Notes to Unaudited Condensed Consolidated Financial Statements
|
|
Note 1 — Description of Business and Basis of Presentation
|
Description of business
Papa Murphy’s Holdings, Inc. (“Papa Murphy’s” or the “Company”), together with its subsidiaries, is a franchisor and operator of a Take ‘N’ Bake pizza chain. The Company franchises the right to operate Papa Murphy’s Take ‘N’ Bake pizza franchises and operates Papa Murphy’s Take ‘N’ Bake pizza stores owned by the Company. As of
March 28, 2016
, the Company had
1,555
stores consisting of
1,513
domestic stores (
1,378
franchised stores and
135
Company-owned stores) across
38
states, plus
42
franchised stores in Canada and the United Arab Emirates.
Substantially all of the Company’s revenues are derived from retail sales of pizza and other food and beverage products to the general public by Company-owned stores and the collection of franchise royalties and fees associated with franchise and development rights.
Basis of presentation
The accompanying
interim unaudited
condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “
SEC
”). Accordingly, they do not include all information and footnotes required by generally accepted accounting principles in the United States (“
GAAP
”) for complete financial statements. In the Company’s opinion, all necessary adjustments, consisting of only normal recurring adjustments, have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying
interim unaudited
condensed consolidated financial statements
should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 28, 2015
.
During the three months ended March 28, 2016, the Company early adopted ASU No. 2016-09,
Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“
ASU 2016-09
”). The Company applied the new guidance on a modified retrospective basis through a cumulative-effect adjustment. As a result, changes have been made to the presentation of
Stockholders’ Equity
in the
Condensed Consolidated Balance Sheets
at
December 28, 2015
. See
Recent Accounting Pronouncements
below for additional information. A summary of the changes made to the
Condensed Consolidated Balance Sheets
at
December 28, 2015
, is included in the following table:
|
|
|
|
|
|
|
|
|
(in thousands)
|
As Filed
|
|
Updated
|
Additional paid-in capital
|
$
|
118,801
|
|
|
$
|
118,842
|
|
Accumulated deficit
|
(21,214
|
)
|
|
(21,255
|
)
|
Principles of consolidation
The
interim unaudited
condensed consolidated financial statements
include the accounts of Papa Murphy’s Holdings, Inc., its subsidiaries and certain entities which the Company consolidates as variable interest entities (“
VIE
s”). All significant intercompany transactions and balances have been eliminated.
Throughout the
interim unaudited
condensed consolidated financial statements
and the related notes thereto, “Papa Murphy’s” and “the Company” refer to Papa Murphy’s Holdings, Inc. and its consolidated subsidiaries.
Fiscal year
The Company uses a 52- or 53-week fiscal year, ending on the Monday nearest to December 31. Fiscal year
2016
is a 53-week year and
2015
was a 52-week year. All three month periods presented herein contain 13 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods. References to
2016
and
2015
are references to fiscal years ending
January 2, 2017
, and ended
December 28, 2015
, respectively.
Accounting Pronouncements Recently Adopted
In March 2016, the FASB issued
ASU 2016-09
, which simplifies several aspects of the accounting for share-based payment awards to employees, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The effective date for
ASU 2016-09
is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted in any annual or interim period for which financial statements have not yet been issued. All amendments in
ASU 2016-09
that apply must be adopted in the same period. The Company early adopted
ASU 2016-09
at the beginning of fiscal year 2016. As permitted under
ASU 2016-09
, the Company has elected to account for forfeitures in compensation cost when they occur in order to ease the administrative burden of estimating forfeitures. The effect of adopting
ASU 2016-09
is reflected in
Stockholders’ Equity
in the
Condensed Consolidated Balance Sheets
on a modified retrospective basis through a cumulative-effect adjustment. See
Basis of Presentation
above for additional information.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“
ASU 2014-09
”), a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under GAAP. The original effective date for
ASU 2014-09
would have required adoption by the Company in the first quarter of fiscal 2017 with early adoption prohibited. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date
, which defers the effective date of
ASU 2014-09
for one year and permits early adoption in accordance with the original effective date of
ASU 2014-09
. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
which is an amendment to the new revenue recognition standard on assessing whether an entity is a principal or an agent in a revenue transaction. This amendment addresses implementation issues that were discussed by the Revenue Recognition Transition Resource Group to clarify the principal versus agent assessment and lead to more consistent application. This new standard has the same effective date and transition requirements as
ASU 2014-09
.
The new revenue standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company has not yet selected a transition method. The Company is continuing to evaluate the impact the adoption of this standard will have on the recognition of revenue.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“
ASU 2016-02
”). This update requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than twelve months.
ASU 2016-02
also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include both qualitative and quantitative information. The effective date for
ASU 2016-02
is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with earlier adoption permitted. The Company is still evaluating the impact of
ASU 2016-02
on its financial position and results of operations.
|
|
Note 2 — Prepaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28, 2016
|
|
December 28, 2015
|
Prepaid media development costs
|
$
|
216
|
|
|
$
|
352
|
|
Prepaid software and support
|
1,048
|
|
|
464
|
|
Prepaid rents
|
527
|
|
|
477
|
|
Prepaid insurance
|
517
|
|
|
602
|
|
Taxes receivable
|
2,101
|
|
|
2,872
|
|
POS software licenses for resale
|
—
|
|
|
660
|
|
Assets held for sale
|
599
|
|
|
605
|
|
Advertising cooperative assets, restricted
|
172
|
|
|
26
|
|
Other
|
149
|
|
|
81
|
|
Total prepaid expenses and other current assets
|
$
|
5,329
|
|
|
$
|
6,139
|
|
The Company recognizes software license revenue upon the resale of Point of Sale (“
POS
”) software licenses to franchise owners at cost. The income from the sale is included in
Other
revenues and the related expense is recorded in
Selling, general and administrative
costs on the
Condensed Consolidated Statements of Net Income
.
POS
software license revenue during the periods reported was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
March 28, 2016
|
|
March 30, 2015
|
POS software license revenue
|
$
|
657
|
|
|
$
|
186
|
|
|
|
Note 3 — Property and Equipment
|
Property and equipment are net of accumulated depreciation of
$15.2 million
and
$13.8 million
at
March 28, 2016
, and
December 28, 2015
, respectively. Depreciation expense during the periods reported was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
March 28, 2016
|
|
March 30, 2015
|
Depreciation expense
|
$
|
1,444
|
|
|
$
|
1,004
|
|
|
|
Note 4 — Intangible Assets
|
Intangible assets are net of accumulated amortization of
$23.8 million
and
$23.0 million
as of
March 28, 2016
, and
December 28, 2015
, respectively. Amortization expense during the periods reported was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
March 28, 2016
|
|
March 30, 2015
|
Amortization expense
|
$
|
1,271
|
|
|
$
|
1,315
|
|
Notes Receivable
Notes receivable consists of a note maturing in 2020 that is collateralized by store assets. Changes in the account balance represent amortization payments collected per the terms of the agreement.
Accounts Receivable
The Company’s allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28, 2016
|
|
December 28, 2015
|
Allowance for doubtful accounts
|
$
|
33
|
|
|
$
|
31
|
|
|
|
Note 6 — Financing Arrangements
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28, 2016
|
|
December 28, 2015
|
2014 Credit Facility
|
|
|
|
Term loan
|
$
|
105,879
|
|
|
$
|
109,200
|
|
Revolving line of credit
|
1,000
|
|
|
—
|
|
Notes payable
|
3,000
|
|
|
3,000
|
|
Total principal amount of long-term debt
|
109,879
|
|
|
112,200
|
|
Unamortized debt issuance costs
|
(1,083
|
)
|
|
(1,163
|
)
|
Total long-term debt
|
108,796
|
|
|
111,037
|
|
Less current portion
|
(2,279
|
)
|
|
(2,800
|
)
|
Total long-term debt, net of current portion
|
$
|
106,517
|
|
|
$
|
108,237
|
|
2014 senior secured credit facility
On August 28, 2014, PMI Holdings, Inc., a wholly-owned subsidiary of Papa Murphy’s Holdings, Inc., entered into a
$132.0 million
senior secured credit facility (the “
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 of credit subfacility and a
$1.0 million
swing-line loan subfacility. The term loan and any loans made under the revolving credit facility mature in
August 2019
. As of
March 28, 2016
,
$105.0 million
of the outstanding term loan balance was subject to the LIBOR rate option at
3.69%
, and the remaining
$0.9 million
was subject to the base rate option at
5.50%
. As of
March 28, 2016
, the revolving credit facility was subject to the base rate option at
5.75%
.
With a maturity date of over one year from
March 28, 2016
, balances outstanding under the
2014 Credit Facility
are classified as non-current on the
Condensed Consolidated Balance Sheets
, except for mandatory, minimum term loan amortization payments due on the last day of each fiscal quarter. Minimum term loan amortization payments are
$0.7 million
, increasing to
$1.4 million
in the third fiscal quarter of 2016. A portion of the Company’s future term loan amortization payments have been made in advance of their due dates.
The weighted average interest rate for all borrowings under our
2014 Credit Facility
for the
first
quarter of
2016
was
3.74%
.
Notes payable
Papa Murphy’s Company Stores, Inc., a wholly owned subsidiary of Papa Murphy’s Holdings, Inc., has a
$3.0 million
note payable which bears interest at
5%
and matures in
December 2018
. This note is subordinated to the
2014 Credit Facility
.
|
|
Note 7 — Fair Value Measurement
|
The Company determines the fair value of assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant.
GAAP
defines a fair value hierarchy that prioritizes the assumptions used to measure fair value. The three levels of the fair value hierarchy are defined as follows:
|
|
▪
|
Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
|
|
|
▪
|
Level 2 — Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
|
|
|
▪
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
|
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2016
|
|
December 28, 2015
|
|
|
(in thousands)
|
CARRYING VALUE
|
|
FAIR VALUE
|
|
CARRYING VALUE
|
|
FAIR VALUE
|
|
FAIR VALUE MEASUREMENTS
|
Financial assets
|
|
|
|
|
|
|
|
|
|
Notes receivable
(1)
|
$
|
202
|
|
|
$
|
205
|
|
|
$
|
221
|
|
|
$
|
224
|
|
|
Level 3
|
|
|
(1)
|
The fair value of notes receivable was estimated primarily using a discounted cash flow method based on a discount rate, reflecting the applicable credit spread.
|
Financial instruments not included in the table above consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate carrying value because of the short-term nature of the accounts. The fair value of long-term debt approximates carrying value because the borrowings are made with variable market rates and negotiated terms and conditions that are consistent with current market rates.
|
|
Note 8 — Accrued and Other Liabilities
|
Accrued and other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28, 2016
|
|
December 28, 2015
|
Accrued compensation and related costs
|
$
|
2,491
|
|
|
$
|
3,699
|
|
Gift cards payable
|
2,419
|
|
|
2,902
|
|
Accrued interest and non-income taxes payable
|
623
|
|
|
855
|
|
Convention fund balance
|
942
|
|
|
626
|
|
Unearned product rebates
|
498
|
|
|
922
|
|
Advertising cooperative liabilities
|
260
|
|
|
137
|
|
Other
|
534
|
|
|
615
|
|
|
$
|
7,767
|
|
|
$
|
9,756
|
|
Information on the Company’s income taxes for the periods reported is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
March 28, 2016
|
|
March 30, 2015
|
Provision for income taxes
|
$
|
460
|
|
|
$
|
1,620
|
|
Income before income taxes
|
1,102
|
|
|
4,216
|
|
Effective income tax rate
|
41.7
|
%
|
|
38.4
|
%
|
The effective income tax rates for the three months ended
March 28, 2016
, and
March 30, 2015
, include the effect of certain permanent differences between tax reporting purposes and financial reporting purposes and the relative impact of those differences on a small quarterly income.
|
|
Note 10 — Share-based Compensation
|
In May 2010, the Company’s Board of Directors approved the 2010 Amended Management Incentive Plan (the “
2010 Plan
”). In May 2014, the Company’s Board of Directors adopted the 2014 Equity Incentive Plan (the “
2014 Plan
,” and together with the
2010 Plan
, the “
Incentive Plans
”). The
Incentive Plans
reserve
2,116,747
common shares for equity incentive awards consisting of incentive stock options, non-qualified stock options, restricted stock awards and unrestricted stock awards. Equity incentive awards may be issued from either the
2014 Plan
or the
2010 Plan
.
Under the
Incentive Plans
, the Company has awarded
577,229
and
584,017
shares of restricted common stock to eligible employees as of
March 28, 2016
, and
December 28, 2015
, respectively. In addition, the Company has issued
1,238,551
and
1,076,555
stock options under the
Incentive Plans
to eligible employees as of
March 28, 2016
, and
December 28, 2015
, respectively.
During the three months ended March 28, 2016, the Company early adopted
ASU 2016-09
. As permitted under
ASU 2016-09
, the Company has elected to account for forfeitures in compensation cost when they occur in order to ease the administrative burden of estimating forfeitures. See
Recent Accounting Pronouncements
in
Note 1 — Description of Business and Basis of Presentation
for additional information.
Restricted common shares
Information with respect to restricted stock activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares of
Restricted Common Stock
|
|
|
|
Time Vesting
|
|
Performance Vesting
|
|
Weighted Average
Sale/Grant Date
Fair Value Per Share
|
Unvested, December 28, 2015
|
49,513
|
|
|
186,515
|
|
|
$
|
3.11
|
|
Vested
|
(3,017
|
)
|
|
—
|
|
|
5.48
|
|
Repurchased
|
(3,016
|
)
|
|
(3,772
|
)
|
|
1.42
|
|
Unvested, March 28, 2016
|
43,480
|
|
|
182,743
|
|
|
$
|
3.00
|
|
The fair value of awards vested during the periods reported were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands, except per share amounts)
|
March 28, 2016
|
|
March 30, 2015
|
Total fair value of shares vested
|
$
|
17
|
|
|
$
|
17
|
|
Stock options
Information with respect to stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
Subject to Options
|
|
|
|
|
|
|
|
Time
Vesting
|
|
Performance
Vesting
|
|
Weighted
Average
Exercise
Price Per Share
|
|
Weighted
Average Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(thousands)
|
Outstanding, December 28, 2015
|
841,956
|
|
|
200,481
|
|
|
$
|
11.55
|
|
|
|
|
|
Granted
|
169,950
|
|
|
—
|
|
|
11.03
|
|
|
|
|
|
Forfeited
|
(5,063
|
)
|
|
(2,891
|
)
|
|
11.62
|
|
|
|
|
|
Outstanding, March 28, 2016
|
1,006,843
|
|
|
197,590
|
|
|
$
|
11.48
|
|
|
8.6 years
|
|
$
|
—
|
|
Exercisable, March 28, 2016
|
500,264
|
|
|
—
|
|
|
$
|
11.39
|
|
|
8.2 years
|
|
$
|
—
|
|
Vested and expected to vest, March 28, 2016
|
930,856
|
|
|
167,952
|
|
|
$
|
11.47
|
|
|
8.2 years
|
|
$
|
—
|
|
Fair value information for options granted and vested and the intrinsic value of options exercised during the periods reported are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands, except per share amounts)
|
March 28, 2016
|
|
March 30, 2015
|
Weighted average grant date fair value per share
|
$
|
3.71
|
|
|
$
|
5.41
|
|
Total fair value of awards granted
|
629
|
|
|
1,039
|
|
Total fair value of awards vested
|
329
|
|
|
10
|
|
Total intrinsic value of options exercised
|
—
|
|
|
32
|
|
Compensation cost and valuation
Total compensation costs recognized in connection with the
Incentive Plans
during the periods reported were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
March 28, 2016
|
|
March 30, 2015
|
Stock compensation expense
|
$
|
231
|
|
|
$
|
156
|
|
Associated income tax benefits
|
72
|
|
|
52
|
|
As of
March 28, 2016
, the total unrecognized stock-based compensation expense was
$2.9 million
, with
$2.1 million
associated with time vesting awards and
$0.8 million
associated with performance vesting awards. The remaining weighted average contractual life for unrecognized stock-based compensation expense was
3.1 years
as of
March 28, 2016
.
The fair value of the stock option awards granted during the periods reported was estimated using the Black-Scholes model with the following weighted-average assumptions:
|
|
|
|
|
|
Three Months Ended
|
|
March 28, 2016
|
|
March 30, 2015
|
Risk free rate
|
1.8%
|
|
1.9%
|
Expected volatility
|
30.4%
|
|
37.9%
|
Expected term
|
6.3 years
|
|
6.3 years
|
Expected dividend yield
|
0.0%
|
|
0.0%
|
|
|
Note 11 — Earnings per Share (EPS)
|
The number of shares and earnings per share (“
EPS
”) data for all periods presented are based on the historical weighted-average shares of common stock outstanding. Basic
EPS
is calculated by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted
EPS
is calculated using income available to common stockholders divided by diluted weighted-average shares of common stock outstanding during each period, which includes unvested restricted common stock and outstanding stock options. Diluted
EPS
considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect.
The following table sets forth the computations of basic and dilutive
EPS
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands, except per share data)
|
March 28, 2016
|
|
March 30, 2015
|
Earnings:
|
|
|
|
Net income
|
$
|
642
|
|
|
$
|
2,596
|
|
Shares:
|
|
|
|
Weighted average common shares outstanding
|
16,717
|
|
|
16,604
|
|
Dilutive effect of restricted equity awards
|
36
|
|
|
186
|
|
Diluted weighted average number of shares outstanding
|
16,753
|
|
|
16,792
|
|
Earnings per share:
|
|
|
|
Basic earnings per share
|
$
|
0.04
|
|
|
$
|
0.16
|
|
Diluted earnings per share
|
$
|
0.04
|
|
|
$
|
0.15
|
|
For the
three
months ended
March 28, 2016
, and
March 30, 2015
, an aggregated total of
380,000
shares and
174,000
shares, respectively, have been excluded from the diluted
EPS
calculation because their effect would have been anti-dilutive.
|
|
Note 12 — Commitments and Contingencies
|
Operating lease commitments
The Company leases facilities and various office equipment under non-cancelable operating leases which expire through
December 2025
. Lease terms for its store units are generally for
five years
with renewal options and generally require the Company to pay a proportionate share of real estate taxes, insurance, common area maintenance and other operating costs.
The Company has entered into operating leases that it has subleased to
three
franchised stores. These operating leases have minimum base rent terms, contingent rent terms if individual franchised store sales exceed certain levels and have terms expiring on various dates from
May 2020
to
October 2020
.
Lease guarantees
The Company is the guarantor for operating leases of
17
franchised stores that have terms expiring on various dates from
August 2016
to
April 2021
. The obligations from these leases will generally continue to decrease over time as the leases expire. The applicable franchise owners continue to have primary liability for these operating leases. As of
March 28, 2016
, the Company does not believe it is probable it would be required to perform under the outstanding guarantees.
Legal proceedings
The Company is currently subject to litigation with a group of franchise owners. In January 2014,
six
franchise owner groups claimed that the Company misrepresented sales volumes, made false representations to them and charged excess advertising fees, among other things. The Company engaged in mediation with these franchise owners, which is required under the terms of their franchise agreements, in order to address and resolve their claims, but was unable to reach a settlement agreement. On April 4, 2014, a total of
twelve
franchise owner groups, including those franchise owners that
previously made the allegations described above, filed a lawsuit against the Company in the Superior Court in Clark County, Washington, making essentially the same allegations for violation of the Washington Franchise Investment Protection Act, fraud, negligent misrepresentation and breach of contract and seeking declaratory and injunctive relief, as well as monetary damages. Based on motions filed by the Company in that lawsuit, the court ruled on July 9, 2014 that certain of the plaintiffs’ claims under the anti-fraud and nondisclosure provisions of the Washington Franchise Investment Protection Act should be dismissed and that certain other claims in the case would need to be more specifically alleged. The court also ruled that the
six
franchise owner groups who had not mediated with the Company prior to filing the lawsuit must mediate with the Company in good faith, and that their claims be stayed until they have completed mediating with the Company in good faith.
On June 18, 2014, an additional
16
franchise owner groups, represented by the same counsel as the plaintiffs described above, filed a lawsuit in the Superior Court in Clark County, Washington making essentially the same allegations as made in the lawsuit described above and seeking declaratory and injunctive relief, as well as monetary damages. The court consolidated the
two
lawsuits into a single case and ordered that the plaintiffs in the new lawsuit, none of whom had mediated with the Company prior to filing the lawsuit, must do so, and that their claims be stayed until they have done so.
In October 2014, the Company engaged in mediation with the
22
franchise owner groups who had not previously done so. As a result of that mediation and other efforts since then, the Company has 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 addition, some of the claims have been dismissed without prejudice and, as a result, those plaintiffs could refile their claims if various contingencies are not met and the Company therefore provides no assurance that those dismissals will actually occur or remain in effect.
In February 2015, the remaining plaintiffs in the consolidated lawsuits filed an amended complaint, removing some claims, amending some claims, adding claims and naming some of the Company’s former and current franchise sales staff as additional individual defendants. As before, the Company believes the allegations in this litigation lack merit and, for those plaintiffs with whom the Company is unable to reach resolution, the Company will continue to vigorously defend its interests, including by asserting a number of affirmative defenses and, where appropriate, counterclaims. The Company provides no assurance that it will be successful in its defense of these lawsuits; however, it does not currently expect the cost of resolving them to have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
The Company is also currently named as a defendant in a putative class action lawsuit filed by plaintiff John Lennartson on May 8, 2015, in the United States District Court for the Western District of Washington. The lawsuit alleges the Company failed to comply with the requirements of the Telephone Consumer Protection Act (TCPA) when it sent SMS text messages to consumers. The plaintiff in the lawsuit asks that the court certify the putative class and that statutory damages under the TCPA be awarded to plaintiff and each class member. The Company believes the plaintiff’s interpretation of the law is incorrect and it will continue to vigorously defend itself in the lawsuit, but provide no assurance that it will be successful. An adverse judgment or settlement related to this lawsuit could have a material adverse 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. The Company may also engage in future litigation with franchise owners to enforce the terms of franchise agreements and compliance with brand standards as determined necessary to protect the Company’s brand, the consistency of products and the customer experience. Lawsuits require significant management attention and financial resources and the outcome of any litigation is inherently uncertain. The Company does not, however, currently expect that the costs to resolve these routine matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
|
|
Note 13 — Related Party Transactions
|
Employee loans related to share purchases
In connection with share-based compensation, the Company previously made loans to certain non-officer employees of the Company (see
Note 10 — Share-based Compensation
). Loans made in connection with the issuance of the Company’s equity have been recognized in
Stock subscriptions receivable
as a reduction of total equity. As of
March 28, 2016
, and
December 28, 2015
, the Company had stock subscription receivables of
$0.1 million
.
Related party revenue
The Company was party to transactions to sell services to Project Pie, LLC (“
Project Pie
”) during the period
Project Pie
was a cost-method investee. Revenue from these transactions are recorded as
Other
revenues on the
Condensed Consolidated Statements of Net Income
. Related party revenue during the periods reported was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
March 28, 2016
|
|
March 30, 2015
|
Related party revenue
|
$
|
—
|
|
|
$
|
4
|
|
|
|
Note 14 — Segment Information
|
The Company has the following reportable segments: (i) Domestic Franchise; (ii) Domestic Company Stores; and (iii) International. The Domestic Franchise segment includes operations with respect to franchised stores in the United States and derives its revenues primarily from franchise and development fees and franchise royalties from franchised stores in the United States. The Domestic Company Stores segment includes operations with respect to Company-owned stores in the United States and derives its revenues from retail sales of pizza and side items to the general public. The International segment includes operations related to the Company’s operations outside the United States and derives its revenues from franchise and development fees and franchise royalties from franchised stores outside the United States.
The following tables summarize information on profit or loss and assets for each of the Company’s reportable segments:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
March 28, 2016
|
|
March 30, 2015
|
Revenues
|
|
|
|
Domestic Franchise
|
$
|
12,215
|
|
|
$
|
11,935
|
|
Domestic Company Stores
|
20,674
|
|
|
17,167
|
|
International
|
96
|
|
|
66
|
|
Total
|
$
|
32,985
|
|
|
$
|
29,168
|
|
Segment Operating Income (Loss)
|
|
|
|
Domestic Franchise
|
$
|
3,827
|
|
|
$
|
5,927
|
|
Domestic Company Stores
|
(92
|
)
|
|
1,136
|
|
International
|
53
|
|
|
24
|
|
Corporate and unallocated
|
(1,465
|
)
|
|
(1,739
|
)
|
Total
|
$
|
2,323
|
|
|
$
|
5,348
|
|
Depreciation and amortization
|
|
|
|
Domestic Franchise
|
$
|
1,463
|
|
|
$
|
1,300
|
|
Domestic Company Stores
|
1,241
|
|
|
1,011
|
|
International
|
11
|
|
|
8
|
|
Total
|
$
|
2,715
|
|
|
$
|
2,319
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 28, 2016
|
|
December 28, 2015
|
Total Assets
|
|
|
|
Domestic Franchise
|
$
|
131,716
|
|
|
$
|
139,705
|
|
Domestic Company Stores
|
45,821
|
|
|
45,217
|
|
International
|
371
|
|
|
438
|
|
Other
(1)
|
89,281
|
|
|
90,111
|
|
Total
|
$
|
267,189
|
|
|
$
|
275,471
|
|
|
|
(1)
|
Other assets which are not allocated to the individual segments primarily include trade names and trademarks, unamortized deferred financing charges, and an intercompany note.
|
|
|
Note 15 — Subsequent Events
|
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. The Company recognizes in the
Unaudited Condensed Consolidated Financial Statements
the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company’s
Unaudited Condensed Consolidated Financial Statements
do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before financial statements are issued. In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through
May 4, 2016
, the date the
Unaudited Condensed Consolidated Financial Statements
were issued.
On April 11, 2016, Papa Murphy’s Company Stores, Inc., a wholly owned subsidiary of the Company, acquired certain assets used in the operation of
nine
Papa Murphy’s stores in the Joplin, Missouri, and Fort Smith, Arkansas, areas from a franchise owner. The total purchase price of
$2.4 million
was funded through existing cash and advances on the
2014 Credit Facility
.