITDA for the Domestic Franchise segment increased in 2017 compared to 2016 due primarily to reductions in Selling, general andadministrative costs, partially offset by a reduction in total revenues. Adjusted EBITDA for the Domestic Franchise segment decreased in 2016compared to 2015 due primarily to increased marketing costs as advertising fund expenditures exceeded contributions.Domestic Company Stores. The following table presents Domestic Company Stores total revenues and Adjusted EBITDA for the periodsreported:(dollars in thousands)2017 Change 2016 Change 2015Total revenues$76,868 (6.3)% $82,080 10.5% $74,300Percentage of total revenues64.8% 64.7% 61.8%Adjusted EBITDA2,751 (2.0)% 2,808 (52.8)% 5,943Total revenues for the Domestic Company Stores segment decreased in 2017 compared to 2016 as a result of a decline in segment comparablestore sales of 5.5% and the closure of 16 segment stores. For 2016, Total revenues for the Domestic Company Stores segment increasedcompared to 2015 as a result of the opening of 35 new Company-owned stores and the acquisition of 10 stores from franchise owners, partiallyoffset by a decline in segment comparable store sales of 7.3% and the closure of one store.Adjusted EBITDA for the Domestic Company Stores segment decreased in 2017 compared to 2016 as a result of a decline in comparable storesales of 5.5%, partially offset by savings generated from the closing of 16 underperforming stores. For 2016, Adjusted EBITDA for the DomesticCompany Stores segment decreased compared to 2015 as a result of a decline in comparable store sales of 7.3%, increased depreciation andamortization as a result of adding 41 total Company-owned stores, and increased pre-opening costs due to more new store openings.International. The following table presents International total revenues and Adjusted EBITDA for the periods reported:(dollars in thousands)2017 Change 2016 Change 2015Total revenues$372 0.8% $369 11.8% $330Percentage of total revenues0.3% 0.3% 0.3%Adjusted EBITDA315 5.0% 300 11.9% 268Total revenues for the International segment increased in 2017 and 2016 largely as a result of increased royalties from product sales. AdjustedEBITDA for the International segment increased in 2017 and 2016 largely as a result of increased royalties from product sales.Liquidity and Capital ResourcesOur primary sources of liquidity are cash flows from operating activities and proceeds from the incurrence of debt, which together are sufficient tofund our operations, tax payments, capital expenditures, interest, fees, and principal payments on our debt as well as to support our growthstrategy. As a public company, we may also raise additional capital through the sale of equity. Our ability to obtain additional financing will dependon 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. We have also initiated a refranchising initiative to reduceour Company-owned stores to about 50 by 2020. We intend to use the net cash proceeds from refranchising to reduce debt.As of January 1, 2018, we had cash and cash equivalents of $2.2 million and a $20.0 million revolving credit facility, of which none was drawn. Asof January 1, 2018, we had $95.9 million of outstanding indebtedness and principal payments of $2.1 million are due quarterly. We believe that ourcash flows from operations, available cash and cash equivalents, and available borrowings under our revolving credit facility will be sufficient tomeet our liquidity needs for at least the next 12 months.As of January 1, 2018, we were in compliance with all of our covenants and other obligations under our senior secured credit facility.While we believe that we will have the ability to refinance our senior secured credit facility when it matures in 2019, we do not assure you that wewill be able to refinance our credit facility on acceptable terms, if at all.45Table of ContentsCash FlowsThe following table presents a summary of cash flows from operating, investing, and financing activities for the periods presented: Twelve Months Ended(in thousands)2017 2016 2015Net cash provided by operating activities$15,537 $16,804 $23,743Net cash used in investing activities(1,648) (19,390) (19,554)Net cash used in financing activities(13,784) (2,212) (2,378)Total cash flows$105 $(4,798) $1,811Operating ActivitiesNet cash provided by operating activities decreased by $1.3 million in 2017 compared to 2016 primarily due to a $2.7 million decrease in netincome, partially offset by the timing of changes in working capital. Net cash provided by operating activities decreased by $6.9 million in 2016compared to 2015 primarily due to a $1.8 million decrease in net income and the timing of changes in working capital.Investing ActivitiesIn 2017, net cash used in investing activities decreased by $17.7 million compared to 2016 primarily due to a $14.0 million decrease in capitalspending as a result of a reduction in spending on the construction of new Company-owned stores and a $2.6 million decrease in cash paid forstore acquisitions. In 2016, net cash used in investing activities decreased by $0.2 million over 2015 because we did not make additionalinvestments in Project Pie, a cost-method investee, and we did not issue any new notes receivable, the combination of which reduced cash usedin investing activities by $0.8 million. This savings was offset in part by a $7.6 million increase in capital spending, primarily on the construction ofnew stores and our new e-commerce online ordering platform and a $7.1 million decrease in cash paid for store acquisitions.Financing ActivitiesNet cash used in financing activities increased in 2017 by $11.6 million primarily due to an increase in net long-term debt payments of $11.9million. Net cash used in financing activities decreased in 2016 by $0.2 million primarily due to a reduction in net long-term debt payments of $0.3million.Contractual ObligationsAs of January 1, 2018, our contractual obligations and other commitments were as follows: Payments Due by Period(in millions)Total Less than 1year 1-3 years 3-5 years More than 5yearsLong-term debt obligations$95.9 $8.4 $87.5 $— $—Operating lease obligations20.1 5.2 8.2 3.8 2.9Total (1)$116.0 $13.6 $95.7 $3.8 $2.9(1)We have a technology license contract that provides for a purchase commitment which results in our being contingently liable for licenses not purchased by us or ourfranchise owners. We are contingently liable under this agreement for approximately $0.5 million annually through 2018 and considering various factors includinginternal forecasts, prior history, and the ability to use or resell any licenses purchased under this commitment in future periods, no accrual was required related to thiscommitment. This amount is not included in the table above because timing of payment, if any, is uncertain.Off-Balance Sheet ArrangementsWe have guaranteed certain operating lease payments related to specified franchised stores in connection with the divestiture and refranchising ofCompany-owned stores. The maximum aggregate potential liability associated with the guaranteed lease payments is $1.8 million. We believe thatnone of these guarantees has or is likely to have a material effect on our results of operations, financial condition, or liquidity. Additionalinformation on guaranteed lease payments can46Table of Contentsbe found in the “Lease guarantees” section of Financial Statements and Supplementary Data in Note 15 — Commitments and Contingencies of theaccompanying Notes to Consolidated Financial Statements.Critical Accounting PoliciesOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which havebeen prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate our judgments andestimates, including those related to revenue recognition, accounts and notes receivable, goodwill and other intangible assets, impairment of long-lived assets, income taxes, advertising and marketing costs, and share-based compensation. We base our estimates on historical experience andon various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates underdifferent assumptions or conditions. We believe that our most critical accounting policies and estimates are:Revenue recognitionSales from Company-owned stores are recognized as revenue when the products are provided to customers. We report revenues net of salestaxes collected from customers and remitted to government taxing authorities. Royalty fees are based on a percentage of sales and are recordedas revenues as the fees are earned and become receivable from the franchise owner. Lease income is recognized in the period earned, whichgenerally coincides with the period the expense is due to the master leaseholder, if a sublease.Consideration for franchise and development fees that are received in advance of being earned are included as unearned franchise anddevelopment fees in our Consolidated Balance Sheets. For fees paid on an installment basis that have otherwise been earned, recognition ofrevenue is deferred until collectability is certain.Franchise fees are recognized as revenue when all material services or conditions relating to the store have been substantially performed orsatisfied by us, which is typically when a new franchised store begins operations or on the commencement date of the successive franchiseagreement. Development fees for the right to develop stores in specific geographic areas are recognized as revenue when all material services orconditions relating to the sale have been substantially performed, which is typically when the first franchised store begins operations in thedevelopment area. Development fees determined based on the number of stores to open in an area are deferred and recognized on a pro rata basisafter individual franchise agreements are executed for the stores subject to the development agreements and the stores begin operations.Revenue from gift cards is recognized when the gift card is redeemed by a customer in one of our stores. Revenue is not recognized for gift cardsredeemed in franchised stores. When the likelihood of a gift card being redeemed by a customer is determined to be remote and the Companyexpects to be entitled to the breakage, then the value of the unredeemed gift card is recognized by us as a contribution (“gift card breakage”) to theadvertising fund described below. We determine the gift card breakage rate based upon Company-specific historical redemption patterns.Accounts and notes receivableAccounts receivable consist primarily of (a) amounts due from franchise owners for continuing fees that are collected weekly, (b) receivables forsupply chain vendor rebates, (c) subleased retail rents, and (d) other miscellaneous receivables. Accounts receivable are stated net of anallowance for doubtful accounts determined by management through an evaluation of specific accounts, considering historical losses and existingeconomic conditions where relevant.Notes receivable consist primarily of amounts due from sales of Company-owned stores. Management reviews the notes receivable on a periodicbasis and evaluates the creditworthiness and financial condition of the counterparty to determine the appropriate allowance, if any. In certaincases, we will choose to modify the terms of a note to help a store owner achieve certain profitability targets or to accommodate a store ownerwhile the store owner obtains third party financing. If the store owner does not repay the note, we have the contractual right to take back ownershipof the store based on the underlying franchise agreement, which therefore minimizes the credit risk to us.47Table of ContentsGoodwill and other intangible assetsGoodwill arises from business combinations and represents the excess of the purchase consideration transferred over the fair value of the netassets acquired, including identifiable intangible assets and liabilities assumed. The majority of our goodwill was generated in May 2010 when LeeEquity acquired all of the equity interests of PMI Holdings, Inc. (“Lee Equity Acquisition”), though we have also recognized goodwill upon theacquisition of stores from franchise owners. Goodwill is assigned to reporting units for purposes of impairment testing.We consider our trade name and trademarks to be indefinite-lived intangible assets. These assets were initially recognized in May 2010 upon theLee Equity Acquisition. Our intangible assets that are not indefinite-lived include franchise relationships and reacquired franchise rights.Goodwill and intangible assets determined to have an indefinite life are not amortized, but are tested for impairment annually, or more often if anevent occurs or circumstances change that indicate an impairment might exist. Management evaluates indefinite-lived assets each reportingperiod to determine whether events and circumstances continue to support an indefinite useful life. Intangible assets with finite lives are amortizedover their estimated useful lives on a straight-line basis and tested for impairment together with long-lived assets.In performing our annual goodwill impairment test, we have the option to first assess qualitative factors to determine whether the existence ofevents or circumstances leads to a determination that it is not “more likely than not” that the fair value of a reporting unit is less than its carryingamount. If we determine that it is more likely than not, we perform the two-step quantitative goodwill impairment test. Under the two-stepquantitative goodwill impairment test, the fair value of the reporting unit is compared to its respective carrying amount, including goodwill. If the fairvalue exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the fair value, further analysis is performed todetermine the amount of the impairment. Both the qualitative and quantitative assessments are completed separately with respect to the goodwillof each of our reporting units. We review goodwill for impairment annually, as of the first day of our fourth fiscal quarter, or more frequently ifindicators of impairment exist. We can bypass the qualitative assessment and move directly to the quantitative assessment for any reporting unitin any period and can elect to resume performing the qualitative assessment in any subsequent period.Most of our goodwill is attributed to and tested for impairment at the Domestic Franchise segment, which is considered one reporting unit, as thesegment does not have any components of a business for which discrete financial information is available and is regularly reviewed by segmentmanagement.In performing our annual impairment test for indefinite-lived intangible assets, we have the option to first assess qualitatively whether it is morelikely than not that the indefinite-lived intangible asset is impaired, thus necessitating a quantitative impairment test. We do not calculate the fairvalue of an indefinite-lived asset and perform the quantitative test unless we determine that it is more likely than not that the asset is impaired. Wereview indefinite-lived intangible assets for impairment annually, as of the first day of our fourth fiscal quarter, or more frequently if indicators ofimpairment exist. We can bypass the qualitative assessment and move directly to the quantitative assessment for any indefinite-lived intangibleasset in any period and can elect to resume performing the qualitative assessment in any subsequent period.Impairment of long-lived assetsLong-lived assets are evaluated for recoverability of the carrying amount whenever events and circumstances indicate the carrying amount of anasset may not be fully recoverable. Some of the events or changes in circumstances that would trigger an impairment review include, but are notlimited to, significant under-performance relative to expected and/or historical results (such as two years of comparable store sales decrease ortwo years of negative operating cash flows), significant negative industry or economic trends, or knowledge of transactions involving the sale ofsimilar property at amounts below the carrying value.Assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent ofthe cash flows of other assets. Typically, long-lived assets relating to Company-owned stores are tested for impairment at the level of the retailmarket area in which they are located and long-lived assets relating to franchised operations are tested for impairment at the segment level. If thecarrying amount of an asset group exceeds the estimated, undiscounted future cash flows expected to be generated by the asset, then animpairment charge is recognized to the extent the carrying amount exceeds the asset group’s fair value. In determining fair value, managementconsiders current results, trends, future prospects, and other economic factors.48Table of ContentsIncome taxesWe account for income taxes using the asset and liability approach. This requires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of temporary differences between the financial statement and the tax basis of assets and liabilities at theapplicable tax rates. A valuation allowance is recorded against deferred tax assets if, based on available evidence, it is more likely than not thatsome or all of the deferred tax assets will not be realized.The effect of uncertain tax positions would be recorded in the consolidated financial statements only after determining a more likely than notprobability that the uncertain tax positions would withstand an examination by tax authorities based on the technical merits of the position. The taxbenefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimatesettlement. As facts and circumstances change, management reassesses these probabilities and would record any changes in the financialstatements as appropriate.Advertising and marketing costsWe expense media development costs when the advertisement is first aired. All other advertising costs, including contributions to other local andregional advertising programs are expensed when incurred. These costs are included in store operating costs or selling, general, and administrativeexpenses based on the nature of the advertising and marketing costs incurred.Franchised and Company-owned stores in the United States contribute to an advertising fund that we manage on behalf of these stores. Inaddition, certain supply chain vendors contribute to the advertising fund. The advertising fund also operates a gift card program for the PapaMurphy’s system. Any gift card breakage from this program is recognized as a contribution to the advertising fund. Under our franchiseagreements and other agreements, the contributions received must be spent on marketing, creative efforts, media support, or other relatedpurposes specified in the agreements and result in no profit recognized. The expenditures are primarily amounts paid to third parties, but may alsoinclude personnel expenses and allocated costs. In accordance with GAAP, contributions to the advertising fund are netted against the relatedexpense.At each reporting date, to the extent contributions exceed expenditures on a cumulative basis, the excess contributions to the advertising fund areaccounted for as a deferred liability and are recorded in accrued expenses in our Consolidated Balance Sheets. If expenditures exceedcontributions on a cumulative basis, the excess is recorded as an expense within selling, general, and administrative expenses. Previouslyrecognized expenses may be recovered if subsequent contributions exceed expenditures.Share-based CompensationWe maintain two equity compensation plans, our 2010 Amended Management Incentive Plan and our 2014 Management Incentive Plan, underwhich we have granted awards of stock options and restricted stock awards that typically vest based on the achievement of a time-vesting or amarket condition.Compensation expense relating to restricted stock awards is recognized for the portion of the grant date fair value that exceeds any purchase pricepaid for the stock. This expense is recognized over the requisite service period, typically the vesting period, utilizing the straight-line attributionmethod.The fair value of time-vesting stock option awards is estimated on the grant date using a Black-Scholes-Merton option-pricing model.Compensation expense relating to stock option awards is recognized for the grant date fair value. The fair value of stock options that contain amarket condition is estimated on the grant date using a Monte Carlo valuation method, which utilizes multiple input variables to determine theprobability of the Company achieving the market condition and the fair value of the award. This expense is recognized over the requisite serviceperiod, typically the vesting period, utilizing the straight-line attribution method.In addition, prior to the IPO we sold unrestricted common and preferred stock to certain employees and recognized as compensation expense theportion of the fair value that exceeded the purchase price on the issue date.JOBS ActWe qualify as an “emerging growth company” pursuant to the provisions of 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 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 disclosureobligations relating to the presentation of financial statements in Management’s Discussion and Analysis of Financial Condition and Results ofOperations, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and49Table of Contentsstockholder advisory votes on golden parachute compensation. We have availed ourselves of the reduced reporting obligations and executivecompensation disclosure in this annual report on Form 10-K, and expect to continue to avail ourselves of the reduced reporting obligationsavailable 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 toprivate companies. However, we are choosing to “opt out” of this extended transition period, and as a result, we plan to comply with any new orrevised accounting standards on the relevant dates on which non-emerging growth companies must adopt the standards. Section 107 of the JOBSAct provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.Recent Accounting PronouncementsFor a description of recent accounting pronouncements, see the “Recent Accounting Pronouncements” section in Financial Statements andSupplementary Data in Note 2 — Summary of Significant Accounting Policies of the accompanying Notes to Consolidated Financial Statements.50Table of ContentsItem 7A. Quantitative and Qualitative Disclosures about Market RiskCommodity Price RiskWe are exposed to market risks from changes in commodity prices. During the normal course of the year, we enter into national pricingcommitments for cheese and other food products that are affected by changes in commodity prices and, as a result, our franchised and Company-owned stores are subject to volatility in food costs. We also maintain relationships with multiple suppliers for certain key products, such ascheese. We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. In instances when weuse fixed pricing agreements with our suppliers, these agreements cover our physical commodity needs, are not net-settled, and are accounted foras normal purchases.Interest Rate RiskWe are subject to interest rate risk on our senior secured credit facility. Interest rates on our senior secured credit facility are based on LIBOR, andunder specified circumstances we may be required by our lenders to enter into interest rate swap arrangements. A hypothetical 1.0% increase ordecrease in the interest rate associated with our senior secured credit facility would have resulted in a $1.0 million change to interest expense onan annualized basis.Foreign Currency Exchange Rate RiskOur international franchise owners use the local currency as their functional currency. Royalty payments from our franchise owners in the MiddleEast are generally remitted to us in U.S. dollars, and royalty payments from our Canadian franchise owners are generally remitted to us inCanadian dollars. Because our international activities do not account for a significant portion of our revenues, we believe our exposure to foreigncurrency risk is minimal.51Table of ContentsItem 8. Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Operations for the Fiscal Years ended January 1, 2018, January 2, 2017, and December 28, 201553Consolidated Balance Sheets as of January 1, 2018 and January 2, 201754Consolidated Statements of Shareholders’ Equity for the Fiscal Years ended January 1, 2018, January 2, 2017, and December28, 201555Consolidated Statements of Cash Flows for the Fiscal Years ended January 1, 2018, January 2, 2017, and December 28, 201556Notes to Consolidated Financial Statements57Report of Independent Registered Public Accounting Firm8352Table of ContentsPapa Murphy’s Holdings, Inc. and SubsidiariesConsolidated Statements of Operations Fiscal Year Ended(In thousands, except share and per share data)January 1, 2018 January 2, 2017 December 28, 2015Revenues Franchise royalties$37,552 $39,851 $40,243Franchise and development fees2,220 2,912 4,222Company-owned store sales76,868 82,080 74,300Other2,021 2,040 1,444Total revenues118,661 126,883 120,209 Costs and Expenses Store operating costs: Cost of food and packaging25,958 28,347 26,603Compensation and benefits23,603 23,746 19,858Advertising8,221 8,203 7,888Occupancy7,043 6,226 4,750Other store operating costs8,102 10,268 7,517Selling, general, and administrative33,870 28,108 28,207Depreciation and amortization10,452 12,236 10,002Loss (gain) on disposal or impairment of property and equipment15,680 101 (251)Total costs and expenses132,929 117,235 104,574Operating (Loss) Income(14,268) 9,648 15,635 Interest expense, net5,078 4,868 4,523Loss on impairment of investments— — 4,500Other expense, net204 188 133(Loss) Income Before Income Taxes(19,550) 4,592 6,479 (Benefit from) provision for income taxes(19,543) 1,943 2,068Net (Loss) Income(7) 2,649 4,411 Net loss attributable to noncontrolling interests— — 500Net (Loss) Income Attributable to Papa Murphy’s$(7) $2,649 $4,911 Earnings per share of common stock Basic$— $0.16 $0.29Diluted$— $0.16 $0.29Weighted average common stock outstanding Basic16,870,013 16,743,285 16,653,127Diluted16,870,013 16,773,493 16,870,693See accompanying notes.53Table of ContentsPapa Murphy’s Holdings, Inc. and SubsidiariesConsolidated Balance Sheets(In thousands, except par value and share data)January 1, 2018 January 2, 2017ASSETS Current Assets Cash and cash equivalents$2,174 $2,069Accounts receivable, net3,788 5,330Current portion of notes receivable97 92Inventories719 917Prepaid expenses and other current assets2,574 4,708Total current assets9,352 13,116Property and equipment, net10,064 28,516Notes receivable, net of current portion— 57Goodwill107,751 108,470Trade name and trademarks87,002 87,002Definite-life intangibles, net31,655 36,313Other assets350 398Total assets$246,174 $273,872 LIABILITIES AND EQUITY Current Liabilities Accounts payable$5,389 $6,160Accrued expenses and other current liabilities13,139 7,503Current portion of unearned franchise and development fees918 1,358Current portion of long-term debt8,400 7,879Total current liabilities27,846 22,900Long-term debt, net of current portion86,994 100,965Unearned franchise and development fees, net of current portion784 410Deferred tax liability, net24,457 44,179Other liabilities3,922 3,922Total liabilities144,003 172,376Commitments and contingencies (Note 15) Equity Preferred stock ($0.01 par value; 15,000,000 shares authorized; no shares issued or outstanding)— —Common stock ($0.01 par value; 200,000,000 shares authorized; 16,971,461 and 16,955,970 shares issued andoutstanding, respectively)170 170Additional paid-in capital120,614 119,932Accumulated deficit(18,613) (18,606)Total equity102,171 101,496Total liabilities and equity$246,174 $273,872See accompanying notes.54Table of ContentsPapa Murphy’s Holdings, Inc. and SubsidiariesConsolidated Statements of Shareholders’ Equity Common Stock AdditionalPaid-InCapital StockSubscriptionReceivable AccumulatedDeficit Total PapaMurphy’sHoldings, Inc.Shareholders’Equity Non-ControllingInterests TotalEquity (In thousands)Shares Amount BALANCE, December29, 201416,944 $169 $117,354 $(100) $(26,125) $91,298 $444 $91,742Common stock issued42 — 376 — — 376 — 376Common stock repurchases(36) — (10) — — (10) — (10)Stock based compensationexpense— — 1,081 — — 1,081 — 1,081Noncontrolling interesttransactions— — — — — — 56 56Net income— — — — 4,911 4,911 (500) 4,411BALANCE, December28, 201516,950 $169 $118,801 $(100) $(21,214) $97,656 $— $97,656Cumulative effectadjustment— — 41 — (41) — — —Common stock issued45 1 292 — — 293 — 293Common stock repurchases(38) — (84) — — (84) — (84)Stock based compensationexpense— — 882 — — 882 — 882Repayment of notereceivable issued to fundthe purchase of stock— — — 100 — 100 — 100Net income— — — — 2,649 2,649 — 2,649BALANCE, January2, 201716,956 $170 $119,932 $— $(18,606) $101,496 $— $101,496Common stock issued35 — — — — — — —Common stock repurchases(20) — (5) — — (5) — (5)Stock based compensationexpense— — 687 — — 687 — 687Net loss— — — — (7) (7) — (7)BALANCE, January1, 201816,971 $170 $120,614 $— $(18,613) $102,171 $— $102,171See accompanying notes.55Table of ContentsPapa Murphy’s Holdings, Inc. and SubsidiariesConsolidated Statements of Cash Flows Fiscal Year Ended (In thousands)January 1, 2018 January 2, 2017 December 28, 2015Operating Activities Net (Loss) Income$(7) $2,649 $4,411Net loss attributable to noncontrolling interests— — 500Net (Loss) Income Attributable to Papa Murphy’s(7) 2,649 4,911Adjustments to reconcile to cash from operating activities Depreciation and amortization10,452 12,236 10,002Loss (gain) on disposal or impairment of property and equipment15,680 101 (251)Deferred taxes(19,722) 1,724 1,707Stock-based compensation687 898 1,081Loss on impairment of cost-method investment— — 4,000Other non-cash items422 329 646Change in operating assets and liabilities Accounts receivable1,540 (522) 641Prepaid expenses and other assets1,352 2,197 (1,988)Unearned franchise and development fees(66) (567) (1,213)Accounts payable(783) (1,103) 3,628Accrued expenses and other liabilities5,982 (1,138) 579Net cash provided by operating activities15,537 16,804 23,743 Investing Activities Acquisition of property and equipment(3,987) (18,010) (10,430)Acquisition of stores, less cash acquired— (2,562) (9,691)Proceeds from sale of stores2,288 1,110 1,250Issuance of notes receivable— — (250)Payments received on notes receivable51 72 67Investment in cost-method investee— — (500)Net cash used in investing activities(1,648) (19,390) (19,554) Financing Activities Payments on long-term debt(12,979) (3,321) (2,800)Advances on revolver14,900 16,800 5,900Payments on revolver(15,700) (16,000) (5,900)Repurchases of common stock(5) (84) (10)Proceeds from exercise of stock options— 293 376Payments received on subscription receivables— 100 —Investment by noncontrolling interest holders— — 56Net cash used in financing activities(13,784) (2,212) (2,378) Net change in cash and cash equivalents105 (4,798) 1,811Cash and Cash Equivalents, beginning of year2,069 6,867 5,056Cash and Cash Equivalents, end of period$2,174 $2,069 $6,867 Supplemental Disclosures of Cash Flow Information Cash paid during the period for interest$4,835 $4,894 $3,624Cash (received) paid during the period for income taxes$(185) $169 $3,078Noncash Supplemental Disclosures of Investing Activities Net change in property and equipment in accounts payable$(154) $607 $3,098See accompanying notes.56Table of ContentsPapa Murphy’s Holdings, Inc. and SubsidiariesNotes to Consolidated Financial StatementsNote 1Description of Business58Note 2Summary of Significant Accounting Policies58Note 3Acquisitions65Note 4Prepaid Expenses and Other Current Assets67Note 5Property and Equipment67Note 6Divestitures68Note 7Goodwill68Note 8Intangible Assets69Note 9Financing Arrangements70Note 10Fair Value Measurement71Note 11Accrued and Other Liabilities72Note 12Income Taxes72Note 13Share-based Compensation74Note 14Earnings per Share (EPS)76Note 15Commitments and Contingencies77Note 16Retirement Plans79Note 17Advertising Fund79Note 18Segment Information80Note 19Selected Quarterly Financial Data (unaudited)8257Table of ContentsNote 1 — Description of BusinessPapa Murphy’s Holdings, Inc. (“Papa Murphy’s” or the “Company”), together with its subsidiaries, is a franchisor and operator of a Take ‘N’ Bakepizza chain. The Company franchises the right to operate Take ‘N’ Bake pizza franchises and operates Take ‘N’ Bake pizza stores owned by theCompany. As of January 1, 2018, the Company had 1,523 stores consisting of 1,483 domestic stores (1,338 franchised stores and 145 Company-owned stores) across 39 states, plus 40 franchised stores in Canada and the United Arab Emirates.Substantially all revenues are derived from retail sales of pizza and other food and beverage products to the general public by Company-ownedstores and the collection of franchise royalties and fees associated with franchise and development rights.Note 2 — Summary of Significant Accounting PoliciesPrinciples of consolidation and basis of presentationThese consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States(“GAAP”) and include the accounts of Papa Murphy’s Holdings, Inc., its subsidiaries, and certain entities which the Company consolidates asvariable interest entities (“VIEs”). The Company reports noncontrolling interests in consolidated entities as a component of equity separate fromshareholders’ equity. All significant intercompany transactions and balances have been eliminated.The Company participates in various advertising cooperatives with its franchise owners established to collect and administer funds contributed foruse in advertising and promotional programs in a specific market designed to increase sales and promote the Papa Murphy’s brand. Contributionsto the advertising cooperatives are required for both Company-owned and franchised stores and are generally based on a percentage of a store’ssales. The Company maintains certain variable interests in these cooperatives. As the cooperatives are required to spend all funds collected onadvertising and promotional programs, total equity at risk is not sufficient to permit the cooperatives to finance their activities without additionalsubordinated financial support. Therefore, these cooperatives are VIEs. As a result of the Company’s voting rights exercised through Company-owned stores, the Company consolidates certain of these cooperatives for which it is the primary beneficiary. Advertising cooperative assets,consisting primarily of cash and receivables, can only be used to settle the obligations of the respective cooperative. Advertising cooperativeliabilities represent the corresponding obligation arising from the receipt of the contributions to purchase advertising and promotional programs forwhich creditors do not have recourse to the general credit of a primary beneficiary. Therefore, the Company reports all assets and liabilities of theadvertising cooperatives that it consolidates as prepaid expenses and other current assets and accrued expenses and other current liabilities,respectively, in the Consolidated Balance Sheets. Because the contributions to these advertising and marketing cooperatives are specificallydesignated and segregated for advertising, the Company does not reflect franchise owner contributions to these cooperatives in its ConsolidatedStatements of Operations or Consolidated Statements of Cash Flows.Fiscal yearThe Company uses a 52- or 53-week fiscal year, ending on the Monday nearest to December 31. Fiscal year 2017 was a 52-week year, fiscal year2016 was a 53-week year, and fiscal year 2015 was a 52-week year. All references to years relate to fiscal periods rather than calendar periods.References to fiscal 2017, 2016, and 2015 are references to fiscal years ended January 1, 2018, January 2, 2017, and December 28, 2015,respectively.Use of estimatesPreparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amountsreported in the Company’s consolidated financial statements and accompanying notes. Significant items that are subject to such estimates andassumptions include the estimation of the fair value of acquired assets and liabilities, including fixed assets, goodwill, and intangible assets andthe related subsequent impairment analysis, fair value of stock based compensation, asset retirement obligations, lease guarantees, and deferredtax asset valuation allowance. Although management bases its estimates on historical experience and assumptions that are believed to bereasonable under the circumstances, actual results may differ from those estimates.58Table of ContentsCash and cash equivalentsThe Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. TheCompany maintains cash and cash equivalent balances with financial institutions that periodically exceed federally insured limits. The Companyalso holds limited funds, to the extent necessary, on deposit outside the United States. The Company makes such deposits with entities itbelieves are of high credit quality and has not incurred any losses related to these balances. Management believes its credit risk to be minimal.All credit card, debit card, and electronic benefits transfer transactions that process in less than seven days are classified as cash and cashequivalents. The amounts due from banks for these transactions classified as cash and cash equivalents totaled $1.0 million as of the end of eachof fiscal 2017 and 2016.Accounts receivableAccounts receivable consist primarily of (a) amounts due from franchise owners for continuing fees that are collected weekly, (b) receivables forvendor rebates and (c) other miscellaneous receivables. Accounts receivable are stated net of an allowance for doubtful accounts determined bymanagement through an evaluation of specific accounts, considering historical losses and existing economic conditions where relevant. Allowancefor doubtful accounts amounted to $67,000 and $37,000 as of the end of fiscal 2017 and 2016, respectively.Notes receivableNotes receivable consist primarily of amounts due from sales of Company-owned stores. Management reviews the notes receivable on a periodicbasis and evaluates the creditworthiness and financial condition of the counterparty to determine the appropriate allowance, if any. If the storeowner does not repay the note, the Company has the contractual right to take back ownership of the store based on the underlying franchiseagreement, which therefore minimizes the credit risk to the Company.InventoriesInventories consist principally of food products and packaging supplies for use in Company-owned stores. Inventories are valued at the lower ofcost, determined under the first-in, first-out method or net realizable value.Property and equipmentProperty and equipment are recorded at cost. Property and equipment are depreciated using the straight-line method over the estimated usefullives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the useful lives of the assets or therelated lease term, including renewal options to the extent renewals are reasonably assured, not to exceed 10 years.The estimated useful lives for property and equipment are: Property and EquipmentEstimated Useful LifeLeasehold improvementsShorter of lease term or estimated useful life, not to exceed 10 yearsRestaurant equipment and fixtures5 to 7 yearsOffice furniture and equipment3 to 7 yearsSoftware3 to 5 yearsVehicles5 yearsDeferred financing costsCosts incurred to obtain long-term financing are accounted for as a deferred charge and amortized to interest expense over the terms of therespective debt agreements using the effective interest method. Unamortized deferred charges are recorded as a reduction from the carryingamount of the related debt liability in the Company’s Consolidated Balance Sheets.Goodwill and other intangible assetsGoodwill arises from business combinations and represents the excess of the purchase consideration transferred over the fair value of the netassets acquired, including identifiable intangible assets and liabilities assumed. The majority of the59Table of ContentsCompany’s goodwill was generated in May 2010 when affiliates of Lee Equity Partners, LLC (“Lee Equity”) acquired all of the equity interests ofPMI Holdings, Inc. (“Lee Equity Acquisition”), though the Company has also recognized goodwill upon the acquisition of stores from franchiseowners. Goodwill is assigned to reporting units for purposes of impairment testing.The Company considers its trade name and trademarks to be indefinite-lived intangible assets. These assets were initially recognized in May 2010upon the Lee Equity Acquisition. The Company’s intangible assets that are not indefinite-lived include franchise relationships and reacquiredfranchise rights.Goodwill and intangible assets determined to have an indefinite life are not amortized, but are tested for impairment annually, or more often if anevent occurs or circumstances change that indicate an impairment might exist. Management evaluates indefinite-lived assets each reportingperiod to determine whether events and circumstances continue to support an indefinite useful life. Intangible assets with finite lives are amortizedover their estimated useful lives on a straight-line basis and tested for impairment together with long-lived assets.In performing its annual goodwill impairment test, the Company first assesses qualitative factors to determine whether the existence of events orcircumstances leads to a determination that it is not “more likely than not” that the fair value of a reporting unit is less than its carrying amount. Ifthe Company determines that it is more likely than not, it performs the two-step quantitative goodwill impairment test. Under the two-stepquantitative goodwill impairment test, the fair value of the reporting unit is compared to its respective carrying amount, including goodwill. If the fairvalue exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the fair value, further analysis is performed todetermine the amount of the impairment. Both the qualitative and quantitative assessments are completed separately with respect to the goodwillof each of the Company’s reporting units. The Company reviews goodwill for impairment annually, as of the first day of our fourth fiscal quarter, ormore frequently if indicators of impairment exist. The Company can bypass the qualitative assessment and move directly to the quantitativeassessment for any reporting unit in any period and can elect to resume performing the qualitative assessment in any subsequent period.Most of the Company’s goodwill is attributed to and tested for impairment at the Domestic Franchise segment, which is considered one reportingunit, as the segment does not have any components of a business for which discrete financial information is available and is regularly reviewed bysegment management.In performing its annual impairment test for indefinite-lived intangible assets, the Company first assesses qualitatively whether it is more likelythan not that the indefinite-lived intangible asset is impaired, thus necessitating a quantitative impairment test. The Company does not calculatethe fair value of an indefinite-lived asset and perform the quantitative test unless it determines that it is more likely than not that the asset isimpaired. The Company reviews indefinite-lived intangible assets for impairment annually, as of the first day of its fourth fiscal quarter, or morefrequently if indicators of impairment exist. The Company can bypass the qualitative assessment and move directly to the quantitativeassessment for any indefinite-lived intangible asset in any period and can elect to resume performing the qualitative assessment in anysubsequent period.Impairment of long-lived assetsLong-lived assets are evaluated for recoverability of the carrying amount whenever events and circumstances indicate the carrying amount of anasset may not be fully recoverable. Some of the events or changes in circumstances that would trigger an impairment review include, but are notlimited to, significant under-performance relative to expected and/or historical results (such as two years of comparable store sales decrease ortwo years of negative operating cash flows), significant negative industry or economic trends, or knowledge of transactions involving the sale ofsimilar property at amounts below the carrying value.Assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent ofthe cash flows of other assets. Typically, long-lived assets relating to Company-owned stores are tested for impairment at the level of the retailmarket in which they are located and long-lived assets relating to franchised operations are tested for impairment at each segment level. If thecarrying amount of an asset group exceeds the estimated undiscounted future cash flows expected to be generated by the asset, then animpairment charge is recognized to the extent the carrying amount exceeds the asset group’s fair value. In determining fair value, managementconsiders current results, trends, future prospects, and other economic factors.Assets held for saleAssets are classified as held for sale when management with the appropriate authority commits to a plan to sell the assets, the assets areavailable for immediate sale, the assets are actively marketed at a reasonable price, the sale is probable within a year, and certain other criteriaare met. Assets held for sale consist primarily of Company-owned stores where the Company has committed to a plan to sell specific stores.Assets designated as held for sale are held at the lower of the net60Table of Contentsbook value or fair value less costs to sell and reported in Prepaid expenses and other current assets on the Consolidated Balance Sheets (seeNote 4 — Prepaid Expenses and Other Current Assets). Depreciation is not charged against property and equipment classified as assets held forsale.Asset retirement obligations (“AROs”)AROs are primarily associated with leasehold improvements which, at the end of a lease, the Company is obligated to remove in order to complywith certain lease agreements. At the inception of a lease with such conditions, the Company records an ARO and a corresponding capital asset inan amount equal to the estimated fair value of the obligation. Fair value is estimated based on a number of assumptions requiring management’sjudgment, including store closing costs, cost inflation rates, and discount rates in effect at the time the lease is signed. Over time, the obligation isaccreted to its projected future value and, upon satisfaction of the ARO conditions, any difference between the recorded liability and the actualretirement costs incurred is recognized as an operating gain or loss in the Consolidated Statements of Operations. The Company had AROsoutstanding of $1.6 million and $1.8 million as of the end of fiscal 2017 and 2016, respectively, as a component of other liabilities.Revenue recognitionCompany-owned store sales are recognized when products are provided to customers. Franchise royalties are based on a percentage of sales andare recognized as the fees are earned and become receivable from the franchise owner.Franchise fees are recognized as revenue when all material services or conditions relating to a store have been substantially performed orsatisfied by the Company, which is typically when a new franchised store begins operations or on the commencement date of the successivefranchise agreement. Development fees for the right to develop stores in specific geographic areas are recognized as revenue when all materialservices or conditions relating to the sale have been substantially performed, which is typically when the first franchised store begins operations inthe development area. Development fees determined based on the number of stores to open in an area are deferred and recognized on a pro ratabasis after individual franchise agreements are executed for the stores subject to the development agreements and the stores begin operations.Consideration for franchise and development fees received in advance of being earned are included as unearned franchise and development feesin the Company’s Consolidated Balance Sheets. For fees paid on an installment basis that have otherwise been earned, recognition of revenue isdeferred until collectability is certain.Other revenues consist primarily of (a) software license revenue from the resale of point-of-sale (“POS”) software licenses to franchise owners atcost; (b) transaction fees from the Company’s online ordering platform; (c) customer support services provided to franchisees; and (d) leaseincome recognized in the period earned, which generally coincides with the period the expense is due to the master leaseholder, if a sublease.The Company operates a system-wide gift card program and recognizes revenue from gift cards when a gift card is redeemed in a Company-owned store. When the likelihood of a gift card being redeemed by a customer is determined to be remote (“gift card breakage”), the value of theunredeemed gift card is recognized by the Company as a contribution to the advertising fund described under Advertising and marketing costsbelow. The Company determines the gift card breakage rate based upon Company-specific historical redemption patterns.Software revenue recognitionPeriodically, the Company acquires POS software licenses in a lump sum purchase. The Company recognizes revenues for the resale of softwarelicenses upon delivery to franchise owners to the extent collectability is probable.Advertising and marketing costsAdvertising costs, including contributions to local advertising cooperatives which are based on a percentage of sales, are expensed when incurredexcept for media development costs which are expensed when the advertisement is first aired. These costs are included in store operating costsor selling, general, and administrative expenses based on the nature of the advertising and marketing costs incurred.Franchised and Company-owned stores in the United States contribute to an advertising fund that the Company manages on behalf of thesestores. In addition, certain suppliers contribute to the advertising fund. Under our franchise agreements and other agreements, contributionsreceived by the advertising fund must be spent on marketing, creative efforts, media support, or other related purposes specified in theagreements and result in no profit recognized. Contributions to the advertising fund are netted against the related expense. Expenditures of theadvertising fund are primarily amounts paid to61Table of Contentsthird-parties, but may also include personnel expenses and allocated costs. At each reporting date, to the extent contributions to the advertisingfund exceed expenditures on a cumulative basis, the excess contributions are accounted for as a deferred liability and are recorded in accruedexpenses in the Company’s Consolidated Balance Sheets. However, if expenditures exceed contributions on a cumulative basis, the excess isrecorded as an expense within selling, general, and administrative expenses. In subsequent periods, previously recognized expenses may berecovered if subsequent contributions exceed expenditures. Excess (recovered) advertising expense included in selling, general, andadministrative, net of contributions, was $4.4 million, $0.4 million and $1.7 million for fiscal 2017, 2016, and 2015, respectively.As of the end of fiscal 2017, previously recognized expenses of $6.0 million may be recovered in future periods if subsequent advertising fundcontributions exceed expenditures.Store pre-opening costsPre-opening costs, including wages, benefits, and travel for the training and opening teams, cost of food and packaging, and other store operatingcosts are expensed as incurred prior to a store opening for business.Rent expenseRent expense for the Company’s leases, which generally have escalating rental payments over the term of the lease, is recorded on a straight-linebasis over the lease term. The lease term includes renewal options that are reasonably expected to be exercised and begins when the Companyhas control and possession of the leased property, which is typically before rental payments are due under the lease. The difference between therent expense and rent paid is recorded as deferred rent as a component of accrued expenses. Tenant allowances are recorded in deferred rent andamortized as reductions of rent expense over the lease term. Rent expense is included in store occupancy costs or selling, general, andadministrative expenses, based on the nature of the leased facility.When a store is closed before the end of its lease, the Company accrues a loss provision for lease termination costs based on the net presentvalue of the contractual, minimum rent obligations reduced by sublease rental income that could be reasonably obtained from the property using acredit-adjusted, risk-free interest rate at the time of closure. Certain other related costs are also included in the provision for lease losses. TheCompany’s provision for lease losses from closed stores was $0.7 million as of the end of fiscal 2017. The initial charge and any subsequentadjustment to the accrual are included in store occupancy costs.Lease guaranteesOn occasion, the Company becomes a guarantor for certain operating leases when it sells a Company-owned store or a store under constructionby the Company. The guarantee obligation is initially measured as the fair value of the guarantee, which is recorded as a liability. The Companyrecognizes its release from risk as a guarantor as the lease obligation is settled over the remaining lease term. In addition, throughout theguarantee period, the Company records a reserve when any loss becomes probable in connection with such lease guarantee. As of the end offiscal 2017 and 2016, the Company’s liability in connection with the unamortized value of these lease guarantees was $69,000 and $55,000,respectively, and no additional liability has been recorded in connection with a probable loss from these guarantees.Income taxesThe Company accounts for income taxes using the asset and liability approach. This requires the recognition of deferred tax assets and liabilitiesfor the expected future tax consequences of temporary differences between the financial statement and the tax basis of assets and liabilities atthe applicable tax rates. A valuation allowance is recorded against deferred tax assets if, based on available evidence, it is more likely than notthat some or all of the deferred tax assets will not be realized.The effect of uncertain tax positions would be recorded in the consolidated financial statements only after determining a more likely than notprobability that the uncertain tax positions would withstand an examination by tax authorities based on the technical merits of the position. The taxbenefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimatesettlement. As facts and circumstances change, management reassesses these probabilities and would record any changes in the financialstatements as appropriate.As of the end of fiscal 2017 and 2016, the Company has recorded reserves for uncertain tax positions totaling $77,000 and $72,000, respectively.62Table of ContentsShare-based compensationThe Company awards equity compensation under the Company’s 2010 Amended Management Incentive Plan (“2010 Plan”) and 2014 ManagementIncentive Plan (“2014 Plan”), consisting of stock option and restricted stock awards. Restricted stock and stock option awards typically vest basedon the achievement of a time-vesting or a market condition. Compensation expense relating to restricted stock with time-vesting conditions isrecognized for the portion of the grant date fair value that exceeds any purchase price paid for the stock. This expense is recognized over therequisite service period, typically the vesting period, utilizing the straight-line attribution method.The fair value of time-vesting stock option awards is estimated on the grant date using a Black-Scholes-Merton option-pricing model.Compensation expense relating to stock option awards is recognized for the grant date fair value. The fair value of stock options that contain amarket condition is estimated on the grant date using a Monte Carlo valuation method, which utilizes multiple input variables to determine theprobability of the Company achieving the market condition and the fair value of the award. The risk-free interest rate is based on the estimatedeffective life and is estimated based on U.S. Treasury Yield Curve rates. Since the Company has limited relevant option exercise experience, theexpected term is based on a simplified method calculation and the expected volatility is based on the historical volatility of the share price of agroup of peer companies. Compensation expense relating to stock option awards is recognized for the grant date fair value. This expense isrecognized over the requisite service period, typically the vesting period, utilizing the straight-line attribution method.Business CombinationsThe Company accounts for business combinations under the acquisition method of accounting, recording any assets acquired and liabilitiesassumed based upon their respective fair values. Any excess of the fair value of purchase consideration over the fair value of the assets acquiredless liabilities assumed is recorded as goodwill. The Company uses management estimates based on historically similar transactions to assist inestablishing the acquisition date fair values of assets acquired, liabilities assumed, and contingent consideration granted, if any. These estimatesand valuations require the Company to make significant assumptions, including projections of future events and operating performance.Internal use softwareExpenditures for major software purchases and software developed for internal use are capitalized and amortized over the useful life of thesoftware (three to five years) on a straight-line basis. The Company’s policy provides for the capitalization of external direct costs of materials andservices associated with developing or obtaining internal-use computer software. Costs associated with preliminary project stage activities,training, maintenance, and all other post-implementation stage activities are expensed as incurred.ReclassificationCertain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Thesereclassifications had no effect on the Company’s consolidated financial position, shareholders’ equity or net cash flows for any of the periodspresented.Recent accounting pronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)(“ASU 2014-09”), a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model tobe applied by reporting companies under GAAP. The original effective date for ASU 2014-09 would have required adoption by the Company in thefirst quarter of fiscal 2017 with early adoption prohibited. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts withCustomers (Topic 606) - Deferral of the Effective Date (“ASU 2015-14”), which defers the effective date of ASU 2014-09 for one year and permitsearly adoption in accordance with the original effective date of ASU 2014-09.The new revenue standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulativeeffect of initially applying the standard recognized at the date of initial application. The Company anticipates adopting the standard in the firstquarter of fiscal 2018 using the full retrospective method to restate each prior reporting period presented.The Company anticipates this standard will have a material impact on its consolidated financial statements. The most significant impacts willrelate to its: (i) accounting for franchise and development fees, and (ii) accounting for its advertising funds. The Company expects revenue relatedto its franchise royalties, which are based on a percentage of franchise sales,63Table of Contentsand revenue from Company-owned restaurants to remain substantially unchanged. Specifically, under the new standard the Company expects torecognize franchise fees ratably over the life of the contract rather than at the time the store is opened or a successive contract commences. Inaddition, the Company expects to account for advertising fund revenues on a gross basis, instead of net, as the Company is the principal thatdetermines how the funds collected will be spent. The Company is adopting this standard using the full retrospective method and will apply thestandard to each prior reporting period. In preparation for adoption of the standard, the Company implemented internal controls and key systemfunctionality to enable the preparation of financial information.The Company estimates that adoption of this standard will result in the recognition of additional revenue of $29.8 million and $24.3 million for fiscal2017 and 2016, respectively, and an increase in selling, general and administrative expenses of $30.7 million and $25.9 million, respectively. Inaddition, the Company estimates that adoption of the standard will result in an increase in unearned franchise and development fees of $9.9 millionand $10.6 million as of January 1, 2018, and January 2, 2017, respectively. See Expected Impacts to Reported Results below for the estimatedimpact of adoption of this standard on our consolidated financial statements.In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This update requires that lessees recognize assets and liabilities onthe balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 also will require disclosuresdesigned to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosuresinclude both qualitative and quantitative information. The effective date for ASU 2016-02 is for fiscal years, and interim periods within those fiscalyears, beginning after December 15, 2018, with earlier adoption permitted. The Company elected to early adopt the standard effective January 2,2018, concurrent with our adoption of the new revenue recognition standard. The Company is adopting this standard using the modifiedretrospective approach and is electing the available practical expedients on adoption. In preparation for adoption of the standard, the Companyimplemented internal controls and key system functionality to enable the preparation of financial information in accordance with the standard.This standard will have a material impact on the Company’s Consolidated Balance Sheets. The most significant impact will be the recognition ofright of use assets and lease liabilities for operating leases. The Company estimates that adoption of this standard will result in recognition ofadditional right of use assets of $16.2 million and additional lease liabilities of $20.0 million as of the end of fiscal 2017 for operating leases. Inaddition, the Company estimates that it will dispose of $2.5 million in other current and long term liabilities as of the end of fiscal 2017 for operatingleases. The Company estimates that this standard will not have a material impact on the Company’s Consolidated Statements of Operations forfiscal 2017 and 2016, except for the impairment of right of use assets in fiscal 2017 in connection with the Company’s impairment of fixed assets(see Note 5 — Property and Equipment).In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 320) (“ASU 2016-15”). This update clarifies the presentationof certain cash receipts and cash payments in the statement of cash flows. The effective date for ASU 2016-15 is for fiscal years, and interimperiods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is still evaluating the impact ofASU 2016-15 on its Consolidated Statements of Cash Flows.In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). The new standard simplifies how an entity measures goodwill impairment by removing the second step of the two-step quantitative goodwillimpairment test. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment willbe measured at the amount by which the carrying value exceeds the fair value of a reporting unit; however, the loss recognized should not exceedthe 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 theannual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company isstill evaluating the impact of ASU 2017-04 on its financial position and results of operations.64Table of ContentsExpected Impacts to Reported ResultsAdoption of the standard related to revenue recognition is expected to impact our reported results as follows: Fiscal 2017 Income Statement(in thousands, except earnings per share)As ReportedNew RevenueStandardAdjustmentAs AdjustedTotal revenues$118,661$29,847$148,508Store advertising and other costs16,323(1,570)14,753Selling, general, and administrative33,87030,73864,608Benefit from income taxes(19,543)168(19,375)Net (Loss) Income(7)511504Diluted earnings per share0.000.030.03 Fiscal 2016 Income Statement(in thousands, except earnings per share)As ReportedNew RevenueStandardAdjustmentAs AdjustedTotal revenues$126,883$24,290$151,173Store advertising and other costs18,471(1,672)16,799Selling, general, and administrative28,10825,93754,045Provision for income taxes1,94391,952Net income2,649162,665Diluted earnings per share0.160.000.16 Balance Sheet as of January 1, 2018(in thousands)As ReportedNew RevenueStandardAdjustmentAs AdjustedUnearned franchise and development fees$1,702$9,899$11,601Accrued expenses and other current liabilities13,139(507)12,632Deferred tax liability, net24,457(3,567)20,890Accumulated deficit(18,613)(5,825)(24,438) Balance Sheet as of January 2, 2017(in thousands)As ReportedNew RevenueStandardAdjustmentAs AdjustedUnearned franchise and development fees$1,768$10,586$12,354Accrued expenses and other current liabilities7,503(516)6,987Deferred tax liability, net44,179(3,734)40,445Accumulated deficit(18,606)(6,336)(24,942)Adoption of the standard related to revenue recognition is not expected to materially affect cash from or used in operating, financing, or investingcash flows on the Company’s consolidated cash flows statements.Note 3 — AcquisitionsAcquisitions in 2016On April 11, 2016, Papa Murphy’s Company Stores, Inc. (“PMCSI”), a wholly owned subsidiary of the Company, acquired certain assets used inthe operation of nine Papa Murphy’s stores in the Joplin, Missouri, and Fort Smith, Arkansas, areas from a franchise owner. On November 15,2016, PMCSI acquired certain assets used in the operation of one store in the65Table of ContentsGrand Rapids, Michigan area from a franchise owner. The total consideration paid of approximately $3.1 million was funded through existing cash,$0.5 million in insurance proceeds, and advances on the Company’s Senior Credit Facility (see Note 9 — Financing Arrangements). The Companyincurred transaction costs of $10,000 associated with the acquisitions that were recognized as other store operating costs in the ConsolidatedStatements of Operations.The fair values of the assets acquired are summarized below (in thousands):Cash and cash equivalents$5Inventory26Prepaid expenses and other current assets27Property and equipment604Asset retirement obligations(67)Total identifiable net assets acquired595Goodwill1,964Total net assets acquired2,559Dispute settlement500Total consideration$3,059Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired and is expected to be fully deductible forincome tax purposes. This goodwill is primarily attributable to the acquired customer bases and, to a lesser extent, economies of scale expectedfrom combining the operations of the acquired stores with the existing operations of the Company.The pro forma effects of this acquisition and the operating results of the acquired stores are not presented because the effects were not material toreported results.InvestmentsThe Company, through a non-wholly owned subsidiary, Project Pie Holdings, LLC (“PPH”), made investments in Project Pie, LLC (“Project Pie”) inthe form of Series A Convertible Preferred Units (the “Preferred Units”). Project Pie is a fast casual custom-pizza restaurant chain with storeslocated throughout the United States, the Philippines and Scotland.The Company disposed of its ownership interests in PPH on June 29, 2015. Prior to the Company’s disposal of its ownership interests in PPH, itrecorded a pre-tax impairment of $4.5 million to its investment in Project Pie.Earlier in 2015, the Company determined that Project Pie was a variable interest entity as a result of Project Pie having insufficient equity at risk,but that the Company did not have a variable interest in Project Pie and did not have control. The Company did not account for its investment inProject Pie as an equity method investment since the Company’s investment was in preferred units with subordination characteristics substantiallydifferent from the common units and were determined not to be in-substance common stock. The Company’s investment was classified as a costmethod investment in other assets.66Table of ContentsNote 4 — Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consist of the following:(in thousands)2017 2016Prepaid media development costs$376 $606Prepaid software and support223 985Prepaid rent549 622Prepaid insurance377 453Taxes receivable182 547POS software licenses for resale364 —Assets held for sale432 1,406Advertising cooperative assets, restricted4 48Other67 41Total prepaid expenses and other current assets$2,574 $4,708Prepaid media development costs represent costs incurred for advertisements that have not aired.Assets held for sale include assets from closed stores that the Company is actively marketing to new or existing franchisees.Note 5 — Property and EquipmentProperty and equipment, net, consists of the following:(in thousands)2017 2016Leasehold improvements$7,475 $11,726Restaurant equipment and fixtures12,515 15,361Office furniture and equipment2,978 2,535Software7,917 14,929Vehicles6 92Construction in progress1,059 987 31,950 45,630Accumulated depreciation and amortization(21,886) (17,114)Property and equipment, net$10,064 $28,516Depreciation expense amounted to $5.8 million, $7.2 million, and $4.7 million during fiscal 2017, 2016, and 2015, respectively.During fiscal 2017, the Company decided to replace its current e-commerce platform. As part of this decision, the Company recognized animpairment to the software component of its property and equipment of $9.1 million during fiscal 2017.As part of the Company’s property and equipment impairment review, the Company recorded an impairment of $4.4 million to its Company-ownedstore assets during fiscal 2017.The Company recognized impairment losses of $2.3 million and $0.2 million in fiscal 2017 and 2016, respectively, related to the closure of certainunderperforming Company-owned stores.No impairment loss was recognized during fiscal 2015.67Table of ContentsNote 6 — DivestituresDivestitures in 2017On May 1, 2017, the Company completed the sale and refranchise of six Company-owned stores in Colorado. On May 8, 2017, the Companycompleted the sale and refranchise of one Company-owned store in Colorado in an unrelated transaction. The aggregate sale price for the sevenstores was $2.5 million, paid in cash, and the Company recognized a pre-tax gain of $0.2 million. In connection with the sale, the buyers paid $0.3million in franchise fees. The assets sold were classified as assets held for sale on the Company’s Consolidated Balance Sheets. Thesedispositions did not meet the criteria for accounting as a discontinued operation.Divestitures in 2016On October 18, 2016, the Company completed the sale and refranchise of one Company-owned store in Colorado and one Company-owned storein Minnesota. On October 24, 2016, the Company completed the sale and refranchise of one Company-owned store in Washington. The aggregatesale price for the three stores was $1.0 million, paid in cash, and the Company recognized a pre-tax gain of $69,000. In connection with the sale,the buyers paid $75,000 in franchise fees. These dispositions did not meet the criteria for accounting as a discontinued operation.The following is a summary of the assets sold (in thousands):Leasehold improvements$386Restaurant equipment and fixtures438Property and equipment824Prepaid expenses and other current assets19Total assets sold$843Note 7 — GoodwillThe following summarizes changes to the Company’s goodwill by reportable segment:(in thousands)Domestic CompanyStores DomesticFranchise TotalBalance at December 28, 2015$24,960 $81,546 $106,506Acquisitions1,964 — 1,964Balance at January 2, 201726,924 81,546 108,470Disposition(719) — (719)Balance at January 1, 2018$26,205 $81,546 $107,751There is no goodwill associated with the International segment. Based on the results of the Company’s impairment testing, the Company did notrecognize any impairment of goodwill during fiscal 2017, 2016, or 2015. The Company recorded Goodwill disposals in fiscal 2017 and 2015 fromthe sale of Company-owned stores to franchise owners.68Table of ContentsNote 8 — Intangible AssetsIntangible assets consist of the following: 2017 (in thousands)Gross CarryingAmount AccumulatedAmortization Net Weighted AverageAmortizationPeriodIntangible assets subject to amortization: Franchise relationships$56,000 $(26,855) $29,145 16.0Reacquired franchise rights5,887 (3,377) 2,510 6.8Net intangible assets subject to amortization$61,887 $(30,232) $31,655 15.1Intangible assets not subject to amortization Trade name and trademarks $87,002 2016 (in thousands)Gross CarryingAmount AccumulatedAmortization Net Weighted AverageAmortizationPeriodIntangible assets subject to amortization: Franchise relationships$56,000 $(23,355) $32,645 16.0Reacquired franchise rights6,914 (3,246) 3,668 6.3Net intangible assets subject to amortization$62,914 $(26,601) $36,313 14.5Intangible assets not subject to amortization Trade name and trademarks $87,002 Reacquired franchise rights were recorded as part of the Company’s acquisitions of franchised stores. Trade name and trademarks are intangibleassets determined to have indefinite lives and are not subject to amortization. Management has concluded that none of its reporting units with amaterial amount of intangible assets not subject to amortization are at risk for failing step one of the quantitative assessment for impairment ofintangible assets.Amortization expense amounted to $4.7 million, $5.1 million, $5.3 million for fiscal 2017, 2016, and 2015, respectively.The estimated future amortization expense of amortizable intangible assets as of the end of fiscal 2017 is as follows (in thousands):Fiscal year2018$4,316 20194,070 20203,945 20214,459 20223,803 Thereafter11,062 $31,65569Table of ContentsNote 9 — Financing ArrangementsLong-term debt consists of the following:(in thousands)2017 2016Term loan under 2014 credit facility$92,900 $105,879Revolving line of credit under 2014 credit facility— 800Notes payable3,000 3,000Total principal amount of long-term debt95,900 109,679Less unamortized debt issuance costs(506) (835)Total long-term debt95,394 108,844Less current portion(8,400) (7,879)Total long-term debt, net of current portion$86,994 $100,965Maturities on long-term debt consist of the following:(in thousands)Senior Secured CreditFacility Notes Payable TotalFiscal Years2018$5,400 $3,000 $8,400 201987,500 — 87,500 $92,900 $3,000 $95,900The weighted average interest rate across all senior secured credit facilities for fiscal 2017, 2016, and 2015 was 4.34%, 3.77%, and 3.45%,respectively.2014 senior secured credit facilityOn August 28, 2014, PMI Holdings, Inc., a wholly-owned subsidiary of the Company, entered into a $132.0 million senior secured credit facility(the “2014 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 ofcredit sub-facility and a $1.0 million swing-line loan sub-facility. Closing and structuring fees of $1.6 million were incurred as a result of thistransaction which will be amortized over the duration of the loan. The term loan and any loans made under the revolving credit facility mature inAugust 2019.Borrowings under the 2014 Credit Facility bear interest at a rate per annum equal to an applicable margin based on the Company’s consolidatedleverage ratio, plus, at the Company’s option, either (a) a base rate determined by reference to the highest of (i) the “Prime Rate” publicly quotedby The Wall Street Journal, (ii) the federal funds rate plus 50 basis points, or (iii) the LIBOR rate with a one-month interest period plus 100 basispoints, or (b) a LIBOR rate determined for the specified interest period. The applicable margin for borrowings under the 2014 Credit Facility rangesfrom 150 to 225 basis points for base rate borrowings and 250 to 325 basis points for LIBOR rate borrowings. The 2014 Credit Facility includescustomary fees for loan facilities of this type, including a commitment fee on the revolving credit facility. As of January 1, 2018, all $92.9 million ofthe term loan was subject to the LIBOR rate option at 4.82%.The obligations under the 2014 Credit Facility are guaranteed by certain domestic subsidiaries of the Company (the “subsidiary guarantors”) andare secured by substantially all assets of the Company and the subsidiary guarantors. The 2014 Credit Facility also contains customaryaffirmative and negative covenants that are typical for loan facilities of this type, including covenants that, among other things, restrict our abilityand the ability of our subsidiaries to incur indebtedness, issue certain types of equity, incur liens, enter into fundamental changes, includingmergers and consolidations, sell assets, make dividends, distributions and investments, and prepay subordinated indebtedness, subject tocustomary exceptions. The 2014 Credit Facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio, aminimum interest coverage ratio, and a fixed charge coverage ratio.With a maturity date of over one year from January 1, 2018, balances outstanding under the 2014 Credit Facility are classified as non-current onthe Consolidated Balance Sheets, except for mandatory, minimum term loan amortization payments of $2.1 million due on the last day of eachfiscal quarter.70Table of ContentsNotes payablePMCSI has a note payable for $3.0 million which bears interest at 5% and matures in December 2018. This note is subordinated to the seniorsecured credit facility.Deferred financing costs and prepayment penaltiesIn conjunction with the 2014 Credit Facility, the Company evaluated the refinancing of its prior credit facility and determined that the borrowing wasextinguished and not modified. Accordingly, unamortized deferred financing costs of $2.3 million from the prior credit facility and a prepaymentpenalty of $1.1 million were expensed as a Loss on early retirement of debt in 2014. The Company incurred $1.6 million in financing costs, whichwas capitalized and is being amortized using an effective interest rate method.Deferred financing costs amortized to interest expense in the Consolidated Statements of Operations amounted to $0.3 million, $0.3 million, and$0.3 million for fiscal years 2017, 2016, and 2015, respectively.Amortization of deferred financing costs in the future is expected to be as follows (in thousands):Fiscal Years2018$310 2019196 $506Note 10 — Fair Value MeasurementThe 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 theliability to a market participant. GAAP defines a fair value hierarchy that prioritizes the assumptions used to measure fair value. The three levels ofthe 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 activemarkets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that areobservable 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 assetsand liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that usesignificant unobservable inputs.The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis: 2017 2016 (in thousands)Carrying Value Fair Value Carrying Value Fair Value Fair ValueMeasurementsFinancial assets Notes receivable (1)$97 $88 $149 $150 Level 3(1)The fair value of notes receivable was estimated primarily using a discounted cash flow method based on a discount rate, reflecting the applicable credit spread.Financial instruments not included in the table above consist of cash and cash equivalents, accounts receivable, accounts payable, and long-termdebt. The fair value of cash and cash equivalents, accounts receivable, and accounts payable approximates 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 marketrates and negotiated terms and conditions that are consistent with current market rates.71Table of ContentsNote 11 — Accrued and Other LiabilitiesAccrued expenses and other current liabilities consist of the following:(in thousands)2017 2016Accrued compensation and related costs$3,902 $2,192Accrued legal settlement costs3,940 —Gift cards and certificates payable3,184 3,033Accrued interest and non-income taxes payable461 524Convention fund balance841 1,025Advertising cooperative liabilities60 204Other751 525 $13,139 $7,503Note 12 — Income TaxesIn December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes a number of changes to existingU.S. tax laws that affect the Company, most notably a reduction of the top U.S. corporate income tax rate from 35% to 21% for tax yearsbeginning after December 31, 2017. The 2017 Tax Act also provides for the acceleration of depreciation for certain assets placed into service afterSeptember 27, 2017 as well as prospective changes beginning in 2018, including additional limitations on the deductibility executive compensationand interest.The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with Staff Accounting BulletinNo. 118, which provides SEC staff guidance for the application of ASC Topic 740 Income Taxes in the reporting period in which the 2017 Tax Actwas signed into law. As such, the Company’s financial results reflect the income tax effects of the 2017 Tax Act for which the accounting underASC Topic 740 is complete and provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting underASC Topic 740 is incomplete, but a reasonable estimate could be determined. The Company included provisional estimates of income tax effectsof the 2017 Tax Act because the interaction between valuation allowance and future deferred tax assets and liabilities is uncertain as of January 1,2018.The changes to existing U.S. tax laws as a result of the 2017 Tax Act, which the Company believes have the most significant impact on theCompany’s federal income taxes, are as follows:Reduction of the U.S. Corporate Income Tax RateThe Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differencesare expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction inthe Company’s statutory U.S. corporate income tax rate from 34% percent to 21%, resulting in a $12.6 million decrease in income tax expense forthe year ended January 1, 2018 and a corresponding $12.6 million decrease in net deferred tax liabilities as of January 1, 2018.72Table of ContentsThe components of the (benefit from) provision for income taxes are as follows:(in thousands)2017 2016 2015Current tax provision Federal$9 $5 $83State171 214 278 180 219 361Deferred tax (benefit) provision Federal(18,877) 1,508 2,211State(846) 216 (504) (19,723) 1,724 1,707Total (benefit from) provision for income taxes$(19,543) $1,943 $2,068The components of the non-current deferred tax liability are as follows:(in thousands)2017 2016Deferred income tax assets: Unearned franchise and development fees$246 $379Convention and Advertising funds balance208 380Compensation accruals449 102Gift card accruals348 458Asset retirement obligation120 201Deferred rent283 434Share-based compensation769 1,082Net operating loss1,013 1,598Other213 387Total deferred tax assets3,649 5,021Valuation allowance(98) (61)Total deferred tax assets after valuation allowance3,551 4,960Deferred income tax liabilities: Fixed asset, goodwill, and intangible asset basis differences(27,273) (46,836)Other(735) (2,303)Total deferred tax liabilities(28,008) (49,139)Net deferred tax liability$(24,457) $(44,179)As of the end of fiscal 2017, the Company had federal and state net operating loss carry forwards of $3.8 million and $5.0 million, respectively. Asof the end of fiscal 2016, the Company had federal and state net operating loss carry forwards of $4.2 million and $3.9 million, respectively. Thefederal and state net operating loss carry forwards begin to expire in 2032 and 2020, respectively. As of the end of fiscal 2017, the Company hasfederal credit carryovers of $0.6 million that are a combination of credits that begin to expire in 2035.Tax benefits for federal and state net operating loss carry forwards are recorded as an asset to the extent that management assesses theutilization of such assets to be “more likely than not”; otherwise, a valuation allowance is required to be recorded. The Company has looked tofuture reversals of existing taxable temporary differences in determining that its federal and a majority of its state net operating loss carry forwardsare more likely than not to be utilized prior to their expiration dates. Consequently, no valuation allowance has been recorded for these deferred taxassets. Several separate filing states where the Company operates have facts that indicate it is more likely that the Company will not utilize theseparate filing state carryovers prior to their expiration dates. As of the end of fiscal 2017, the Company has recorded a $98,000 valuationallowance for these particular carryovers. The Company will continue to evaluate the need for a valuation allowance in the future. Changes inestimated future taxable income and other underlying factors may lead to adjustments to the valuation allowance in the future.73Table of ContentsAs of the end of fiscal 2017, the Company had $77,000 of unrecognized tax benefits that, if recognized, would affect the effective tax rate. Areconciliation of the beginning and ending liability for unrecognized tax benefits excluding interest and penalties is as follows (in thousands):Balance as of the end of fiscal 2016$72Additions for tax positions of prior years5Balance as of the end of fiscal 2017$77A reconciliation of income tax at the United States federal statutory tax rate (using a statutory tax rate of 34%) to income tax expense for theperiods reported is as follows:(in thousands)2017 2016 2015Federal income tax provision based on statutory rate$(6,647) $1,561 $2,203State and local income tax effect(445) 284 314Impact of change in tax rates(12,621) — (464)Non-deductible expenses203 255 133Tax credits and other(33) (157) (118)(Benefit from) provision for income taxes$(19,543) $1,943 $2,068Note 13 — Share-based CompensationIn May 2010, the Company’s Board of Directors approved the 2010 Plan. In May 2014, the Company’s Board of Directors adopted the 2014 Plan(together with the 2010 Plan, the “Incentive Plans”). The Incentive Plans reserve 2,116,747 common shares for equity incentive awards consistingof incentive stock options, non-qualified stock options, restricted stock awards, and unrestricted stock awards. Equity incentive awards may beissued from either the 2010 Plan or the 2014 Plan.Restricted common sharesUnder the Incentive Plans, restricted common stock awards are subject to either time-vesting or market conditions. Time-vesting restrictedcommon stock awards issued under the 2010 Plan have generally vested 20% on each of the five anniversaries of the sale date. Time-vestingrestricted common stock awards granted under the 2014 Plan have generally vested 100% on the one-year anniversary of the grant date. Prior tofiscal 2017, market condition restricted common stock awards were scheduled to vest when the volume-weighted average closing price per shareof the Company’s common stock equals or exceeds $22.00 per share for 90 consecutive trading days. In fiscal 2017, the vesting condition formarket condition restricted common stock was modified to vest when the volume-weighted average closing price per share of the Company’scommon stock equals or exceeds $14.50 per share for 90 consecutive trading days. To the extent the fair value of an award on the date of thesale, grant, or modification exceeds the sale price, if any, the excess is recognized as compensation expense as a component of selling, general,and administrative expenses. Compensation expense for time-vesting restricted common stock awards is recognized over the requisite serviceperiod on a straight line basis.The Company has a right to repurchase shares sold to employees under the 2010 Plan in the case of a qualifying sale, bankruptcy event, or atermination of employment or service of the employee who purchased shares, including a voluntary termination. Unvested shares as of the date ofthese events are repurchased at the original sale price. The Company generally does not repurchase vested shares from terminated employees.74Table of ContentsInformation with respect to restricted stock awards is as follows: Number of Shares ofRestricted Common Stock TimeVesting MarketCondition Weighted AverageAward DateFair Value per ShareUnvested, 201630,670 148,946 $2.70Granted35,333 — 4.65Vested(29,597) (104,820)(1) 5.18Forfeited/Repurchased(1,508) (3,772) 2.93Unvested, 201734,898 40,354 $3.44(1)As part of the severance agreement with the Company’s former CEO and other executives, the Company accelerated the vesting of certain market conditionrestricted common stock awards.Fair value information for restricted stock awards during the periods reported is as follows:(in thousands, except per share amounts)2017 2016 2015Weighted average grant date fair value per share$4.65 $7.66 $19.05Total fair value of shares issued$164 $138 $150Total fair value of shares vested$697 $220 $171Stock optionsUnder the Incentive Plans, stock options are subject to either time-vesting or market conditions. Time-vesting stock options generally vest 25% oneach of the four anniversaries of the grant date. Prior to fiscal 2017, market condition stock options were scheduled to vest when the volume-weighted average closing price per share of the Company’s common stock equals or exceeds $22.00 per share for 90 consecutive trading days. Infiscal 2017, the vesting condition for market condition stock options was modified to vest when the volume-weighted average closing price pershare of the Company’s common stock equals or exceeds $14.50 per share for 90 consecutive trading days. The grant date fair value and anyadditional fair value from modification of an award are recognized as compensation expense as a component of selling, general, and administrativeexpenses. The compensation expense is recognized over the requisite service period, typically the vesting period, on a straight line basis.Information with respect to stock option activity is as follows: Number of SharesSubject to Stock Options TimeVesting MarketCondition WeightedAverageExercisePrice per Share WeightedAverageRemainingContractualTerm AggregateIntrinsicValue(in thousands)Outstanding, 2016951,688 171,495 $11.48 Granted626,667 83,333 4.75 Forfeited(629,240) (96,701) 3.95 Outstanding, 2017949,115 158,127 $7.60 8.3 years $478Exercisable, 2017277,398 — $11.10 6.8 years $10Fair value information for stock options granted and vested and the intrinsic value of stock options exercised during the periods reported are asfollows:(in thousands, except per share amounts)2017 2016 2015Weighted average grant date fair value per share$1.66 $3.67 $5.41Total fair value of awards granted$1,179 $651 $1,039Total fair value of awards vested$422 $594 $431Total intrinsic value of stock options exercised$— $25 $18975Table of ContentsCompensation cost and valuationTotal compensation costs recognized in connection with the Incentive Plans for fiscal 2017, 2016, and 2015 amounted to $0.7 million, $0.9 million,and $1.1 million, respectively. Additionally, the associated income tax benefits for fiscal 2017, 2016, and 2015 amounted to $0.1 million,$0.3 million, and $0.4 million, respectively.As of the end of fiscal 2017, the total unrecognized share-based compensation expense was $1.5 million, with $1.1 million associated with time-vesting awards and $0.4 million associated with market condition awards. The remaining weighted average period for unrecognized share-basedcompensation expense was 2.4 years as of the end of fiscal 2017.The fair value of the stock option awards granted during the periods reported was estimated with the following weighted-average assumptions. 2017 2016 2015Risk free rate2.00% 1.74% 1.94%Expected volatility25.8% 30.4% 37.9%Expected term5.5 years 6.3 years 6.3 yearsExpected dividend yield0.0% 0.0% 0.0% Note 14 — Earnings per Share (EPS)The number of shares and earnings per share (“EPS”) data for all periods presented are based on the historical weighted-average shares ofcommon stock outstanding.Basic EPS is calculated by dividing income available to common stockholders by the weighted-average number of shares of common stockoutstanding during each period. Diluted EPS is calculated using income available to common stockholders divided by diluted weighted-averageshares of common stock outstanding during each period, which includes unvested restricted common stock and outstanding stock options. DilutedEPS considers the effect of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential commonshares would have an anti-dilutive effect.The following table sets forth the computations of basic and diluted EPS:(in thousands, except per share data)2017 2016 2015Earnings: Net (loss) income$(7) $2,649 $4,411Net loss attributable to noncontrolling interests— — 500Net (loss) income attributable to Papa Murphy’s(7) 2,649 4,911Cumulative Series A and B Preferred dividends— — (2,150)Net (loss) income available to common shareholders$(7) $2,649 $2,761Shares: Basic weighted average common shares outstanding16,870 16,743 16,653Dilutive effect of restricted equity awards (1)— 30 218Diluted weighted average number of shares outstanding16,870 16,773 16,871Earnings per share: Basic earnings per share$— $0.16 $0.29Diluted earnings per share$— $0.16 $0.29(1)An aggregated total of 901,000, 746,000, and 78,000 potential common shares have been excluded from the diluted EPS calculation for 2017, 2016, and 2015,respectively, because their effect would have been anti-dilutive.76Table of ContentsNote 15 — Commitments and ContingenciesOperating lease commitmentsThe Company leases facilities and various office equipment under non-cancelable operating leases which expire through December 2025. Leaseterms for its store units are generally for five years with renewal options and generally require the Company to pay a proportionate share of realestate taxes, insurance, common area maintenance, and other operating costs.The Company has entered into operating leases that it has subleased to two franchised stores. These operating leases have minimum base rentterms and contingent rent terms if individual franchised store sales exceed certain levels and have terms expiring on various dates from May 2020to October 2020.As of the end of fiscal 2017, future minimum payments under the non-cancelable operating leases, excluding contingent rent obligations, are asfollows:(in thousands)Total leaseminimumpayments Sublease income Net leaseminimumpaymentsFiscal years2018$5,227 $54 $5,173 20194,602 54 4,548 20203,607 30 3,577 20212,319 — 2,319 20221,475 — 1,475 Thereafter2,855 — 2,855 $20,085 $138 $19,947Rent expense for fiscal 2017, 2016, and 2015 was $8.0 million, $7.2 million, and $5.6 million, respectively.Lease guaranteesAs of the end of fiscal 2017, the Company is the guarantor for operating leases of 21 franchised stores that have terms expiring on various datesfrom January 2018 to November 2022. These obligations were recorded at fair value at the time the guarantee was entered into, typically inconnection with the refranchising of a Company-owned store. The obligations from these leases will generally continue to decrease over time asthe leases expire. As of the end of fiscal 2017, the Company does not believe it is probable it would be required to perform under the outstandingguarantees. The applicable franchise owners continue to have primary liability for these operating leases.As of the end of fiscal 2017, future commitments under these leases are as follows (in thousands):Fiscal Years2018$598 2019552 2020430 2021186 202214 $1,780Legal proceedingsThe Company is currently subject to litigation with a group of franchise owners. In January 2014, six franchise owner groups claimed that theCompany misrepresented sales volumes, made false representations to them, and charged excess advertising fees, among other things. TheCompany engaged in mediation with these franchise owners, which is required under the terms of their franchise agreements, in order to addressand resolve their claims, but was unable to reach a settlement agreement. On April 4, 2014, a total of twelve franchise owner groups, includingthose franchise owners that previously made the allegations described above, filed a lawsuit against the Company in the Superior Court in ClarkCounty, Washington, making essentially the same allegations for violation of the Washington Franchise Investment Protection Act,77Table of Contentsfraud, negligent misrepresentation and breach of contract and seeking declaratory and injunctive relief, as well as monetary damages. Based onmotions filed by the Company in that lawsuit, the court ruled on July 9, 2014 that certain of the plaintiffs’ claims under the anti-fraud andnondisclosure provisions of the Washington Franchise Investment Protection Act should be dismissed and that certain other claims in the casewould need to be more specifically alleged. The court also ruled that the six franchise owner groups who had not mediated with the Company priorto 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 inthe Superior Court in Clark County, Washington making essentially the same allegations as made in the lawsuit described above and seekingdeclaratory and injunctive relief, as well as monetary damages. The court consolidated the two lawsuits into a single case and ordered that theplaintiffs 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 stayeduntil they 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 thatmediation and other efforts, the Company has now 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 individualdefendants. In September 2016, the remaining 15 franchise owner groups in the consolidated lawsuits filed an amended complaint to add a claimunder the Washington Consumer Protection Act based on substantially the same allegations as the prior claims, to re-plead claims under theWashington Franchise Investment Protection Act that had previously been dismissed, and to dismiss Dan Harmon as a defendant.In June 2017, the parties moved for summary judgment. The Company moved for summary judgment against two of the remaining franchise ownergroups, the board of directors members moved for summary judgment on all claims against them, and the plaintiffs moved for summary judgmentagainst all defendants on their Washington Consumer Protection Act and Washington Franchise Investment Protection Act claims. A hearing onthe 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 thatmediation and other efforts, the Company reached resolutions with six of the remaining franchise owner groups, and their claims have beendismissed.The Company is from time to time involved in litigation, certain other claims and arbitration matters arising in the ordinary course of business. TheCompany accrues for 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 reasonablyestimable. These accruals are reviewed at least quarterly and adjusted to reflect the effects of negotiations, settlements, rulings, advice of legalcounsel 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 theadditional 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 canmake it difficult to predict the impact a particular lawsuit will have on its business. There are many reasons that the Company cannot make theseassessments, 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; thedifficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other partiesmay share in any ultimate liability; and/or the often slow pace of litigation.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 StatesDistrict Court for the Western District of Washington. The lawsuit alleges the Company failed to comply with the requirements of the TelephoneConsumer Protection Act (TCPA) when it sent SMS text messages to consumers. Mr. Lennartson asks that the court certify the putative classand that statutory damages under the TCPA be awarded to plaintiff and each class member. On October 14, 2016, the Federal CommunicationsCommission (FCC) granted the Company a limited waiver from the TCPA’s written consent requirements for certain text messages that it sent upthrough October 16, 2013 to individuals who, like Mr. Lennartson, provided written consent prior to October 16, 2013. On October 20, 2016, theCompany filed a motion for summary judgment seeking dismissal. On October 27, 2016, Mr. Lennartson filed a motion seeking to extend the timeto 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’s78Table of Contentssummary judgment motion until he can complete his appeal of the FCC’s waiver order. In addition, on January 9, 2017, Mr. Lennartson filed anamended complaint adding additional plaintiffs, some of whom provided consent after October 16, 2013, and who are therefore differently situatedfrom 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 Companyand the plaintiffs have commenced negotiations regarding the proposed terms of a settlement agreement, and the Court has issued a stay of thecase for 30 days while the parties pursue settlement negotiations. Successful completion of these negotiations, in addition to necessary courtapprovals and other conditions, would result in the final resolution of the lawsuit; however, the Company provides no assurance that any finalsettlement agreement will be reached by the parties or approved by the Court, or that the lawsuit will be finally resolved. The Company hasrecorded a contingent liability of $3.9 million related to this lawsuit. An adverse judgment or settlement related to this lawsuit could have a materialadverse effect on the Company’s consolidated financial position, results of operations, or cash flows.In addition to the foregoing, the Company is subject to routine legal proceedings, claims and litigation in the ordinary course of its business. TheCompany may also engage in future litigation with franchise owners to enforce the terms of franchise agreements and compliance with brandstandards as determined necessary to protect the Company’s brand, the consistency of products and the customer experience. Lawsuits requiresignificant 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 16 — Retirement PlansThe Company has a defined contribution benefit plan, qualified under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”), covering alleligible employees. 401(k) Plan participants may receive up to a 4% matching contribution up to the limits established by the plan and by theInternal Revenue Service and are vested immediately. Contributions to the 401(k) Plan by the Company during fiscal 2017, 2016, and 2015amounted to $0.4 million, $0.4 million, and $0.4 million, respectively.Note 17 — Advertising FundFranchised and Company-owned stores in the United States contribute to an advertising fund that the Company manages on behalf of thesestores. In addition, certain suppliers contribute to the advertising fund. Under our franchise agreements and other agreements, contributionsreceived by the advertising fund must be spent on marketing, creative efforts, media support, or other related purposes specified in theagreements and result in no profit recognized. Contributions to the advertising fund are netted against the related expense. Expenditures of theadvertising fund are primarily amounts paid to third-parties, but may also include personnel expenses and allocated costs. At each reporting date,to the extent contributions to the advertising fund exceed expenditures on a cumulative basis, the excess contributions are accounted for as adeferred liability and are recorded in accrued expenses in the Company’s Consolidated Balance Sheets. However, if expenditures exceedcontributions on a cumulative basis, the excess is recorded as an expense within selling, general, and administrative expenses. In subsequentperiods, previously recognized expenses may be recovered if subsequent contributions exceed expenditures.Information on the Company’s advertising fund balance for the periods reported is as follows: (in thousands)2017 2016 2015Opening fund (deficit) surplus$(1,586) $(1,200) $505Net activity during the period(4,383) (386) (1,705)Ending fund deficit$(5,969) $(1,586) $(1,200)As of January 1, 2018, previously recognized expenses of $6.0 million may be recovered in future periods if subsequent advertising fundcontributions exceed expenditures.79Table of ContentsNote 18 — Segment InformationThe Company has the following reportable segments: (i) Domestic Franchise; (ii) Domestic Company Stores; and (iii) International. The DomesticFranchise segment includes operations with respect to franchised stores in the United States and derives its revenues from franchise anddevelopment fees and the collection of franchise royalties from the Company’s franchise owners located in the United States. The DomesticCompany Stores segment includes operations with respect to Company-owned stores in the United States and derives its revenues from retailsales of pizza and side items to the general public. The International segment includes operations related to the Company’s operations outside theUnited States and derives its revenues from franchise and development fees and the collection of franchise royalties from franchises locatedoutside the United States.The Company measures the performance of its segments based on segment adjusted EBITDA and allocates resources based primarily on thismeasure. “EBITDA” is calculated as net (loss) income before interest expense, income taxes, depreciation, and amortization. Segment adjustedEBITDA excludes certain unallocated and corporate expenses. Although segment adjusted EBITDA is not a measure of financial condition orperformance determined in accordance with GAAP, the Company uses segment adjusted EBITDA to compare the operating performance of itssegments on a consistent basis and to evaluate the performance and effectiveness of its operational strategies. The Company’s calculation ofsegment adjusted EBITDA may not be comparable to that reported by other companies.The following tables summarize information on revenues, segment adjusted EBITDA, depreciation and amortization, interest expense (income),and assets for each of the Company’s reportable segments and include a reconciliation of segment adjusted EBITDA to (loss) income beforeincome taxes: Revenues(in thousands)2017 2016 2015Domestic Franchise$41,421 $44,434 $45,579Domestic Company Stores76,868 82,080 74,300International372 369 330Total$118,661 $126,883 $120,209The following table summarizes revenues by geographic area: Revenues(in thousands)2017 2016 2015United States$118,289 $126,514 $119,879International372 369 330Total$118,661 $126,883 $120,20980Table of Contents Segment Adjusted EBITDA(in thousands)2017 2016 2015Domestic Franchise$24,195 $23,772 $26,142Domestic Company Stores2,751 2,808 5,943International315 300 268Total reportable segments adjusted EBITDA27,261 26,880 32,353Corporate and unallocated(7,417) (5,184) (6,678)Depreciation and amortization(10,452) (12,236) (10,002)Interest expense, net(5,078) (4,868) (4,524)Secondary offering costs(1)— — (345)Loss on Project Pie impairment and disposal(2)— — (4,325)CEO transition and restructuring(3)(2,614) — —E-commerce impairment(4)(9,085) — —Store closures and impairments(5)(7,712) — —Litigation settlements(6)(4,453) — —(Loss) Income Before Income Taxes$(19,550) $4,592 $6,479(1)Represents costs related to the secondary offering of the Company’s common stock.(2)Represents a $4 million loss recognized upon impairment of Project Pie, a cost-method investment, and its subsequent disposal, and the write-off as bad debtreceivables totaling $325,000.(3)Represents non-recurring management transition and restructuring costs plus costs associated with recruitment of a new Chief Executive Officer and Chief FinancialOfficer.(4)Represents impairment of our e-commerce platform based on the decision to move to a third-party developed and hosted solution.(5)Represents non-cash charges associated with the disposal or impairment of store assets upon the determination that the book value of certain stores was higherthan the fair value of those stores, plus lease buyouts and reserves for the residual contractual lease obligations on closed stores.(6)Payments and accruals made toward franchisee settlements and litigation reserves. Depreciation and amortization(in thousands)2017 2016 2015Domestic Franchise$5,891 $6,606 $5,392Domestic Company Stores4,530 5,599 4,579International31 31 31Total$10,452 $12,236 $10,002 Total Assets(in thousands)2017 2016 2015Domestic Franchise$119,964 $133,466 $139,705Domestic Company Stores38,674 52,531 45,217International336 318 438Other (1)87,200 87,557 90,111Total$246,174 $273,872 $275,471(1) Other assets which are not allocated to the individual segments primarily include trade names & trademarks.All long-lived assets are held within the United States.81Table of ContentsNote 19 — Selected Quarterly Financial Data (unaudited)The following table presents selected unaudited quarterly financial data for the periods indicated:(in thousands, except per share data)Q1 Q2 Q3 Q42017 Revenue$31,994 $29,102 $26,824 $30,741Operating (Loss) Income(7,945) (6,861) (2,081) 2,619Net (Loss) Income(5,414) (6,187) (1,869) 13,463Basic (loss) earnings per share$(0.32) $(0.37) $(0.11) $0.80Diluted (loss) earnings per share$(0.32) $(0.37) $(0.11) $0.79 2016 Revenue$32,985 $29,894 $28,519 $35,485Operating Income2,323 2,813 691 3,821Net Income (Loss)642 952 (421) 1,476Basic earnings (loss) per share$0.04 $0.06 $(0.03) $0.09Diluted earnings (loss) per share$0.04 $0.06 $(0.03) $0.09The sum of the quarterly earnings per share does not always equal the annual earnings per share as a result of the computation of quarterly versusannual average shares outstanding.82Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors ofPapa Murphy’s Holdings, Inc.Opinion of the Financial StatementsWe have audited the accompanying consolidated balance sheets of Papa Murphy’s Holdings, Inc. and subsidiaries (the “Company”) as of January1, 2018 and January 2, 2017, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years inthe period ended January 1, 2018, and the related notes and schedules (collectively referred to as the “consolidated financial statements”). In ouropinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of theCompany as of January 1, 2018 and January 2, 2017, and the consolidated results of its operations and its cash flows for the years then ended, inconformity with accounting principles generally accepted in the United States of America.Basis for OpinionThese consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firmregistered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to theCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commissionand the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. TheCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, weare required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly, we express no opinion.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due toerror or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding theamounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used andsignificant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believethat our audits provide a reasonable basis for our opinion./s/ Moss Adams LLPPortland, OregonMarch 14, 2018We have served as the Company’s auditor since 2006.83Table of ContentsItem 9. Changes in and Disagreements With Accountants on Accounting andFinancial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this report, pursuant to Rules 13a-15 and 15d-15 under the Securities ExchangeAct of 1934 (“Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end ofthe period covered by this report, our disclosure controls and procedures are effective to provide reasonable assurance that information we arerequired to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the timeperiods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.Management’s Annual Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)under the Exchange Act). With the participation of our Chief Executive Officer and Chief Financial Officer, our management evaluated theeffectiveness of our internal control over financial reporting based on the framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”) in Internal Control—Integrated Framework (2013). Based on our evaluation under the framework in InternalControl—Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of January1, 2018.We have not engaged an independent registered accounting firm to perform an audit of our internal control over financial reporting as of anybalance sheet date or for any period reported in our financial statements. Our independent public registered accounting firm will first be required toattest to the effectiveness of our internal control over financial reporting for our Annual Report on Form 10-K for the first year we are no longer an“emerging growth company.”Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred duringour last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Duringfiscal year 2017, we implemented internal controls to ensure we have adequately evaluated our contracts and properly assessed the impact of thenew accounting standards related to revenue recognition and leases on our financial statements to facilitate the adoption of these new accountingstandards on January 2, 2018. We do not expect any further significant changes to our internal control over financial reporting due to the adoptionof the new standards.Item 9B. Other InformationNone.84Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2018 Annual Meeting of Stockholders.The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of our 2017 fiscal year.Item 11. Executive CompensationThe information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2018 Annual Meeting of Stockholders.The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of our 2017 fiscal year.Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder MattersThe information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2018 Annual Meeting of Stockholders.The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of our 2017 fiscal year.Item 13. Certain Relationships and Related Transactions, and DirectorIndependenceThe information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2018 Annual Meeting of Stockholders.The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of our 2017 fiscal year.Item 14. Principal Accountant Fees and ServicesThe information required by this item is incorporated by reference to our Definitive Proxy Statement for our 2018 Annual Meeting of Stockholders.The Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of our 2017 fiscal year.85Table of ContentsPART IVItem 15. Exhibits and Financial Statement Schedules(a)The following documents are filed as part of this report: Form 10-K PageNo.1.Financial Statements: The following financial statements are included inItem 8. “Financial Statements and Supplementary Data”: Consolidated Statements of Operations for the Fiscal Years ended January 1, 2018, January 2, 2017, and December28, 201553 Consolidated Balance Sheets as of January 1, 2018 and January 2, 201754 Consolidated Statements of Shareholders’ Equity for the Fiscal Years ended January 1, 2018, January 2, 2017, andDecember 28, 201555 Consolidated Statements of Cash Flows for the Fiscal Years ended January 1, 2018, January 2, 2017, and December28, 201556 Notes to Consolidated Financial Statements57 Report of Independent Registered Public Accounting Firm832.Financial Statement Schedule: Schedule I - Condensed Financial Information of the Registrant89 Schedule II - Valuation and Qualifying Accounts93 All other schedules are omitted because they are not applicable, not required or the required information is shown in thefinancial statements or the notes thereto. 3.Exhibits: Incorporated By ReferenceExhibit File FilingNumberDescription Of ExhibitsFormNumberExhibitDate3.1Fifth Amended and Restated Certificate of Incorporation of Papa Murphy’s Holdings,Inc.8-K001-364323.1May 13, 20143.2Amended and Restated Bylaws of Papa Murphy’s Holdings, Inc.8-K001-364323.1December 22, 20164.1Form of Common Stock Certificate.S-1/A333-1944884.1April 28, 20144.2Second Amended and Restated Stockholders’ Agreement.8-K001-364324.1May 13, 201410.1‡Amended 2010 Management Incentive Plan.S-1/A333-19448810.1April 4, 201410.2Stockholder’s Agreement8-K001-3643210.1May 13, 201410.3Credit agreement, dated as of August 28, 2014 among PMI Holdings, Inc., GeneralElectric Capital Corporation, and the other financial institutions party thereto.10-Q001-3643210.1November 13, 201410.4‡Form of 2014 Equity Incentive Plan.S-1/A333-19448810.5April 28, 201410.5Form of Franchise Agreement.S-1/A333-19448810.6April 4, 201410.6Form of Area Development Agreement.S-1/A333-19448810.7April 4, 201410.7Form of Multiple Store Commitment Letter and Amendment to Franchise Agreement.S-1/A333-19448810.8April 4, 201410.8*‡Executive Employment and Non-Competition Agreement dated as of August 10,2017 between Papa Murphy’s Holdings, Inc. and Weldon Spangler. 10.9‡Form of Stock Option Agreement subject to time-vesting under the Amended 2010Management Incentive Plan.S-1/A333-19448810.20April 21, 201410.10‡Form of Stock Option Agreement subject to performance-vesting under theAmended 2010 Management Incentive Plan.S-1/A333-19448810.21April 21, 201486Table of Contents Incorporated By ReferenceExhibit File FilingNumberDescription Of ExhibitsFormNumberExhibitDate10.11‡Form of Restricted Stock Agreement subject to time-vesting under the Amended2010 Management Incentive Plan.S-1/A333-19448810.22April 21, 201410.12‡Form of Restricted Stock Agreement subject to performance-vesting under theAmended 2010 Management Incentive Plan.S-1/A333-19448810.23April 21, 201410.13‡Form of Amendment to the Restricted Stock Agreement subject to performance-vesting under the Amended 2010 Management Incentive Plan.S-1/A333-19448810.24April 21, 201410.14‡Form of Stock Option Agreement subject to time-vesting under the Form of 2014Equity Incentive Plan.S-1/A333-19448810.25April 21, 201410.15‡Form of Restricted Stock Agreement subject to time-vesting under the Form of 2014Equity Incentive Plan.S-1/A333-19448810.26April 21, 201410.16Form of Indemnification Agreement between Papa Murphy’s Holdings, Inc. andeach of its directors and executive officers.S-1/A333-19448810.27April 21, 201410.17Form of Indemnification Agreement between Papa Murphy’s Holdings, Inc. andeach of its sponsor-affiliated directors.S-1/A333-19448810.28April 21, 201410.18‡Form of Stock Option Agreement subject to performance-vesting under the Form of2014 Equity Incentive Plan.S-1/A333-19448810.29April 28, 201410.19First Amendment to Credit Agreement, dated as of October 31, 2016, among PMIHoldings, Inc., Wells Fargo Bank, National Association, and the other financialinstitutions party thereto.10-Q001-3643210.1November 2, 201610.20Master Marketing Agreement dated as of September 7, 2016 between Murphy’sMarketing Services, Inc. and GroupM Worldwide, Inc. (d/b/a Modi Media).10-K001-3643210.32March 15, 201710.21Amendment to Master Marketing Agreement dated as of September 27, 2016between Murphy’s Marketing Services, Inc. and The Midas Exchange, Inc.10-K001-3643210.33March 15, 201710.22‡Amended and Restated Executive Employment and Non-Competition Agreementdated as of July 27, 2016 between Papa Murphy’s Holdings, Inc. and Victoria J.Tullett.10-K001-3643210.16March 15, 201710.23‡Amended and Restated Executive Employment and Non-Competition Agreementdated as of July 27, 2016 between Papa Murphy’s Holdings, Inc. and MarkHutchens.10-K001-3643210.18March 15, 201710.24‡Executive Separation Agreement and Release dated as of March 31, 2017 betweenPapa Murphy’s Holdings, Inc. and Brandon Solano.10-Q001-3643210.1May 10, 201710.25‡Executive Separation Agreement and Release dated as of March 29, 2017 betweenPapa Murphy’s Holdings, Inc. and Jayson Tipp.10-Q001-3643210.2May 10, 201710.26*‡Letter of promotion dated as of June 14, 2017 between Papa Murphy’s Holdings,Inc. and Mark Hutchens. 10.27Cooperation Agreement by and among Papa Murphy’s Holdings, Inc., MFPPartners, L.P., Misada Capital Holdings, LLC, Alexander C. Matina and Noah A.Elbogen, dated December 21, 2017.8-K001-3643210.1December 21, 201710.28Letter Agreement by and among Papa Murphy’s Holdings, Inc., MFP Partners, L.P.,Misada Capital Holdings, LLC, and LEP Papa Murphy’s Holdings, LLC, datedDecember 21, 2017.8-K001-3643210.2December 21, 201721.1*List of Subsidiaries of the Registrant. 23.1*Consent of Moss Adams LLP 24.1*Directors’ Powers of Attorney 31.1*Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a)of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002. 31.2*Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a)of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002. 32.1*Certificate of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2*Certificate of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 87Table of Contents Incorporated By ReferenceExhibit File FilingNumberDescription Of ExhibitsFormNumberExhibitDate101.INS*XBRL Instance Document 101.SCH*XBRL Taxonomy Extension Schema Document 101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF*XBRL Taxonomy Extension Definition Linkbase Document 101.LAB*XBRL Taxonomy Extension Label Linkbase Document 101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document * Filed herewith‡ A management contract or compensatory plan or arrangement88Table of ContentsSCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANTPapa Murphy’s Holdings, Inc.Parent Company InformationCondensed Statements of (Loss) Income Fiscal Year(in thousands)2017 2016 2015Equity in (losses) earnings of subsidiaries$(16,718) $6,905 $9,486Selling, general, and administrative expense2,636 2,140 2,380Operating (Loss) Income(19,354) 4,765 7,106 Other expense, net200 180 136(Loss) Income Before Income Taxes(19,554) 4,585 6,970 (Benefit from) provision for income taxes(19,547) 1,936 2,059Net (Loss) Income(7) 2,649 4,911See accompanying notes.89Table of ContentsSCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANTPapa Murphy’s Holdings, Inc.Parent Company InformationCondensed Balance Sheets (in thousands, except par value and share data)January 1, 2018 January 2, 2017Assets Current Assets Prepaid expenses and other current assets$183 $547Total current assets183 547Investment in affiliates128,631 145,349Total assets$128,814 $145,896Liabilities and Equity Current Liabilities Other current liabilities$56 $36Due to consolidated affiliates2,130 185Total current liabilities2,186 221Deferred tax liability24,457 44,179Total liabilities$26,643 $44,400Commitments and contingencies Shareholders’ Equity Preferred stock ($0.01 par value; 15,000,000 shares authorized; no shares issued or outstanding)— —Common stock ($0.01 par value; 200,000,000 shares authorized; 16,971,461 and 16,955,970 shares issued andoutstanding, respectively)170 170Additional paid-in capital120,614 119,932Accumulated deficit(18,613) (18,606)Total shareholders’ equity102,171 101,496Total liabilities and shareholders’ equity$128,814 $145,896See accompanying notes.90Table of ContentsSCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANTPapa Murphy’s Holdings, Inc.Parent Company InformationCondensed Statements of Cash Flows Fiscal Year(in thousands)2017 2016 2015Net cash (used in) provided by operating activities$6 $(209) $(7,278) Investing Activities (Deemed) dividend from subsidiary— — 6,912Net cash provided by (used in) investing activities— — 6,912 Financing Activities Repurchases of common stock(6) (84) (10)Proceeds from exercise of stock options— 293 376Net cash provided by financing activities(6) 209 366 Net change in cash and cash equivalents— — — Cash and Cash Equivalents, beginning of year— — —Cash and Cash Equivalents, end of period$— $— $—See accompanying notes.91Table of ContentsSCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANTPapa Murphy’s Holdings, Inc.Parent Company InformationNotes to Condensed Financial InformationNote 1—Basis of PresentationPapa Murphy’s Holdings, Inc. (the “Parent Company”) is a holding company with no material operations of its own that conducts substantially all ofits activities through its subsidiaries.These consolidated financial statements have been presented on a “parent-only” basis. Under a parent-only presentation, the Parent Company’sinvestments in subsidiaries are presented under the equity method of accounting. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with GAAP have been condensed or omitted. As such, these parent-only statements should be readin conjunction with the Notes to Consolidated Financial Statements of Papa Murphy’s Holdings, Inc. and subsidiaries included in FinancialStatements and Supplementary Data.92Table of ContentsSchedule II—Valuation and Qualifying AccountsPapa Murphy’s Holdings, Inc. and Subsidiaries Balance at Beginning ofPeriod Charged to costs andexpenses (Write-offs), Net ofRecoveries Balance atEnd of PeriodFiscal year 2017 Allowance for trade and other receivables$37 $48 $(18) $67Fiscal year 2016 Allowance for trade and other receivables$31 $6 $— $37Fiscal year 2015 Allowance for trade and other receivables$60 $(30) $1 $3193Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by theundersigned, hereunto duly authorized, on March 14, 2018.PAPA MURPHY’S HOLDINGS, INC. By: /s/ Mark Hutchens Name:Mark Hutchens Title:Executive Vice President, ChiefOperating Officer, and ChiefFinancial OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant in the capacities and on the dates indicated. SIGNATURETITLEDATE /s/ Weldon SpanglerChief Executive OfficerMarch 14, 2018 Weldon Spangler(Principal Executive Officer) and Director /s/ Mark HutchensExecutive Vice President, Chief Operating Officer, and Chief FinancialOfficerMarch 14, 2018 Mark Hutchens(Principal Financial Officer and Principal Accounting Officer) /s/ Jean Birch*Chair of the BoardMarch 14, 2018 Jean Birch /s/ Benjamin Hochberg*DirectorMarch 14, 2018 Benjamin Hochberg /s/ Yoo Jin Kim*DirectorMarch 14, 2018 Yoo Jin Kim /s/ L. David Mounts*DirectorMarch 14, 2018 L. David Mounts /s/ John Shafer*DirectorMarch 14, 2018 John Shafer /s/ Rob Weisberg*DirectorMarch 14, 2018 Rob Weisberg /s/ Katherine L. Scherping*DirectorMarch 14, 2018 Katherine L. Scherping /s/ Noah Elbogen*DirectorMarch 14, 2018 Noah Elbogen /s/ Alex Matina*DirectorMarch 14, 2018 Alex Matina *By: /s/ Mark Hutchens Mark Hutchens Attorney-in-fact pursuant to filed Power of Attorney94Exhibit 10.8EXECUTIVE EMPLOYMENT AND NON-COMPETITION AGREEMENTThis EXECUTIVE EMPLOYMENT AND NON-COMPETITION AGREEMENT (this “Agreement”), dated as of the 10thday of August, 2017, by and between Papa Murphy’s Holdings, Inc., a Delaware corporation (the “Company”), and WeldonSpangler, a resident of Newton, Massachusetts (“Executive”).WHEREAS, the purpose and business of the Company is to operate a ‘take and bake’ pizza franchising business (the“Business”);WHEREAS, the Company desires to be assured that the confidential information and goodwill of the Company will bepreserved for the exclusive benefit of the Company;WHEREAS, the Company desires to be assured that the unique and expert services of Executive will continue to be availableto the Company, and that Executive is willing and able to continue to render such services on the terms and conditions hereinafter setforth; andNOW, THEREFORE, in consideration of such employment and the mutual covenants and promises herein contained, and forother good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executiveagree as follows:1.Employment. The Company hereby agrees to employ Executive, and Executive hereby agrees to accept employment withthe Company, upon the terms and conditions contained in this Agreement, to be effective on the date that Executive commencesemployment with the Company (the “Effective Date”). Executive’s employment with the Company shall continue, subject to earliertermination of such employment pursuant to the terms hereof, until April 1, 2019 after the Effective Date (the “Employment Period”).Notwithstanding anything herein to the contrary, this Agreement shall be of no force or effect until the Effective Date. On April 1,2019 and on each anniversary thereof, the Employment Period shall be automatically extended for an additional twelve-month period.The Company or Executive may elect to terminate the automatic extension of the Employment Period by giving written notice of suchelection not less than ninety (90) days prior to the end of the then current Employment Period.2.Duties. During the Employment Period, Executive shall serve on a full-time basis and perform services in a managerialcapacity in a manner consistent with Executive’s position as Chief Executive Officer of the Company and President of the Companyand Executive’s duties and responsibilities shall include those duties reasonably assigned to him from time to time by the Company’sBoard of Directors (the “Board”). During the Employment Term, the Board shall nominate Executive for re-election as a member ofthe Board at the expiration of each then-current term. Executive shall devote his entire business time, attention and energies (exceptingvacation time, holidays, sick days and periods of disability) and use his best efforts in his employment with the Company; provided,however, that this Agreement shall not be interpreted as prohibiting Executive from managing his personal affairs, engaging incharitable or civic activities, or serving as a director of or providing services to another business or enterprise (whether engaged in forprofit or not; provided, however, with respect to for profit businesses, Executive shall be limited to serving as a director to three for-profit business enterprises other than the Company), so long as such1activities do not interfere in any material respect with the performance of Executive’s duties and responsibilities hereunder.3.Compensation.3.1Base Salary.(a)In consideration of the services rendered by Executive under this Agreement, the Company shall payExecutive a base salary (the “Base Salary”) at the rate of $515,000 per calendar year during his employment.(b)The Base Salary shall be paid in such installments and at such times as the Company pays its regularlysalaried executives and shall be subject to all necessary withholding taxes, FICA contributions and similar deductions in accordancewith the Company’s customary payroll procedures.(c)The Base Salary will be reviewed on an annual basis by the Board and may be increased based on individualperformance and/or the performance of the Company; provided, however, that Executive’s Base Salary may not be decreased at anytime (including after any increase) other than as part of an across-the-board salary reduction similarly affecting all or substantially allmanagement employees.3.2Bonus. During the Employment Period, Executive shall be eligible to receive an annual bonus award (the “AnnualBonus”) with the target amount equal to at least 75% at the discretion of the Compensation Committee and the Board (subject to anyrequired stockholder approval) of the Base Salary, payable in accordance with the Company’s incentive compensation policy;provided, that, such Annual Bonus shall in no event be paid later than March 15 of the calendar year immediately following the fiscalyear to which such Annual Bonus relates. The Annual Bonus shall be based upon the attainment of certain targets as agreed upon byExecutive and the Board with respect to the Company’s financial performance for any fiscal year ending during the EmploymentPeriod. The Annual Bonus shall be subject to all necessary withholding taxes, FICA contributions and similar deductions.3.3Equity Incentive Awards. The Compensation Committee shall determine the timing, amount and form of any grantsequity-based incentive compensation awards to be made to Executive.3.4Vacation. Executive shall be entitled to take vacation consistent with Company policy, such vacation to extend forsuch periods and to be taken at such intervals as shall be appropriate and consistent with the proper performance of Executive’s dutieshereunder.3.5Benefits. During the term of Executive’s employment under this Agreement, Executive shall be entitled to participatein any benefit plans (excluding any severance or bonus plans unless specifically referenced in this Agreement) offered by the Companyas in effect from time to time (collectively, “Benefit Plans”), on the same basis as that generally made available to other seniorexecutives of the Company, to the extent Executive may be eligible to do so under the terms of any such Benefit Plan. Executiveunderstands that any such Benefit Plans may be terminated or amended from time to time by the Company in its discretion.4.Termination. Executive’s employment hereunder may be terminated as follows:24.1By the Company. With or without Cause (as defined below), the Company may terminate the employment ofExecutive at any time during the term of employment upon giving Executive at least 90 days’ prior written notice thereof. The effectivedate of the termination of Executive’s employment shall be the date on which such applicable 90-day period expires; provided,however, that the Company may, upon notice to Executive and without reducing Executive’s Base Salary during such 90-day period,excuse Executive from any or all of his duties during such period and request Executive to immediately resign as a director of theCompany, if applicable, and officer of the Company, whereupon, if requested to so resign, Executive shall immediately resign.4.2By Executive. Executive may terminate his employment at any time upon giving the Company, in the case oftermination by Executive (a) other than with Good Reason, at least 60 days’ prior written notice thereof and (b) with Good Reason, atleast 31 days’ prior written notice thereof. The effective date of the termination of Executive’s employment shall be the date on whichsuch applicable 60- or 31-day period expires; provided, however, that the Company may, upon notice to Executive and withoutreducing Executive’s annual base salary during such 60- or 31-day period, excuse Executive from any or all of his duties during suchperiod and request Executive to immediately resign as a Director, if applicable, and officer of the Company, whereupon, if requested toso resign, Executive shall immediately resign; and provided further, that in the case of termination with Good Reason, the Companyhas not cured the condition constituting Good Reason. Any such resignation at the Company’s request following Executive’s notice oftermination other than with Good Reason shall not be deemed to represent termination of Executive’s employment by the Company forpurposes of this Agreement or otherwise, but shall be deemed voluntary termination by Executive of his employment without GoodReason.4.3Total Disability of Executive. This Agreement and Executive’s employment hereunder shall terminate automaticallyupon the death or Total Disability of Executive. The term “Total Disability” as used herein shall mean a physical or mental incapacityor disability which renders Executive unable to render the services required hereunder (a), with or without reasonable accommodation,for a period or periods aggregating 180 days in any 12-month period or (b) for a period of 90 consecutive days. Executive andEmployer hereby acknowledge that Executive’s ability to perform the duties specified in Section 2 hereof is of the essence of thisAgreement. Termination hereunder shall be deemed to be effective immediately upon Executive’s death or a determination by theBoard of Directors of Executive’s Total Disability.5.Termination Payments.5.1Death or Total Disability. Subject to Section 5.7, upon the termination of Executive’s employment due to death orTotal Disability, Executive or his legal representatives shall be entitled to receive (a) an amount equal to Base Salary payable throughthe date of termination and (b) a pro rata portion of Executive’s Annual Bonus, if any, for the applicable period of the calendar year forwhich Executive was employed (which portion of the Annual Bonus shall be reasonably determined by the Board at the end of theyear in which termination occurs in accordance with the Board’s bonus determination policies then in effect), payable at the same timeas such payment would have been made if not for Executive’s death or Total Disability. Executive or his legal representatives shallalso be entitled to any accrued and unpaid vacation pay or other benefits which may be owing in accordance with the Company’spolicies.35.2Termination Without Cause or by Executive for Good Reason. Subject to Section 5.7, if Executive’s employment isterminated by the Company at any time during the Employment Period without Cause or by Executive at any time during theEmployment Period for Good Reason, Executive shall be entitled to receive (a) any accrued but unpaid Base Salary through the dateof termination; (b) Base Salary through the one-year anniversary of such date of termination, payable at the time such payments wouldhave otherwise been payable under this Agreement had the Executive not been terminated; provided, however, that no portion of suchseverance pay shall be paid to the Executive prior to the first regular payroll following the 60th day of the date of the Executive’stermination of employment with the Company (the “First Payroll Date”) and the portion of the severance pay that would have beenpaid to the Executive prior to the First Payroll Date shall be paid to the Executive on the First Payroll Date in a single lump sum; (c) apro rata portion of Executive’s Annual Bonus, if any, for the applicable period of the calendar year for which Executive was employed(which portion of the Annual Bonus shall be reasonably determined by the Board at the end of the year in which termination occurs inaccordance with the Board’s bonus determination policies then in effect), payable at the later of (i) same time as such payment wouldhave been made if not for termination of Executive’s employment with the Company as set forth in Section 3.2 hereof and (ii) the FirstPayroll Date; (d) if Executive is entitled (and timely and properly elects) to continue his coverage under the Company’s group healthplans pursuant to Section 4980B of the Internal Revenue Code of 1986, as amended (commonly known as (“COBRA”)), payment by(or reimbursement from) the Company of the same portion of the premium for such coverage as the Company was paying forExecutive’s coverage under such plans as of Executive’s date of termination, for a period of one year after the date of termination oruntil Executive is no longer entitled to COBRA continuation coverage under the Company’s group health plans, whichever period isshorter; provided, however, that the Company may unilaterally amend clause (d) of this sentence or eliminate the benefit providedthereunder to the extent it deems necessary to avoid the imposition of excise taxes, penalties or similar charges on the Company or itsaffiliates (or successors), including, without limitation, under Section 4980D of Internal Revenue Code of 1986, as amended (the“Code”); (e) (1) outstanding stock options held by Executive with solely time-based vesting shall become immediately exercisable withrespect to the portion that would have otherwise become exercisable on or before the one-year anniversary of Executive’s date oftermination and shall remain exercisable until the earlier of (x) the 60th day after the one-year anniversary of Executive’s date oftermination and (y) the stock option expiration date as set forth in the applicable stock option agreement; (2) for outstanding restrictedstock awards held by Executive with solely time-based vesting, any vesting requirements shall be deemed satisfied, and any Companyrepurchase rights shall immediately terminate, with respect to the portion that would have otherwise become vested and no longersubject to forfeiture or repurchase on or before the one-year anniversary of Executive’s date of termination; and (3) with respect to anyother outstanding equity compensation awards other than stock options and restricted stock awards (but including restricted stock units)with solely time-based vesting, Executive will immediately vest in and have the right to exercise or payment of such awards,restrictions on such awards will lapse, and all other terms and conditions of such awards will be deemed met, with respect to theportion that would have otherwise become vested and exercisable or payable and no longer subject to restriction on or before the one-year anniversary of Executive’s date of termination; and (f) (1) outstanding stock options held by Executive with performance-basedvesting that are not vested and exercisable on Executive’s date of termination will not be forfeited when Executive’s employmentterminates and shall instead remain outstanding until the earlier of (x) the fifth anniversary of the date on which such stock optionsbecome vested and exercisable and (y) the4stock option expiration date as set forth in the applicable stock option agreement and (2) for outstanding restricted stock awards held byExecutive with performance-based vesting, such restricted stock awards shall not cease to vest upon Executive’s date of terminationand any Company repurchase right shall not become exercisable with respect to any such restricted stock awards. Executive shall alsobe entitled to any accrued and unpaid vacation pay or other benefits which may be owing in accordance with the Company’s policies.5.3Termination for Cause, by Executive without Good Reason or by Nonrenewal. Except for Base Salary through theday on which Executive’s employment was terminated and any accrued and unpaid vacation pay or other benefits which may beowing in accordance with the Company’s policies or applicable law, Executive shall not be entitled to receive severance or any othercompensation or benefits after the last date of employment with the Company upon the termination of Executive’s employmenthereunder by the Company for Cause pursuant to Section 4.1, by Executive without Good Reason pursuant to Section 4.2 or as aresult of non-renewal by the Company or Executive pursuant to Section 1.5.4Cause Defined. For purposes of this Agreement, the following shall constitute “Cause” for termination:(a)dishonest statements or acts of Executive with respect to the Company or any affiliate of the Company;(b)the commission by or indictment of Executive for (A) a felony or (B) any misdemeanor involving moralturpitude, deceit, dishonesty or fraud (“indictment,” for these purposes, meaning an indictment, probable cause hearing or any otherprocedure pursuant to which an initial determination of probable or reasonable cause with respect to such offense is made);(c)gross negligence, willful misconduct or insubordination of Executive with respect to the Company or anyaffiliate of the Company; or(d)material breach by Executive of any of Executive’s obligations to the Company;(e)failure to relocate to the Portland, Oregon/Vancouver, Washington metropolitan area on or before February28, 2018;provided, that, in the case of clause (d), in the event that the Company provides written notice of termination for Cause in reliance uponthis, Executive shall have the opportunity to cure such circumstances within 30 days of receipt of such notice.5.5Good Reason Defined. For purposes of this Agreement, the term “Good Reason” shall mean, without Executive’sverbal or written consent:(a)the Company materially breached its obligations under this Agreement;(b)any material diminution of significant duties of Executive;(c)a reduction in Executive’s Base Salary of 10% or more, other than pursuant to a reduction applicable to allsenior executives or employees generally; or5(d)the company’s corporate headquarters is moved a distance of at least 50 miles from its current corporateheadquarters in Vancouver, Washington.Notwithstanding the foregoing subsections (a) through (d), Good Reason for termination shall not exist unless (i) Executive notifiesEmployer in writing of the occurrence or existence of the event or condition which Executive believes constitutes Good Reason within90 days of the occurrence or initial existence of such event or condition (which notice specifically identifies such event or condition),(ii) the Company fails to cure or remedy such event or condition within 30 days after the date on which it receives such notice (the“Remedial Period”), and (iii) Executive actually terminates employment within 90 days after the expiration of the Remedial Period.5.6Termination for Good Reason or Without Cause Following a Change in Control.(a)Payment. Notwithstanding anything to the contrary in the Company’s 2010 Management Incentive Plan, ifExecutive’s employment is terminated (i) in connection with a Change in Control or (ii) within one year after a Change in Control(A) by Executive for Good Reason, or (B) by the Company without Cause, then Executive’s compensation and benefits upontermination shall be governed by this Section 5.6 and Section 5.7 instead of the provisions of Section 5.2 above. In such event,Executive shall be entitled solely to the following: (1) Base Salary through the date of termination, paid on the Company’s’ normalpayroll payment date; (2) an amount equal to the sum of his Base Salary and his target annual bonus for the year of termination,payable in a lump sum on the First Payroll Date; (3) an additional amount equal to Executive’s target annual bonus for such year prorated for the number of full months during the bonus year prior to such termination of employment, payable in a lump sum on the FirstPayroll Date; (4) if Executive is entitled (and timely and properly elects) to continue his coverage under the Company’s group healthplans pursuant to COBRA, payment by (or reimbursement from) the Company of the same portion of the premium for such coverageas the Company was paying for Executive’s coverage under such plans as of Executive’s date of termination for a period of one yearafter the date of termination or until Executive is no longer entitled to COBRA continuation coverage under the Company’s grouphealth plans, whichever period is shorter; provided, however, that the Company may unilaterally amend clause (4) of this sentence oreliminate the benefit provided thereunder to the extent it deems necessary to avoid the imposition of excise taxes, penalties or similarcharges on the Company or its affiliates (or successors), including, without limitation, under Section 4980D of the Code; and (5) anyaccrued and unpaid vacation pay or other benefits which may be owing to Executive in accordance with the Company’s policies.(b)Equity Compensation. If Executive’s employment is terminated (i) in connection with a Change in Control or(ii) within one year after a Change in Control (A) by Executive for Good Reason, or (B) by the Company without Cause, then:(1) outstanding stock options held by Executive with solely time-based vesting shall become immediately fully exercisable and shallremain exercisable until the earlier of (x) the 60th day after the one-year anniversary of Executive’s date of termination and (y) thestock option expiration date as set forth in the applicable stock option agreement; (2) for outstanding restricted stock awards held byExecutive with solely time-based vesting, any vesting or performance requirements shall be deemed satisfied, and any Companyrepurchase rights shall immediately terminate; (3) with respect to any outstanding equity compensation awards other than stock optionsand restricted stock awards (but including restricted stock units) with solely time-based vesting, Executive will immediately vest in andhave the right to exercise or payment of such awards, all restrictions on such awards will lapse, and all other terms6and conditions of such awards will be deemed met; (4) outstanding stock options held by Executive with performance-based vestingthat are not vested and exercisable on Executive’s date of termination will not be forfeited when Executive’s employment terminatesand shall instead remain outstanding until the stock option expiration date as set forth in the applicable stock option agreement; and(5) for outstanding restricted stock awards held by Executive with performance-based vesting, such restricted stock awards shall notcease to vest upon Executive’s date of termination and any Company repurchase right shall not become exercisable with respect to anysuch restricted stock awards.(c)Change in Control Defined. A “Change in Control” shall mean: (i) any consolidation or merger of theCompany in which the Company is not the continuing or surviving corporation or pursuant to which shares of Company’s CommonStock would be converted into the right to receive cash, securities or other property, other than a merger of the Company in which theholders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the survivingcorporation immediately after the merger; (ii) any sale, lease, exchange or other transfer (in one transaction or a series of relatedtransactions) of all or substantially all the assets of the Company; (iii) the acquisition by any person (as such term is defined inSection 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), excluding, for this purpose, the Company)of any shares of Common Stock (or securities convertible into Common Stock), if after making such acquisition, such person is thebeneficial owner (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of 40% or moreof the outstanding Common Stock (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire commonstock); or (iv) the failure, for any reason, of the persons comprising the Board of Directors as of the date hereof (the “IncumbentBoard”) to constitute at least a majority of the Board of Directors; provided, however, that any person whose election or nomination forelection was approved by a majority of the persons then comprising the Incumbent Board (other than an election or nomination of aperson whose initial assumption of office is in connection with an actual or threatened election contest relating to the election ofdirectors) shall be, for purposes of this Agreement, deemed to be a member of the Incumbent Board.5.7Condition to Payment. All payments and benefits due to Executive under this Section 5 which are not otherwiserequired by law shall be contingent upon (a) execution by Executive (or Executive’s beneficiary or estate) of a fully effective and non-revocable general release of all claims to the maximum extent permitted by law against the Company, its affiliates and its current andformer stockholders, directors, members, managers, employees and agents, in such form as determined by the Company in its solediscretion within 60 days of Executive’s termination of employment and (b) compliance by Executive with his obligations under thisAgreement, including, without limitation, the restrictions on activities of Executive set forth in Section 7 and under any stockholders orother agreement to which the Company and Executive are a party. No payments (or reimbursements) that are subject to this Section 5.7shall be made prior to the First Payroll Date. Any payments that would have been made to (or on behalf of) Executive underSection 5.2 during the period between the date of termination of Executive’s employment with the Company and the First PayrollDate, but for the requirements of this Section 5.7, shall be paid to Executive in a lump sum on the First Payroll Date and, thereafter, theremaining portion of such benefits shall be paid over the remainder of the time period originally scheduled for such payments.75.8Section 280G.(a)Amount of Payments and Benefits. Notwithstanding anything to the contrary herein, in the event that theExecutive becomes entitled to receive or receives any payments, options, awards or benefits (including, without limitation, themonetary value of any noncash benefits and the accelerated vesting of equity-based awards) under this Agreement or under any otherplan, agreement or arrangement with the Company or any person affiliated with the Company (collectively, the “Payments”), that mayseparately or in the aggregate constitute “parachute payments” within the meaning of Section 280G of the Code and the TreasuryRegulations promulgated thereunder (or any similar or successor provision) (collectively, “Section 280G”) and it is determined that, butfor this Section 5.8 any of the Payments will be subject to any excise tax pursuant to Section 4999 of the Code or any similar orsuccessor provision (the “Excise Tax”), the Company shall pay to the Executive either (i) the full amount of the Payments or (ii) anamount equal to the Payments, reduced by the minimum amount necessary to prevent any portion of the Payments from being an“excess parachute payment” (within the meaning of Section 280G) (the “Capped Payments”), whichever of the foregoing amountsresults in the receipt by the Executive, on an after-tax basis, of the greatest amount of Payments notwithstanding that all or someportion of the Payments may be subject to the Excise Tax. For purposes of determining whether the Executive would receive a greaterafter-tax benefit from the Capped Payments than from receipt of the full amount of the Payments, (i) there shall be taken into accountany Excise Tax and all applicable federal, state and local taxes required to be paid by the Executive in respect of the receipt of suchpayments and (ii) such payments shall be deemed to be subject to federal income taxes at the highest rate of federal income taxationapplicable to individuals that is in effect for the calendar year in which the payments and benefits are to be paid, and state and localincome taxes at the highest rate of taxation applicable to individuals in the state and locality of the Executive’s residence on theeffective date of the relevant transaction described under Section 280G(b)(2)(A)(i) of the Code, net of the maximum reduction infederal income taxes that could be obtained from deduction of such state and local taxes (as determined by assuming that suchdeduction is subject to the maximum limitation applicable to itemized deductions under Section 68 of the Code and any otherlimitations applicable to the deduction of state and local income taxes under the Code). In the event that Executive will receive CappedPayments and to the extent that an ordering of the reduction other than by the Executive is required by Section 11.7 or other taxrequirements, the Payments shall be reduced by the Company in a manner and order of priority that provides the Executive with thelargest net after-tax value; provided that payments of equal after-tax present value shall be reduced in the reverse order of payment.Notwithstanding anything to the contrary herein, any such reduction shall be structured in a manner intended to comply withSection 409A of the Code.(b)Computations and Determinations. All computations and determinations called for by this Section 5.8 shall bemade by an independent accounting firm or independent tax counsel appointed by the Company (the “Tax Counsel”), and all suchcomputations and determinations shall be conclusive and binding on the Company and the Executive. For purposes of suchcalculations and determinations, the Tax Counsel may rely on reasonable, good faith interpretations concerning the application ofSections 280G and 4999 of the Code. The Tax Counsel shall submit its determination and detailed supporting calculations to both theExecutive and the Company within 15 days after receipt of a notice from either the Company or the Executive that the Executive mayreceive payments which may be considered “parachute payments.” The Company and the Executive shall furnish to the Tax Counselsuch information and documents as the Tax Counsel may reasonably request in order to make the computations and determinationscalled for8by this Section 5.8. The Company shall bear all costs that the Tax Counsel may reasonably incur in connection with the computationsand determinations called for by this Section 5.8.5.9No Other Severance. Executive hereby acknowledges and agrees that, other than the severance payment described inSections 5.2 and 5.6 hereof, upon termination, Executive shall not be entitled to any other severance under any Company benefit planor severance policy generally available to the Company’s employees or otherwise.5.10Board Resignation. Upon termination of Executive’s employment for any reason, Executive agrees to resign, as ofthe date of such termination and to the extent applicable, as an officer and director of the Company and all of its subsidiaries andaffiliates.5.11Survival. This Section 5 shall survive any termination or expiration of this Agreement.6.Reimbursement of Expenses. The Company shall reimburse Executive for all reasonable and necessary expenses actuallyincurred by Executive directly in connection with the business and affairs of the Company and the performance of his dutieshereunder, upon presentation of proper receipts or other proof of expenditure and in accordance with such reasonable guidelines orlimitations established by the Board from time to time.7.Non-Competition; Non-Solicitation; Confidentiality; Proprietary Rights.7.1Executive hereby agrees that during the period commencing on the date hereof and ending on the date that is oneyear following the date of the termination of Executive’s employment with the Company (the “Noncompetition Period”), Executivewill not, without the express written consent of the Company, directly or indirectly, anywhere in the United States or in any foreigncountry in which the Company has conducted business, is conducting business or is then contemplating conducting business, engagein any activity which is, or participate or invest in, or provide or facilitate the provision of financing to, or assist (whether as owner,part-owner, shareholder, member, partner, director, officer, trustee, employee, agent or consultant, or in any other capacity), anybusiness, organization or person other than the Company (or any subsidiary or affiliate of the Company), and including any suchbusiness, organization or person involving, or which is, a family member of Executive, whose business, activities, products or servicesare competitive with any of the business, activities, products or services conducted, offered or then contemplated to be conducted oroffered by the Company or its subsidiaries or affiliates; provided, however, nothing herein shall prohibit Executive from beingemployed by any business, organization or person that operates in the quick service restaurant industry and derives less than 10% of itstotal revenue from the sale of pizza. Without implied limitation, the foregoing covenant shall be deemed to prohibit (a) hiring orengaging or attempting to hire or engage for or on behalf of Executive or any such competitor any officer or employee of the Companyor any of its direct and/or indirect subsidiaries and affiliates, or any former employee of the Company and any of its direct and/orindirect subsidiaries and affiliates who was employed during the 6-month period immediately preceding the date of such attempt to hireor engage, (b) encouraging for or on behalf of Executive or any such competitor any such officer or employee to terminate his or hisrelationship or employment with the Company or any of its direct or indirect subsidiaries and affiliates, (c) soliciting for or on behalf ofExecutive or any such competitor any client (including all franchisees) of the Company or any of its direct or indirect subsidiaries andaffiliates, or any former client (including9all franchisees) of the Company or any of its direct or indirect subsidiaries and affiliates who was a client (including all franchisees)during the 6-month period immediately preceding the date of such solicitation and (d) diverting to any person (as hereinafter defined)any client (including all franchisees) or business opportunity of the Company or any of its direct or indirect subsidiaries and affiliates.Notwithstanding anything herein to the contrary, Executive may make passive investments in any enterprise the shares of which arepublicly traded if such investment constitutes less than 2% of the equity of such enterprise. Neither Executive nor any business entitycontrolled by Executive is a party to any contract, commitment, arrangement or agreement which could, following the date hereof,restrain or restrict the Company or any subsidiary or affiliate of the Company from carrying on its business or restrain or restrictExecutive from performing his employment obligations, and as of the date of this Agreement Executive has no business interestswhatsoever in or relating to the industries in which the Company or its subsidiaries or affiliates currently engage, and other than passiveinvestments in the shares of public companies of less than 2%.7.2In the course of performing services hereunder, on behalf of the Company (for purposes of this Section 7 includingall predecessors of the Company) and its affiliates, Executive has had and from time to time will have access to ConfidentialInformation (as defined below). Executive agrees (a) to hold the Confidential Information in strict confidence, (b) not to disclose theConfidential Information to any person (other than in the regular business of the Company or its affiliates), and (c) not to use, directlyor indirectly, any of the Confidential Information for any purpose other than on behalf of the Company and its affiliates. Alldocuments, records, data, apparatus, equipment and other physical property, whether or not pertaining to Confidential Information, thatare furnished to Executive by the Company or are produced by Executive in connection with Executive’s employment will be andremain the sole property of the Company. Upon the termination of Executive’s employment with the Company for any reason and asand when otherwise requested by the Company, all Confidential Information (including, without limitation, all data, memoranda,customer lists, notes, programs and other papers and items, and reproductions thereof relating to the foregoing matters) in Executive’spossession or control, shall be immediately returned to the Company. Executive recognizes that the Company and its affiliates possessa proprietary interest in all of the Confidential Information and have the exclusive right and privilege to use, protect by copyright,patent or trademark, or otherwise exploit the processes, ideas and concepts described therein to the exclusion of Executive, except asotherwise agreed between the Company and Executive in writing. Executive expressly agrees that any products, inventions,discoveries or improvements made by Executive or Executive’s agents or affiliates in the course of Executive’s employment shall bethe property of and inure to the exclusive benefit of the Company. Executive further agrees that any and all products, inventions,discoveries or improvements developed by Executive (whether or not able to be protected by copyright, patent or trademark) duringthe course of his employment, or involving the use of the time, materials or other resources of the Company or any of its affiliates, shallbe promptly disclosed to the Company and shall become the exclusive property of the Company, and Executive shall execute anddeliver any and all documents necessary or appropriate to implement the foregoing. Nothing in this Agreement is intended to or will beused in any way to limit Executive’s rights to communicate with a government agency, as provided for, protected under or warrantedby applicable law.7.3During and after Executive’s employment, Executive shall cooperate fully with the Company in the defense orprosecution of any claims or actions now in existence or which may be10brought in the future against or on behalf of the Company that relate to events or occurrences that transpired while Executive wasemployed by the Company. The Company shall reimburse Executive for any reasonable out-of-pocket expenses incurred inconnection with Executive’s performance of obligations pursuant to this Section 7.3.7.4The term “Confidential Information” shall mean information belonging to the Company which is of value to theCompany or with respect to which Company has right in the course of conducting its business and the disclosure of which could resultin a competitive or other disadvantage to the Company. Confidential Information includes information, whether or not patentable orcopyrightable, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including, by way of exampleand without limitation, trade secrets, ideas, concepts, designs, configurations, specifications, drawings, blueprints, diagrams, models,prototypes, samples, flow charts processes, techniques, formulas, software, improvements, inventions, data, know-how, discoveries,copyrightable materials, marketing plans and strategies, sales and financial reports and forecasts, customer lists, studies, reports,records, books, contracts, instruments, surveys, computer disks, diskettes, tapes, computer programs and business plans, prospects andopportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by themanagement of the Company. Confidential Information includes information developed by Executive in the course of Executive’semployment by the Company, as well as other information to which Executive may have access in connection with Executive’semployment. Confidential Information also includes the confidential information of others with which the Company has a businessrelationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain, unless due tobreach of Executive’s duties under Section 7.2.8.Remedies. It is specifically understood and agreed that any breach of the provisions of Section 7 of this Agreement is likelyto result in irreparable injury to the Company and that the remedy at law alone will be an inadequate remedy for such breach, and thatin addition to any other remedy it may have, the Company shall be entitled (a) to enforce the specific performance of this Agreementby Executive and to seek both temporary and permanent injunctive relief (to the extent permitted by law) without bond and withoutliability should such relief be denied, modified or violated and (b) to cease making any payments or providing any benefit otherwiserequired by this Agreement, including, without limitation, any severance payment required under Section 5.2, in each case in additionto any other remedy to which the Company may be entitled at law or in equity.9.Severable Provisions. The provisions of this Agreement are severable and the invalidity of any one or more provisions shallnot affect the validity of any other provision. In the event that a court of competent jurisdiction shall determine that any provision ofthis Agreement or the application thereof is unenforceable in whole or in part because of the duration or scope thereof, the partieshereto agree that said court in making such determination shall have the power to reduce the duration and scope of such provision tothe extent necessary to make it enforceable, and that the Agreement in its reduced form shall be valid and enforceable to the full extentpermitted by law.10.Notices. All notices hereunder, to be effective, shall be in writing and shall be deemed effective when delivered by hand ormailed by (a) certified mail, postage and fees prepaid, or (b) nationally recognized overnight express mail service, as follows:11If to the Company:Papa Murphy’s Holdings, Inc.8000 N.E. Parkway Drive, Suite 350Vancouver, WA 98662Attn: Legal DepartmentIf to the Executive:Weldon Spangler18 Norumbega CourtNewton, MA 02466or to such other address as a party may notify the other pursuant to a notice given in accordance with this Section 10.11.Miscellaneous.11.1Executive Representation. Executive hereby represents to the Company that the execution and delivery of thisAgreement by Executive and the Company and the performance by Executive of Executive’s duties hereunder shall not constitute abreach of, or otherwise contravene, or be prevented, interfered with or hindered by, the terms of any employment agreement or otheragreement or policy to which Executive is a party or otherwise bound.11.2Entire Agreement; Amendment. This Agreement constitutes the entire Agreement between the parties hereto withregard to the subject matter hereof, superseding all prior understandings and agreements, whether written or oral. This Agreement maynot be amended or revised except by a writing signed by the parties.11.3Assignment and Transfer. The provisions of this Agreement shall be binding on and shall inure to the benefit of theCompany and any successor in interest to the Company. Neither this Agreement nor any of the rights, duties or obligations ofExecutive shall be assignable by Executive, nor shall any of the payments required or permitted to be made to the Executive by thisAgreement be encumbered, transferred or in any way anticipated, except as required by applicable laws. All rights of Executive underthis Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, estates, executors,administrators, heirs and beneficiaries. All amounts payable to Executive hereunder shall be paid, in the event of Executive’s death, tothe Executive’s estate, heirs or representatives.11.4Waiver of Breach. A waiver by either party of any breach of any provision of this Agreement by the other partyshall not operate or be construed as a waiver of any other or subsequent breach by the other party.11.5Withholding. The Company shall be entitled to withhold from any amounts to be paid or benefits provided toExecutive hereunder any federal, state, local or foreign withholding, FICA contributions, or other taxes, charges or deductions which itis from time to time required to withhold. The Company shall be entitled to rely on advice of counsel if any question as to the amountor requirement of any such withholding shall arise.1211.6Set Off. The Company’s obligation to pay Executive the amounts provided and to make the arrangements providedhereunder shall be subject to set‑off, counterclaim or recoupment of amounts owed by Executive to the Company or its affiliates;provided, however, this set-off right is limited to actual amounts owed by Executive to the Company (which, for the avoidance ofdoubt, shall exclude any consequential or indirect damages).11.7Section 409A. The parties intend that this Agreement and the payments and benefits provided hereunder be exemptfrom the requirements of Section 409A of the Code to the maximum extent possible, whether pursuant to the short-term deferralexception described in Treas. Reg. Section 1.409A-1(b)(4), the involuntary separation pay plan exception described in Treas. Reg.Section 1.409A-1(b)(9)(iii), or otherwise. To the extent Section 409A of the Code is applicable to this Agreement, the parties intendthat this Agreement and any payments and benefits thereunder comply with the deferral, payout and other limitations and restrictionsimposed under Section 409A of the Code. Notwithstanding anything herein to the contrary, this Agreement shall be interpreted,operated and administered in a manner consistent with such intentions; provided, however that in no event shall the Company (or anyof its affiliates or successors) be liable for any additional tax, interest or penalty that may be imposed on Executive pursuant toSection 409A of the Code or for any damages incurred by Executive as a result of this Agreement (or the payments or benefitshereunder) failing to comply with, or be exempt from, Section 409A of the Code. Without limiting the generality of the foregoing andnotwithstanding any other provision of this Agreement to the contrary:(a)If any payment, compensation or other benefit provided to Executive in connection with his employmenttermination is determined, in whole or in part, to constitute “nonqualified deferred compensation” within the meaning of Section 409Aof the Code and Executive is a specified employee as defined in Section 409A(a)(2)(B)(i) of the Code, then no portion of such“nonqualified deferred compensation” shall be paid before the day that is 6 months plus one (1) day after the date of termination (the“New Payment Date”). The aggregate of any payments that otherwise would have been paid to Executive during the period betweenthe date of termination and the New Payment Date shall be paid to Executive in a lump sum on such New Payment Date. Thereafter,any payments that remain outstanding as of the day immediately following the New Payment Date shall be paid without delay over thetime period originally scheduled, in accordance with the terms of this Agreement. Notwithstanding the foregoing, to the extent that theforegoing applies to the provision of any ongoing welfare benefits to Executive that would not be required to be delayed if thepremiums therefor were paid by Executive, Executive shall pay the full cost of premiums for such welfare benefits during the six-month period and the Company shall pay Executive an amount equal to the amount of such premiums paid by Executive during suchsix-month period promptly after its conclusion.(b)The parties hereto acknowledge and agree that the interpretation of Section 409A of the Code and itsapplication to the terms of this Agreement is uncertain and may be subject to change as additional guidance and interpretations becomeavailable. Anything to the contrary herein notwithstanding, all benefits or payments provided by the Company to Executive that wouldbe deemed to constitute “nonqualified deferred compensation” within the meaning of Section 409A of the Code are intended tocomply with Section 409A of the Code. If, however, any such benefit or payment is deemed to not comply with Section 409A of theCode, the Company and Executive agree to renegotiate in good faith any such benefit or payment (including, without limitation, as tothe timing of any severance payments payable hereof) so that either (i) Section 409A13of the Code will not apply or (ii) compliance with Section 409A of the Code will be achieved; provided, that, neither the Company norits employees or representatives shall have liability to Executive with respect hereto.(c)Notwithstanding anything to the contrary contained in this Agreement, all reimbursements for costs andexpenses under this Agreement shall be paid in no event later than the end of the taxable year following the taxable year in whichExecutive incurs such expense. With regard to any provision herein that provides for reimbursement of costs and expenses or in-kindbenefits, except as permitted by Section 409A of the Code, (i) the right to reimbursement or in-kind benefits shall not be subject toliquidation or exchange for another benefit, and (ii) the amount of expenses eligible for reimbursements or in-kind benefits providedduring any taxable year shall not affect the expenses eligible for reimbursement or in-kind benefits to be provided in any other taxableyear.(d)If under this Agreement, an amount is paid in two or more installments, for purposes of Section 409A of theCode, each installment shall be treated as a separate payment.(e)A termination of employment shall not be deemed to have occurred for purposes of any provision of thisAgreement providing for the payment of any amounts or benefits subject to Section 409A of the Code upon or following a terminationof employment unless such termination is also a “separation from service” as defined in Section 1.409A-1(h) of the Department ofTreasury final regulations, including the default presumptions, and for purposes of any such provision of this Agreement, references toa “resignation,” “termination,” “terminate,” “termination of employment” or like terms shall mean separation from service.11.8Governing Law. This Agreement shall be construed under and enforced in accordance with the laws of the State ofDelaware, without regard to the conflicts of law provisions thereof.11.9 Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereofor otherwise arising out of the termination of Executive’s employment (including, without limitation, any claims of unlawfulemployment discrimination whether based on age or otherwise) shall, to the fullest extent permitted by law, be settled by arbitration inany forum and form agreed upon by the parties or, in the absence of such an agreement, under the auspices of the AmericanArbitration Association (“AAA”) in Vancouver, Washington in accordance with the Employment Dispute Resolution Rules of theAAA, including, but not limited to, the rules and procedures applicable to the selection of arbitrators. In the event that any person orentity other than Executive or the Company may be a party with regard to any such controversy or claim, such controversy or claimshall be submitted to arbitration subject to such other person or entity’s agreement. Judgment upon the award rendered by the arbitratormay be entered in any court having jurisdiction thereof. This Section 11.9 shall be specifically enforceable. Notwithstanding theforegoing, this Section 11.9 shall not preclude either party from pursuing a court action for the sole purpose of obtaining a temporaryrestraining order or a preliminary injunction in circumstances in which such relief is appropriate; provided that any other relief shall bepursued through an arbitration proceeding pursuant to this Section 11.9.1411.10Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed anoriginal and shall have the same effect as if the signatures hereto and thereto were on the same instrument.IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.COMPANY:PAPA MURPHY’S HOLDINGS, INC.By: /s/ Jean M. Birch Jean M. BirchChair of the Board EXECUTIVE:/s/ Weldon Spangler Weldon Spangler15Exhibit 10.26June 14, 2017CONFIDENTIAL TO: Mark HutchensDear Mark,In recognition of the key role you play in the organization we are pleased to promote you to Executive Vice President effective June13, 2017. You will retain the title of Chief Financial Officer.As discussed, your short-term incentive compensation target will increase immediately from 50% to 60% (of your base pay). Inaddition, you are eligible to receive the right and option to purchase, on the terms and conditions set forth in the 2014 Equity IncentivePlan and the Stock Option Agreement, 135,000 shares of Papa Murphy’s Holdings, Inc. stock. The options will vest in 1/4thinstallments on the first, second, third and fourth anniversaries of the date of grant, subject to your continued employment on theapplicable vesting dates. The options will be granted to you on the first business day of the fiscal quarter following your promotiondate (your options will be granted on July 4th at the July 3rd stock price). Your eligibility for all other Papa Murphy’s benefits willremain the same.We look forward to your continued success on the Papa Murphy's team!Sincerely,/s/ Jean BirchJean BirchInterim CEO and Chair of the Board8000 NE Parkway Dr., Suite 350 ● Vancouver, WA 98662 ● Tel: (360) 260-7272 ● Fax (360) 260-0500Exhibit 21.1SUBSIDIARIES OFPAPA MURPHY'S HOLDINGS, INC.Subsidiary Jurisdiction ofOrganizationMM1 Regional LLC FloridaMM2 Regional LLC FloridaMurphy’s Marketing Services, Inc. FloridaPapa Murphy’s Company Stores, Inc. WashingtonPapa Murphy’s Intermediate, Inc. DelawarePapa Murphy’s International LLC DelawarePapa Murphy’s Worldwide LLC DelawarePMI Holdings, Inc. DelawareExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-203907, Form S-8 No. 333-221540, and Form S-8No. 333-195634) of Papa Murphy's Holdings, Inc. of our report dated March 14, 2018, relating to the consolidated financial statements of PapaMurphy's Holdings, Inc. and subsidiaries appearing in this Annual Report on Form 10-K for the year ended January 1, 2018./s/ Moss Adams LLPPortland, OregonMarch 14, 2018Exhibit 24.1 SPECIAL POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appointsMark Hutchens his or her true and lawful attorney‑in‑fact and agent with full power of substitution and resubstitution, for him or herand in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10‑K for the fiscal year endedJanuary 1, 2018, for filing with the U.S. Securities and Exchange Commission by Papa Murphy’s Holdings, Inc., a Delawarecorporation, together with any and all amendments to such Form 10‑K, and to file the same with all exhibits thereto, and all documentsin connection therewith, with the U.S. Securities and Exchange Commission, granting to such attorney‑in‑fact and agent full powerand authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully andto all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that such attorney‑in‑fact andagent may lawfully do or cause to be done by virtue hereof.This Power of Attorney may be signed in any number of counterparts, each of which shall be an original, with the same effectas if the signatures thereto and hereto were upon the same instrument.[Signature Pages Follow]IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 7th day of March,2018./s/ Jean M. Birch Jean M. BirchIN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 7th day of March,2018./s/ Benjamin Hochberg Benjamin Hochberg IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 8th day of March,2018./s/ Yoo Jin Kim Yoo Jin KimIN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 7th day of March,2018./s/ L. David Mounts L. David MountsIN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 7th day of March,2018./s/ John D. Shafer, Jr. John D. Shafer, Jr.IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 7th day of March,2018./s/ Rob Weisberg Rob WeisbergIN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 9th day of March,2018./s/ Katherine L. Scherping Katherine L. ScherpingIN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 7th day of March,2018./s/ Alexander C. Matina Alexander C. MatinaIN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 8th day of March,2018./s/ Noah A. Elbogen Noah A. ElbogenExhibit 31.1CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a) AS ADOPTEDPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Weldon Spangler, certify that:1.I have reviewed this annual report on Form 10-K of Papa Murphy's Holdings, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principals;c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; andd.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date: March 14, 2018 /s/ Weldon Spangler Weldon Spangler Chief Executive Officer (Principal Executive Officer)Exhibit 31.2CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a) AS ADOPTEDPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Mark Hutchens, certify that:1.I have reviewed this annual report on Form 10-K of Papa Murphy's Holdings, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principals;c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; andd.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date: March 14, 2018 /s/ Mark Hutchens Mark Hutchens Chief Financial Officer (Principal Financial Officer)Exhibit 32.1CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Papa Murphy's Holdings, Inc. (the “Company”) on Form 10-K for the period ended January 1, 2018, as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), I, Weldon Spangler, Chief Executive Officer of the Company,certify, pursuant to 18 U.S.C. § 1350, adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: March 14, 2018 /s/ Weldon Spangler Weldon Spangler Chief Executive OfficerExhibit 32.2CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Papa Murphy's Holdings, Inc. (the “Company”) on Form 10-K for the period ended January 1, 2018, as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark Hutchens, Chief Financial Officer of the Company, certify,pursuant to 18 U.S.C. § 1350, adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: March 14, 2018 /s/ Mark Hutchens Mark Hutchens Chief Financial Officer

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