Papa Murphys Holdings, Inc.
Papa Murphy's Holdings, Inc. (Form: 10-Q, Received: 11/04/2015 17:42:41)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
–––––––––––––––––––––––––––––––––––––
FORM 10-Q
–––––––––––––––––––––––––––––––––––––
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 28, 2015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-36432
–––––––––––––––––––––––––––––––––––––
Papa Murphy’s Holdings, Inc.
(Exact name of registrant as specified in its charter)
–––––––––––––––––––––––––––––––––––––
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
27-2349094
(IRS Employer
Identification No.)
8000 NE Parkway Drive, Suite 350
Vancouver, WA
(Address of principal executive offices)
 
98662
(Zip Code)
(360) 260-7272
(Registrant’s telephone number, including area code)
–––––––––––––––––––––––––––––––––––––
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 12 months (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 posted pursuant 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
 
Accelerated filer [ ]
Non-accelerated filer [X]
 
Smaller reporting company [ ]

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 October 30, 2015 , there were 16,949,720 shares of the Registrant’s common stock, $0.01 par value, outstanding.



Table of Contents

TABLE OF CONTENTS
 
 
 
 
PART I — FINANCIAL INFORMATION
 
 
 
Item 1.
Unaudited Condensed Consolidated Financial Statements
 
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 28, 2015, and September 29, 2014
 
Unaudited Condensed Consolidated Balance Sheets as of September 28, 2015, and December 29, 2014
 
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 28, 2015, and September 29, 2014
 
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II — OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
SIGNATURES


2

Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Papa Murphy’s Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
 
Three Months Ended
 
Nine Months Ended
(In thousands, except share and per share data)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Revenues
 
 
 
 
 
 
 
Franchise royalties
$
9,124

 
$
8,965

 
$
29,557

 
$
28,349

Franchise and development fees
1,123

 
1,088

 
3,092

 
3,119

Company-owned store sales
17,604

 
11,626

 
52,927

 
35,121

Lease and other
281

 
490

 
845

 
2,543

Total revenues
28,132

 
22,169

 
86,421

 
69,132

 
 
 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
 
 
Store operating costs:
 
 
 
 
 
 
 
Cost of food and packaging
6,409

 
4,667

 
18,942

 
13,756

Compensation and benefits
4,918

 
3,000

 
13,994

 
8,935

Advertising
1,806

 
1,286

 
5,227

 
3,531

Occupancy
1,210

 
715

 
3,386

 
2,049

Other store operating costs
2,061

 
1,069

 
5,362

 
3,145

Selling, general and administrative
6,038

 
5,915

 
21,083

 
22,938

Depreciation and amortization
2,641

 
2,007

 
7,380

 
5,815

Loss (gain) on disposal of property and equipment
4

 
(15
)
 
66

 
27

Total costs and expenses
25,087

 
18,644

 
75,440

 
60,196

Operating Income
3,045

 
3,525

 
10,981

 
8,936

 
 
 
 
 
 
 
 
Interest expense
1,137

 
1,539

 
3,429

 
6,966

Interest income
(4
)
 
(14
)
 
(23
)
 
(67
)
Loss on early retirement of debt

 
3,428

 

 
4,619

Loss on disposal or impairment of investments

 

 
4,500

 

Other expense, net
44

 
63

 
90

 
118

Income (Loss) Before Income Taxes
1,868

 
(1,491
)
 
2,985

 
(2,700
)
 
 
 
 
 
 
 
 
Provision for (benefit from) income taxes
746

 
(703
)
 
1,206

 
(1,124
)
Net Income (Loss)
1,122

 
(788
)
 
1,779

 
(1,576
)
 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interests

 

 
500

 

Net Income (Loss) Attributable to Papa Murphy's
$
1,122

 
$
(788
)
 
$
2,279

 
$
(1,576
)
 
 
 
 
 
 
 
 
Earnings (loss) per share of common stock
 
 
 
 
 
 
 
Basic
$
0.07

 
$
(0.05
)
 
$
0.14

 
$
(0.35
)
Diluted
$
0.07

 
$
(0.05
)
 
$
0.13

 
$
(0.35
)
Weighted average common stock outstanding
 
 
 
 
 
 
 
Basic
16,672,327

 
16,584,724

 
16,635,400

 
10,603,339

Diluted
16,919,504

 
16,584,724

 
16,893,575

 
10,603,339

See accompanying notes.

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Table of Contents

Papa Murphy’s Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)
September 28, 2015
 
December 29, 2014
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
5,483

 
$
5,056

Accounts receivable, net of allowance for doubtful accounts of $30 and $60, respectively
2,692

 
5,661

Current portion of notes receivable
71

 
62

Inventories
840

 
640

Prepaid expenses and other current assets
3,484

 
3,423

Advertising cooperative assets, restricted
284

 
149

Current deferred tax asset
1,969

 
1,338

Total current assets
14,823

 
16,329

Property and equipment, net
19,208

 
12,120

Notes receivable, net of current portion
168

 
225

Goodwill
106,740

 
101,082

Trade name and trademarks
87,002

 
87,002

Definite-life intangibles, net
42,683

 
44,515

Other assets
289

 
4,191

Total assets
$
270,913

 
$
265,464

 
 
 
 
Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
8,396

 
$
3,057

Accrued expenses and other current liabilities
9,217

 
9,600

Advertising cooperative liabilities
375

 
253

Current portion of unearned franchise and development fees
1,985

 
2,848

Current portion of long-term debt
3,500

 
2,800

Total current liabilities
23,473

 
18,558

Long-term debt, net of current portion
108,156

 
110,715

Unearned franchise and development fees, net of current portion
656

 
640

Deferred tax liability
41,668

 
42,069

Other long-term liabilities
2,263

 
1,740

Total liabilities
176,216

 
173,722

Commitments and contingencies (Note 15)


 


 
 
 
 
Equity
 
 
 
Papa Murphy’s Holdings, Inc. Shareholders’ Equity
 
 
 
Preferred stock ($0.01 par value; 15,000,000 shares authorized; no shares issued)

 

Common stock ($0.01 par value; 200,000,000 shares authorized; 16,940,228 and 16,944,308 shares issued, respectively)
169

 
169

Additional paid-in capital
118,473

 
117,354

Stock subscriptions receivable
(100
)
 
(100
)
Accumulated deficit
(23,845
)
 
(26,125
)
Total Papa Murphy’s Holdings, Inc. shareholders’ equity
94,697

 
91,298

Noncontrolling interests

 
444

Total equity
94,697

 
91,742

Total liabilities and equity
$
270,913

 
$
265,464

See accompanying notes.

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Table of Contents

Papa Murphy’s Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
 
Nine Months Ended
(In thousands)
September 28, 2015
 
September 29, 2014
Operating Activities
 
 
 
Net income (loss)
$
1,779

 
$
(1,576
)
Net loss attributable to noncontrolling interests
500

 

Net income (loss) attributable to Papa Murphy’s
2,279

 
(1,576
)
Adjustments to reconcile to cash from operating activities
 
 
 
Depreciation and amortization
7,380

 
5,815

Loss on disposal of property and equipment
66

 
27

Loss on early retirement of debt

 
4,619

Bad debt expense
325

 
12

Non-cash employee equity compensation
858

 
1,739

Amortization of deferred finance charges
241

 
470

Loss on impairment of cost-method investment
4,000

 

Change in operating assets and liabilities
 
 
 
Accounts receivable
2,652

 
(2,778
)
Prepaid expenses and other current assets
(101
)
 
867

Unearned franchise and development fees
(847
)
 
(76
)
Accounts payable
2,360

 
(21
)
Accrued expenses and other current liabilities
(356
)
 
(2,385
)
Deferred taxes
(1,032
)
 
(1,217
)
Other assets and liabilities
112

 
61

Cash from operating activities
17,937

 
5,557

 
 
 
 
Investing Activities
 
 
 
Acquisition of property and equipment
(5,502
)
 
(3,036
)
Acquisition of stores, less cash acquired
(9,524
)
 
(647
)
Proceeds from sale of stores

 
153

Issuance of notes receivable
(250
)
 

Payments received on notes receivable
49

 
960

Investment in cost-method investee
(500
)
 
(1,500
)
Cash from investing activities
(15,727
)
 
(4,070
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from issuance of long-term debt

 
112,000

Payments on long-term debt
(2,100
)
 
(169,900
)
Issuance of common stock, net of underwriting fees

 
59,675

Repurchases of common stock
(10
)
 
(1,518
)
Debt issuance and modification costs, including prepayment penalties

 
(2,626
)
Payments received on subscription receivables

 
1,097

Costs associated with initial public offering

 
(3,490
)
Proceeds from exercise of stock options
271

 

Investment by noncontrolling interest holders
56

 
167

Cash from financing activities
(1,783
)
 
(4,595
)
 
 
 
 
Net change in cash and cash equivalents
427

 
(3,108
)
Cash and Cash Equivalents, beginning of year
5,056

 
3,705

Cash and Cash Equivalents, end of period
$
5,483

 
$
597

 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
2,516

 
$
6,667

Cash paid during the period for income taxes
2,178

 
110

Deferred offering costs paid in 2013 reclassified to equity

 
1,537

Noncash Supplemental Disclosures of Investing and Financing Activities
 
 
 
Issuance of note payable for acquisition of stores
$

 
$
2,900

Acquisition of property and equipment in accounts payable
$
3,206

 
$
310

See accompanying notes.

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Table of Contents

Papa Murphy’s Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1
Description of Business and Basis of Presentation
Note 2
Acquisitions and Disposals
Note 3
Prepaid Expenses and Other Current Assets
Note 4
Property and Equipment
Note 5
Goodwill
Note 6
Intangible Assets
Note 7
Notes Receivable
Note 8
Financing Arrangements
Note 9
Fair Value Measurement
Note 10
Accrued and Other Liabilities
Note 11
Income Taxes
Note 12
Shareholders’ Equity
Note 13
Share-based Compensation
Note 14
Earnings per Share (EPS)
Note 15
Commitments and Contingencies
Note 16
Related Party Transactions
Note 17
Segment Information

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Table of Contents

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 Take ‘N’ Bake pizza franchises and operates Take ‘N’ Bake pizza stores owned by the Company. As of September 28, 2015 , the Company had 1,500 stores consisting of 1,466 domestic stores ( 1,340 franchised stores and 126 Company-owned stores) across 38 states, plus 34 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.
Public offering and stock split
On May 7, 2014 , the Company completed an initial public offering (the “ IPO ”) of 5,833,333 shares of common stock at a price to the public of $11.00 per share. The Company received net proceeds from the offering of approximately $54.6 million after offering fees and expenses. The net proceeds, along with additional cash on hand, were used to repay $55.5 million of the Company’s loans outstanding under the Company’s then existing senior secured credit facility, after which the Company had $112.1 million outstanding under the facility with the revolver undrawn.
Immediately prior to the IPO , the Company amended and restated its certificate of incorporation to reflect the conversion of all outstanding Series A Preferred Stock and Series B Preferred Stock (together, the “ Preferred Shares ”) to 3,054,318 shares of common stock. In connection with the IPO , on May 1, 2014, the Company amended its certificate of incorporation to effect a 2.2630 for 1 stock split of its common stock. As a result of the stock split, all previously reported share and option amounts in these interim unaudited condensed consolidated financial statements and accompanying notes have been retrospectively restated to reflect the stock split. After the conversion of the Preferred Shares and the stock split, but before the shares were sold in the IPO , the Company had 11,134,070 common shares outstanding.
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 29, 2014 .
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”). The Company reports noncontrolling interests in consolidated entities as a component of equity separate from shareholders’ equity. All significant intercompany transactions and balances have been eliminated.
Throughout the interim unaudited condensed consolidated financial statements and the related notes thereto, “Papa Murphy’s” and “the Company” refer to Papa Murphy’s Holdings, Inc. and its consolidated subsidiaries.
Fiscal year
The Company uses a 52- or 53-week fiscal year, ending on the Monday nearest to December 31. Fiscal years 2015 and 2014 are 52-week years. All three month periods presented herein contain 13 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods. References to 2015 and 2014 are references to fiscal years ending December 28, 2015 , and ended December 29, 2014 , respectively.

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Table of Contents

Recent Accounting Pronouncements
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ ASU 2015-03 ”). This update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs were not affected by this update. The Company early-adopted ASU 2015-03 during the three months ended June 29, 2015. Applying the adoption retroactively, the Company reclassified unamortized debt issuance costs of $1.2 million as of September 28, 2015 , and $1.5 million as of December 29, 2014 , from Deferred finance charges, net to Long-term debt, net of current portion on the Condensed Consolidated Balance Sheets . Adoption of this standard did not affect the Company’s results of operations or cash flows in either the current or previous interim and annual reporting periods.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ 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 . ASU 2014-09 is effective for the Company in the first quarter of fiscal 2017 with early adoption prohibited. The standard is required to be applied retroactively to each prior reporting period presented or retroactively 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 standard will not affect the Company's recognition of revenue from Company-owned restaurants or its recognition of franchise royalties, which are based on a percentage of franchise sales. The Company is continuing to evaluate the effect the adoption of this standard will have on the recognition of other less significant revenue transactions such as franchise and development fees as well as refranchising of Company-owned restaurants.
Note 2 — Acquisitions and Disposals
Project Pie Investment and Disposal
The Company, through a non-wholly owned subsidiary, Project Pie Holdings, LLC (“ PPH ”), made investments in Project Pie, LLC (“ Project Pie ”) in the form of Series A Convertible Preferred Units (the “ Preferred Units ”). Project Pie is a fast casual custom-pizza restaurant chain with stores located throughout the United States, the Philippines and Scotland.
In connection with its investment in Project Pie , PPH had committed as of December 29, 2014 , to fund, upon demand, up to an additional $0.5 million prior to December 2016 through the purchase of additional Series A Preferred Units of Project Pie . During the nine months ended September 28, 2015 , PPH invested the additional $0.5 million and satisfied its commitment to Project Pie .
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 , it recorded a pre-tax impairment of $4.5 million to its investment in Project Pie during the three months ended June 29, 2015.
Earlier in 2015, the Company determined that Project Pie was a VIE 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 in Project Pie as an equity method investment since the Company’s investment was in preferred units with subordination characteristics substantially different from the common units and were determined not to be in-substance common stock. The Company’s investment was classified as a cost method investment in Other assets .
Acquisitions in 2015
M2AD Acquisition
On March 9, 2015, Papa Murphy’s Company Stores, Inc. (“ PMCSI ”), a wholly-owned subsidiary of the Company, acquired certain assets used in the operation of six Papa Murphy’s stores in the Seattle, Washington, area from M2AD Management, Inc., the previous operator of the six Papa Murphy’s stores (the “ M2AD Acquisition ”). Transaction costs of $30,000 associated with the M2AD Acquisition were recognized as Other store operating costs in the Condensed Consolidated Statements of Operations . The total purchase price was $4.1 million , which included a holdback of $6,000 . As of September 28, 2015 , PMCSI retained $5,000 of the holdback amount. The M2AD Acquisition was funded through existing cash and was accounted for using the acquisition method of accounting, whereby operating results subsequent to the acquisition date are included in the interim unaudited condensed consolidated financial statements .

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Table of Contents

The fair values of the assets acquired are summarized below (in thousands):
Cash and cash equivalents
$
5

Inventories
39

Prepaid expenses and other current assets
38

Property and equipment
406

Reacquired franchise rights
1,139

Asset retirement obligation
(75
)
Total identifiable net assets acquired
1,552

Goodwill
2,554

Total consideration
$
4,106

Reacquired franchise rights have weighted average useful lives of 6.6 years . Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired and is expected to be fully deductible for income tax purposes. This goodwill is primarily attributable to the acquired customer bases and, to a lesser extent, economies of scale expected from combining the operations of the acquired entities with the operations of the Company.
Unaudited pro forma information —The following unaudited pro forma consolidated revenues and net income (loss) of the Company give effect to the M2AD Acquisition as if it had occurred as of the beginning of 2014 :
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Pro forma revenues
$
28,132

 
$
23,333

 
$
87,500

 
$
72,868

Pro forma net income (loss)
$
1,122

 
$
(808
)
 
$
2,311

 
$
(1,544
)
 
The pro forma information presented in this note includes adjustments for amortization of acquired intangible assets, depreciation of acquired property and equipment and income tax expense. The pro forma information is presented for informational purposes and may not be indicative of the results that would have been obtained had the M2AD Acquisition actually occurred at the beginning of 2014 , nor is it intended to be indicative of future operating performance.
Revenues and net income from the acquired stores from the closing date of the M2AD Acquisition included in the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 28, 2015 , are as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 28, 2015
Revenues
$
1,259

 
$
2,824

Net income
74

 
188


Other Acquisitions
PMCSI also acquired all of the assets of 16 stores through seven individually immaterial acquisitions during the nine months ended September 28, 2015 : eight stores in Tennessee, three in Washington, two in Texas, one in Idaho, one in Oregon, and one in Colorado. The Tennessee stores were acquired on January 26, 2015, the Idaho store on January 12, 2015, the Oregon store on March 2, 2015, the Texas stores on March 9, 2015 and July 27, 2015, respectively, the Colorado store on May 4, 2015, and the Washington stores on May 11, 2015 (collectively, the “ Other Acquisitions ”). The Company incurred transaction costs of $31,000 associated with the Other Acquisitions that were recognized as Other store operating costs in the Condensed Consolidated Statements of Operations . The aggregate purchase price for the Other Acquisitions was approximately $5.4 million , which included holdbacks totaling $84,000 in the aggregate. As of September 28, 2015 , PMCSI retained $13,000 of the aggregate holdback amount. The Other Acquisitions were funded through existing cash and were accounted for using the acquisition method of accounting, whereby operating results subsequent to the acquisition date are included in the interim unaudited condensed consolidated financial statements .

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The fair values of the assets acquired are summarized below (in thousands):
Cash and cash equivalents
$
9

Inventories
81

Prepaid expenses and other current assets
67

Property and equipment
1,280

Reacquired franchise rights
1,041

Asset retirement obligation
(176
)
Total identifiable net assets acquired
2,302

Goodwill
3,104

Total consideration
$
5,406

Reacquired franchise rights have weighted average useful lives of 3.4 years . Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired and is expected to be fully deductible for income tax purposes. This goodwill is primarily attributable to the acquired customer bases and, to a lesser extent, economies of scale expected from combining the operations of the acquired entities with the operations of the Company.
Unaudited pro forma information —The following unaudited pro forma consolidated revenues and net income (loss) of the Company give effect to the Other Acquisitions as if they had occurred as of the beginning of 2014 :
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Pro forma revenues
$
28,158

 
$
23,906

 
$
88,092

 
$
74,492

Pro forma net income (loss)
$
1,125

 
$
(840
)
 
$
2,296

 
$
(1,639
)
 
The pro forma information presented in this note includes adjustments for amortization of acquired intangible assets, depreciation of acquired property and equipment and income tax expense. The pro forma information is presented for informational purposes and may not be indicative of the results that would have been obtained had the Other Acquisitions actually occurred at the beginning of 2014 , nor is it intended to be indicative of future operating performance.
Revenues and net loss from the acquired stores from the closing date of the Other Acquisitions included in the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 28, 2015 , are as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 28, 2015
Revenues
$
1,929

 
$
4,306

Net loss
(76
)
 
(197
)
Note 3 — Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
(in thousands)
September 28, 2015
 
December 29, 2014
Prepaid media development costs (1)
$
238

 
$
593

Prepaid rents and insurance
1,277

 
620

POS software licenses for resale
1,175

 
1,800

Other
794

 
410

Total prepaid expenses and other current assets
$
3,484

 
$
3,423

(1)
Prepaid media development costs represent costs incurred for advertisements that have not aired.
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 Lease and other revenues and the related expense is recorded in

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Table of Contents

Selling, general and administrative costs on the Condensed Consolidated Statements of Operations . POS software license revenue during the periods reported was as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
POS software license revenue
$
258

 
$
444

 
$
559

 
$
2,370

 
Note 4 — Property and Equipment
Property and equipment are net of accumulated depreciation of $12.6 million and $9.3 million at September 28, 2015 , and December 29, 2014 , respectively. Depreciation expense during the periods reported was as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Depreciation expense
$
1,288

 
$
747

 
$
3,367

 
$
2,079

 
Note 5 — Goodwill
The following summarizes changes to the Company’s goodwill, by reportable segment:
(in thousands)
DOMESTIC
COMPANY STORES
 
DOMESTIC
FRANCHISE
 
TOTAL
Balance at December 29, 2014
$
19,536

 
$
81,546

 
$
101,082

Acquisitions
5,658

 

 
5,658

Balance at September 28, 2015
$
25,194

 
$
81,546

 
$
106,740

There is no goodwill associated with the International Segment. The Company has determined that during the three months ended September 28, 2015 , there were no triggering events that would require an updated impairment review.
Note 6 — Intangible Assets
Intangible assets are net of accumulated amortization of $21.7 million and $19.3 million as of September 28, 2015 , and December 29, 2014 , respectively. Amortization expense during the periods reported was as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Amortization expense
$
1,353

 
$
1,260

 
$
4,013

 
$
3,736

 
Note 7 — Notes Receivable
Notes receivable consist of the following:
(in thousands)
September 28, 2015
 
December 29, 2014
Note maturing in 2020 bearing interest at 9.0% and collateralized by store assets.
$
239

 
$
287

Total notes receivable
239

 
287

Less current portion
(71
)
 
(62
)
Notes receivable, net of current portion
$
168

 
$
225


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Note 8 — Financing Arrangements
Long-term debt consists of the following:
(in thousands)
September 28, 2015
 
December 29, 2014
2014 Credit Facility
 
 
 
Term loan
$
109,900

 
$
112,000

Revolving line of credit

 

Notes payable
3,000

 
3,000

Total principal amount of long-term debt
112,900

 
115,000

Unamortized debt issuance costs
(1,244
)
 
(1,485
)
Total long-term debt
111,656

 
113,515

Less current portion
(3,500
)
 
(2,800
)
Total long-term debt, net of current portion
$
108,156

 
$
110,715

2014 senior secured credit facility
On 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 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 September 28, 2015 , the 2014 Credit Facility bore interest under the LIBOR rate option at 3.45% .
With a maturity date of over one year from September 28, 2015 , 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.
The weighted average interest rate for all borrowings under our 2014 Credit Facility for the third quarter of 2015 was 3.45% .
2013 senior secured credit facility
In August 2014, the borrowings under the 2014 Credit Facility refinanced the $177.0 million senior secured credit facility entered into in October 2013 (the “ 2013 Credit Facility ”), which included a $167.0 million senior secured term loan and a $10.0 million revolving credit facility, including a $2.5 million letter of credit subfacility.
On May 7, 2014 , the Company prepaid $55.5 million of its long-term debt under the 2013 Credit Facility in connection with the IPO . A proportionate share of deferred financing costs of $1.2 million was expensed as a Loss on early retirement of debt on the Company’s Condensed Consolidated Statements of Operations at the time of this debt prepayment.
Notes payable
PMCSI 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 9 — 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.

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Level 3    —    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis:
 
September 28, 2015
 
December 29, 2014
 
 
(in thousands)
CARRYING VALUE
 
FAIR VALUE
 
CARRYING VALUE
 
FAIR VALUE
 
FAIR VALUE MEASUREMENTS
Financial assets
 
 
 
 
 
 
 
 
 
Notes receivable (1)
$
239

 
$
242

 
$
287

 
$
302

 
Level 3
Cost-method investments (2)

 

 
4,000

 
5,055

 
Level 3
Financial liabilities
 
 
 
 
 
 
 
 
 
Long-term debt, including current portion thereof (3)
112,900

 
114,100

 
115,000

 
113,880

 
Level 3
(1)
The fair value of the notes receivable was estimated primarily using a discounted cash flow method based on a discount rate, reflecting the applicable credit spread.
(2)
The fair value of cost-method investments was estimated primarily using a discounted cash flow method based on a discount rate, reflecting the applicable credit spread.
(3)
The fair value of long-term debt was estimated 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 and accounts payable. 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.
Note 10 — Accrued and Other Liabilities
Accrued and other liabilities consist of the following:
(in thousands)
September 28, 2015
 
December 29, 2014
Accrued compensation and related costs
3,988

 
3,670

Gift cards and certificates payable
1,989

 
2,912

Accrued interest and non-income taxes payable
693

 
745

Convention fund balance
746

 
271

Advertising and development fund
5

 
507

Unearned product rebates
1,407

 
791

Other
389

 
704

 
$
9,217

 
$
9,600

Note 11 — Income Taxes
Information on the Company’s income taxes for the periods reported is as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Provision for (benefit from) income taxes
$
746

 
$
(703
)
 
$
1,206

 
$
(1,124
)
Income (loss) before income taxes
1,868

 
(1,491
)
 
2,985

 
(2,700
)
Effective income tax rate
39.9
%
 
47.1
%
 
40.4
%
 
41.6
%
The effective income tax rate for the three months ended September 28, 2015 , includes the effect of certain permanent differences between tax reporting purposes and financial reporting purposes and the relative impact of those differences on a small quarterly income. The effective income tax rate for the three months ended September 29, 2014 , includes the effect

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of certain permanent differences between tax reporting purposes and financial reporting purposes and the relative impact of those differences on a small quarterly loss.
The effective income tax rate for the first nine months of 2015 includes the effect of a discrete adjustment for the cumulative share-based compensation expense adjustment for certain awards previously considered unlikely to vest. The effective tax rate for the first nine months ended September 29, 2014 , includes the effect of a separate unfavorable discrete adjustment for an accelerated restricted stock vesting event recorded in early 2014.
Note 12 — Shareholders’ Equity
Preferred stock
Prior to the IPO , the Company’s preferred stock consisted of Series A Preferred Shares and Series B Preferred Shares. The Preferred Shares had a cumulative preferred dividend of 6.00%  per year based on an original liquidation value of $36.68 per share. Upon liquidation of the Company, the holders of the Preferred Shares were entitled to receive the unpaid liquidation value plus accreted dividends before any distribution could be made to the holders of common stock. In addition, the Preferred Shares participated in 20% of all remaining earnings if distributed to common stockholders. The unpaid liquidation value of the Series A and Series B Preferred Shares was $21.14 and $26.80 per share, respectively, as of the IPO . At the IPO , the Preferred Shares were converted into 3,054,318 shares of common stock.
Noncontrolling interests
The Company received the following additional investments by noncontrolling interest holders in PPH during the periods reported:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Additional investment by noncontrolling interest holders in PPH
$

 
$

 
$
56

 
$
167

Note 13 — Share-based Compensation
In May 2010, the Company’s Board of Directors approved the 2010 Amended Management Incentive Plan (the “ 2010 Plan ”). In May 2014, the Company’s Board of Directors adopted the 2014 Equity Incentive Plan (the “ 2014 Plan ,” and together with the 2010 Plan , the “ Incentive Plans ”). With the adoption of the 2014 Plan , the Company has discontinued selling stock and issuing awards under the 2010 Plan , but stock previously purchased and awards previously granted under the 2010 Plan remain outstanding.
The Incentive Plans reserve 2,116,747 common shares for equity incentive awards, which can be awarded as incentive stock options, non-qualified stock options, restricted stock awards, and unrestricted stock awards. Under the Incentive Plans , the Company has awarded 584,017 and 610,084 shares of restricted common stock to eligible employees as of September 28, 2015 , and December 29, 2014 , respectively. In addition, the Company has issued 1,051,929 and 945,149 stock options under the Incentive Plans to eligible employees as of September 28, 2015 , and December 29, 2014 , respectively.

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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 29, 2014
127,650

 
215,556

 
$
2.27

Granted
7,877

 

 
19.05

Vested
(70,930
)
 

 
1.94

Repurchased
(7,542
)
 
(29,041
)
 
0.70

Unvested, September 28, 2015
57,055

 
186,515

 
$
3.15

The weighted average fair value of share-based compensation awards granted and the fair values of awards granted and vested during the period were as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands, except per share amounts)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Weighted average grant date fair value per share
$
19.41

 
$
8.80

 
$
19.05

 
$
8.80

Total fair value of shares granted
60

 
60

 
150

 
60

Total fair value of shares vested
86

 
26

 
137

 
458

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
(in thousands)
Outstanding, December 29, 2014
722,307

 
222,842

 
$
11.16

 
 
 
 
Granted
192,000

 

 
13.43

 
 
 
 
Exercised
(24,626
)
 

 
11.00

 
 
 
 
Forfeited
(38,233
)
 
(22,361
)
 
11.76

 
 
 
 
Outstanding, September 28, 2015
851,448

 
200,481

 
$
11.55

 
8.7 years
 
$
3,516

Exercisable, September 28, 2015
428,646

 

 
$
11.19

 
8.6 years
 
$
1,588

Vested and expected to vest at September 28, 2015
788,028

 
170,409

 
$
11.52

 
8.7 years
 
$
3,227

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
 
Nine Months Ended
(in thousands, except per share amounts)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Weighted average grant date fair value per share
N/A
 
N/A
 
$
5.41

 
$
4.27

Total fair value of awards granted
$

 
$

 
1,039

 
4,151

Total fair value of awards vested
23

 
87

 
346

 
1,519

Total intrinsic value of options exercised
121

 

 
154

 

N/A = not applicable

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Compensation cost and valuation
Total compensation costs recognized in connection with the Incentive Plans during the periods reported were as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Stock compensation expense
$
202

 
$
193

 
$
858

 
$
1,738

Associated income tax benefits
64

 
68

 
282

 
578

 
As of September 28, 2015 , the total unrecognized stock-based compensation expense, net of estimated forfeitures, was $2.8 million , with $1.9 million associated with time vesting awards and $0.9 million associated with performance vesting awards. The remaining weighted average contractual life for unrecognized stock-based compensation expense was 3.4 years as of September 28, 2015 .
Prior to the IPO , the valuation of the Company’s common stock and Preferred Shares was based on the principles of option-pricing theory. This approach is based on modeling the value of the various components of an entity’s capital structure as a series of call options on the proceeds expected from the sale of the entity or the liquidation of its assets at some future date. Specifically, each of the preferred and common equity is modeled as a call option on the aggregate value of the Company with an exercise price equal to the liquidation preferences of the more senior securities. Both the income and market approaches were considered when estimating the fair value of the Company.
The Company’s valuation was performed under both an IPO and non- IPO scenario with each value weighted based on an estimated probability of occurrence. The key inputs required to calculate the value of the common stock using the option-pricing model included the risk free rate, the volatility of the underlying assets, and the estimated time until a liquidation event. The Company applied a marketability discount to the value of common stock based on facts and circumstances at each valuation date.
During the reported periods prior to the IPO , the Company assumed the following:
 
Three Months Ended 
 March 31, 2014
(1)
 
IPO Scenario
 
Non-IPO Scenario
Risk free rate
0.36%
 
0.36%
Volatility of the underlying assets
45%
 
45%
Estimated time until a liquidation event
0.58 years
 
1.75 years
Marketability discount—common stock
10%
 
25%
Marketability discount—preferred stock
8%
 
15%
Weight applied to scenario
95%
 
5%
(1)
The last pre-IPO valuation of the Company was performed as of March 31, 2014.
The fair value of the stock option awards granted during the periods reported was estimated with the following weighted-average assumptions.
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Risk free rate
N/A
 
N/A
 
1.9%
 
2.0%
Expected volatility
N/A
 
N/A
 
37.9%
 
35.0%
Expected term
N/A
 
N/A
 
6.3 years
 
6.3 years
Expected dividend yield
N/A
 
N/A
 
0.0%
 
0.0%
 
N/A = not applicable
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 of common stock outstanding. Prior to the IPO , the Company’s cumulative preferred stockholders were entitled to participate in 20% of all remaining earnings or dividends if distributed to common stockholders. As such, the

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Company calculated EPS using the two-class method. The two-class method determines EPS for common stock and participating securities according to dividends and dividend equivalents and their respective participation rights in undistributed earnings.
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
 
Nine Months Ended
(in thousands, except per share data)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Earnings:
 
 
 
 
 
 
 
Net income (loss)
$
1,122

 
$
(788
)
 
$
1,779

 
$
(1,576
)
Less: Net loss attributable to noncontrolling interests

 

 
500

 

Net income (loss) attributable to Papa Murphy's
1,122

 
(788
)
 
2,279

 
(1,576
)
Less: cumulative Series A and B Preferred dividends

 

 

 
(2,150
)
Net income (loss) available to common shareholders
$
1,122

 
$
(788
)
 
$
2,279

 
$
(3,726
)
Shares:
 
 
 
 
 
 
 
Weighted average common shares outstanding
16,672

 
16,585

 
16,635

 
10,603

Dilutive effect of restricted equity awards (1)
247

 

 
258

 

Diluted weighted average number of shares outstanding
16,920

 
16,585

 
16,894

 
10,603

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
0.07

 
$
(0.05
)
 
$
0.14

 
$
(0.35
)
Diluted earnings (loss) per share
$
0.07

 
$
(0.05
)
 
$
0.13

 
$
(0.35
)
(1)
The Company’s potential common stock instruments such as stock options and restricted stock were not included in the computation of diluted EPS for the three and nine months ended September 29, 2014 as the effect of including these shares in the calculation would have been anti-dilutive.
For the three months ended September 28, 2015 , and September 29, 2014 , an aggregated total of 70,000 shares and 128,000 shares, respectively, have been excluded from the diluted income per share calculation because their effect would have been anti-dilutive. For the nine months ended September 28, 2015 , and September 29, 2014 , an aggregated total of 69,000 shares and 170,000 shares, respectively, have been excluded from the diluted income per share calculation because their effect would have been anti-dilutive.
Note 15 — 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, 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 eight franchised stores that have terms expiring on various dates from August 2016 to July 2020 . 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

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September 28, 2015 , 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 our franchise owners, initially filed by twelve franchise owners and their individual stakeholders on April 11, 2014, in the Superior Court in Clark County, Washington, claiming that the Company misrepresented sales volumes, made false representations to them and charged excess advertising fees, among other things, and alleging 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. On June 18, 2014, an additional 16 franchise owners and their individual stakeholders, represented by the same counsel as the plaintiffs described above, filed a lawsuit with the Superior Court in Clark County, Washington , making essentially the same claims and 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. The Company reached resolution with eleven of the franchise owners (and those owners’ individual stakeholders) involved in the consolidated lawsuits, and their claims have either been dismissed or dismissal is pending. The Company believes the allegations in these consolidated lawsuits 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, the Company 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.
On May 8, 2015, the Company was named as a defendant in a class action lawsuit in United States District Court for the Western District of Washington claiming a violation of the federal Telephone Consumer Protection Act, which prohibits companies from making telemarketing calls to numbers listed in the Federal Do-Not-Call Registry and imposes other obligations and limitations on making phone calls and sending text messages to consumers. The lawsuit alleges that the Company did not comply with the statutory requirements for obtaining consumers’ consent to receive text messages from the Company, and seeks statutory penalties for those alleged deficiencies. The Company believes the plaintiff's interpretation of the applicable law is incorrect, and it will vigorously defend itself in the lawsuit, but provides no assurance that it will be successful. An adverse judgment or settlement could have an adverse effect on the Company's profitability and could cause variability in its results compared to expectations.
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 its 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, 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 — Related Party Transactions
Advisory services and monitoring agreement
Prior to the IPO , the Company was a party to an advisory services and monitoring agreement with affiliates of Lee Equity Partners, LLC (“ Lee Equity ”). In accordance with the terms of the agreement, the Company paid Lee Equity for ongoing advisory and monitoring services, such as management consulting, financial analysis, and other related services. As compensation, the Company paid an annual fee of $0.5 million in four equal quarterly installments, plus direct expenses incurred, which are included in Selling, general and administrative costs. The agreement did not call for a minimum level of services to be furnished and provided that fees paid to Lee Equity could be deferred at the discretion of Lee Equity or to the extent required under the Company’s 2014 Credit Facility .
On May 7, 2014, the Company completed the IPO and paid Lee Equity $1.5 million in accordance with the terms of the agreement. With the completion of the IPO , the advisory services and monitoring agreement between the Company and Lee Equity was terminated.
Employee loans related to share purchases
In connection with share-based compensation, the Company previously made several loans to certain officers and non-officer employees of the Company (see Note 13 — 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.

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In March 2014, the Company entered into agreements with certain executive officers to repurchase an aggregate of 109,779 shares of common stock at a price of $11.85 per share for a total purchase price of $1.3 million . Included among the repurchased shares were 31,707 shares of common stock for which vesting terms were accelerated in connection with the repurchase. The Company received a payment of $1.0 million from the same executive officers to repay their outstanding stock subscription receivables. Concurrent with the share repurchase, the Company entered into agreements with the same executive officers to issue stock options to purchase an aggregate of 109,779 shares at an exercise price of $11.85 per share, including 78,072 fully vested options and 31,707 options subject to time-based or performance-based vesting provisions. In connection with the acceleration of vesting and the issuance of the fully vested options, the Company recorded stock-based compensation expense of $0.5 million for the nine months ended September 29, 2014 .
All loans made to officers of the Company were repaid prior to the IPO . Some loans made to non-officer employees of the Company were still outstanding at the time of the IPO . As of September 28, 2015 , and  December 29, 2014 , 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 during the period Project Pie was a cost-method investee. Revenue from these transactions are recorded as Lease and other revenues on the Condensed Consolidated Statements of Operations . Related party revenue during the periods reported was as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Related party revenue
$

 
$
24

 
$
4

 
$
108

 
As of September 28, 2015 , and December 29, 2014 , the Company had an Accounts receivable balance from Project Pie of $0 and $66,000 , respectively.
Notes receivable
On March 13, 2015, the Company loaned Project Pie , a cost-method investee, $250,000 , in exchange for a note receivable which bore interest at 13% and matured in June 2015. This note was written off as a bad debt in the three months ended June 29, 2015.
In June 2015, the Company entered into an agreement with Project Pie under which the Company, at its sole discretion, may advance funds not to exceed $0.8 million in exchange for a subordinated note receivable. As of September 28, 2015 , no funds were outstanding under the agreement.
Note 17 — Segment Information
The Company has the following reportable segments: (i) Domestic Company Stores; (ii) Domestic Franchise; and (iii) International. 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 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 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.

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The following tables summarize information on profit or loss and assets for each of the Company’s reportable segments:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Revenues
 
 
 
 
 
 
 
Domestic Franchise
$
10,445

 
$
10,139

 
$
33,258

 
$
33,510

Domestic Company Stores
17,604

 
11,627

 
52,927

 
35,121

International
83

 
403

 
236

 
501

Total
$
28,132

 
$
22,169

 
$
86,421

 
$
69,132

Segment Operating Income (Loss)
 
 
 
 
 
 
 
Domestic Franchise
$
4,901

 
$
4,713

 
$
15,036

 
$
14,941

Domestic Company Stores
(516
)
 
(178
)
 
1,172

 
501

International
76

 
252

 
154

 
28

Corporate and unallocated
(1,416
)
 
(1,262
)
 
(5,381
)
 
(6,534
)
Total
$
3,045

 
$
3,525

 
$
10,981

 
$
8,936

Depreciation and amortization
 
 
 
 
 
 
 
Domestic Franchise
$
1,416

 
$
1,262

 
$
4,005

 
$
3,692

Domestic Company Stores
1,217

 
737

 
3,352

 
2,100

International
8

 
8

 
23

 
23

Total
$
2,641

 
$
2,007

 
$
7,380

 
$
5,815

(in thousands)
September 28, 2015
 
December 29, 2014
Total Assets
 
 
 
Domestic Franchise
$
134,639

 
$
137,417

Domestic Company Stores
46,416

 
34,953

International
415

 
447

Other (1)
89,443

 
92,647

Total
$
270,913

 
$
265,464

(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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K. To match our operating cycle, we use a 52- or 53-week fiscal year, ending on the Monday nearest to December 31. Our fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. Fiscal years 2015 and 2014 are 52-week periods ending on December 28, 2015 , and ended on December 29, 2014 , respectively.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in the section entitled “Risk Factors” in our Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 2015. All statements other than statements of historical fact or relating to present facts or current conditions included in this discussion and analysis are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Examples of forward-looking statements include those regarding our future financial or operating results, cash flows, sufficiency of liquidity, business strategies and priorities, resolution of litigation and claims, expectations for reducing operating costs and increasing sales through the use of our POS system terminals, future benefits of implementing POS system terminals, deductibility of goodwill for income tax purposes, potential efficiencies and synergies created by store acquisitions, expansion and growth opportunities, the number, timing and mix of new store openings, exposure to foreign currency and interest rate risk, as well as industry trends and outlooks. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events .
The forward-looking statements contained in this discussion and analysis are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this discussion and analysis, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements. We believe these factors include, but are not limited to, those described under the section entitled “Risk Factors” in our Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 2015. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual operating and financial performance may vary in material respects from expectations based on these forward-looking statements.
Any forward-looking statement made by us in this discussion and analysis speaks only as of the date on which we make it. Factors or events that could cause our actual operating and financial performance to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Overview
Papa 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 were founded in 1981 and have grown our footprint to a total of 1,500 system-wide stores as of September 28, 2015 , of which 91.6% are franchised, located in 38 states plus Canada and the Middle East.
We have been repeatedly rated the #1 pizza chain in the United States by multiple third-party consumer studies. In 2015, Technomic awarded us the 2015 Chain Restaurant Consumers’ Choice award and named us the Quick Serve concept most likely to be recommended by consumers. Nation’s Restaurant New s rated us the #1 limited service restaurant in the Pizza/Italian Category for 2015. We were rated #1 in the Pizza Category by Market Force Information in 2015, including the top spot in food quality, healthy food, and friendly service. We were also rated the #1 pizza chain overall by Nation’s Restaurant

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New s in 2014, 2013, 2012 and 2011. When compared to broader restaurant chain competition, we were recognized by Technomic in 2015, 2014 and 2013 as the #1 chain overall among all restaurants and all food categories and by Nation’s Restaurant News in 2013 and 2012 as one of the Top 5 Overall limited service restaurant chains across all food categories.
Our financial results are driven largely by system-wide sales at our franchised and Company-owned stores. System-wide sales are driven by comparable store sales growth and store count, which translate into royalty payments from franchise owners, as well as Company-owned store revenues. We strive to consistently increase both comparable store sales and our store counts. Total revenues can also be impacted by acquisitions of franchised stores by our Domestic Company Stores segment or the refranchising of Company-owned stores.
The Take ‘N’ Bake model offers operating advantages that differentiate us from other restaurant concepts. Our domestic stores (i) do not require ovens, freezers or other expensive cooking equipment because our customers bake their customized pizzas at home; (ii) do not require delivery, thereby reducing operational complexity for franchise owners and their employees; (iii) maintain shorter opening hours (typically 11:00 a.m. to 9:00 p.m.) that are attractive to franchise owners and their employees; (iv) require fewer employees during each shift compared to most other restaurant concepts, resulting in lower labor costs; and (v) do not require dining areas, resulting in lower occupancy and operating costs.
The relatively small initial and ongoing investments required to own and operate a Papa Murphy’s store creates the opportunity for higher margins and attractive returns for franchisees. We believe these favorable investment requirements coupled with simple operations, a strong brand message supported by high levels of advertising spending and high-quality menu offerings drive attractive store-level economics, which, in turn, drives demand for new stores.
2015 Highlights
Revenue Growth
Total revenues for the three months ended September 28, 2015 , compared to the three months ended September 29, 2014 , grew 26.9% from $22.2 million to $28.1 million due primarily to the strategic acquisition of franchised stores by our Domestic Company Stores segment, new store openings, and comparable store sales growth. Total revenues for the nine months ended September 28, 2015 , compared to the nine months ended September 29, 2014 , grew 25.0% from $69.1 million to $86.4 million due primarily to the strategic acquisition of franchised stores by our Domestic Company Stores segment, new store openings, and comparable store sales growth.
System-wide sales for the three months ended September 28, 2015 , compared to the three months ended September 29, 2014 , increased 4.7% from $194.0 million to $203.1 million . System-wide sales for the nine months ended September 28, 2015 , compared to the nine months ended September 29, 2014 , increased 7.0% from $610.7 million to $653.5 million .
Comparable store sales growth in 2015 compared to 2014 for selected segments was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Domestic Franchise
1.5
%
 
4.4
%
 
3.9
%
 
3.0
%
Domestic Company Stores
0.0
%
 
8.4
%
 
3.7
%
 
7.1
%
Total domestic stores
1.4
%
 
4.6
%
 
3.9
%
 
3.2
%
As of September 28, 2015 , we had achieved 19 straight quarters of comparable store sales growth and 42 of the last 47 quarters had positive comparable store sales growth. In the nine months ended September 28, 2015 , we also had 24 weeks in which we recorded all-time highs for system-wide sales.
Store Development
We and our franchise owners opened 23 stores, all in the United States, in the three months ended September 28, 2015 . In the nine months ended September 28, 2015 , we and our franchise owners opened 65 stores, including 59 in the United States. While we plan to strategically expand our Company-owned store base in select markets, we may also refranchise select Company-owned stores over time as opportunities arise. We expect the majority of our new store expansion will continue to be from new franchised store openings.

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Acquisitions
During the three months ended September 28, 2015 , we acquired one store in the Dallas, Texas, market. During the nine months ended September 28, 2015 , we acquired 22 Papa Murphy’s stores from franchise owners in six different markets across the country. Nine stores were acquired in the Seattle, Washington, market, eight stores in the Knoxville, Tennessee, market, two stores in the Dallas, Texas, market, and one store each in the Boise, Idaho; Portland, Oregon; and Colorado Springs, Colorado, markets.
Technology Investments
Our POS system is an important technology platform and tool for our future growth. Future precision marketing tools and mobile coupon capabilities necessitate POS system terminals in our stores. We have rolled out POS system terminals to 1,125 stores as of September 28, 2015 . We believe that an opportunity remains for many of our franchise owners to reduce their operating costs by using the POS system terminals.
We continue to roll out an integrated online ordering platform coupled with the latest version of our POS system software, which was in 807 stores as of September 28, 2015 . An additional 19 stores were still on our original, non-integrated online ordering platform pending conversion as of September 28, 2015 .
Our Segments
We operate in three business segments: Domestic Franchise, Domestic Company Stores and International. Our Domestic Franchise segment consists of our domestic franchised stores, which represent the majority of our system-wide stores. Our Domestic Company Stores segment consists of our Company-owned stores in the United States. Our International segment consists of our stores outside of the United States, all of which are franchised. The following table sets forth our Revenues , Operating Income and Depreciation and amortization for each of our segments for the periods presented:  
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Revenues
 
 
 
 
 
 
 
Domestic Franchise
$
10,445

 
$
10,139

 
$
33,258

 
$
33,510

Domestic Company Stores
17,604

 
11,627

 
52,927

 
35,121

International
83

 
403

 
236

 
501

Total
$
28,132

 
$
22,169

 
$
86,421

 
$
69,132

Segment Operating Income (Loss)
 
 
 
 
 
 
 
Domestic Franchise
$
4,901

 
$
4,713

 
$
15,036

 
$
14,941

Domestic Company Stores
(516
)
 
(178
)
 
1,172

 
501

International
76

 
252

 
154

 
28

Corporate and unallocated
(1,416
)
 
(1,262
)
 
(5,381
)
 
(6,534
)
Total
$
3,045

 
$
3,525

 
$
10,981

 
$
8,936

Depreciation and amortization
 
 
 
 
 
 
 
Domestic Franchise
$
1,416

 
$
1,262

 
$
4,005

 
$
3,692

Domestic Company Stores
1,217

 
737

 
3,352

 
2,100

International
8

 
8

 
23

 
23

Total
$
2,641

 
$
2,007

 
$
7,380

 
$
5,815


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Key Operating Metrics
We evaluate the performance of our business using a variety of operating and performance metrics. Set forth below is a description of our key operating metrics.
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2015
 
September 29, 2014
 
September 28, 2015
 
September 29, 2014
Domestic store average weekly sales (AWS)
$
10,568

 
$
10,487

 
$
11,431

 
$
11,026

Domestic comparable store sales growth
1.4
%
 
4.6
%
 
3.9
%
 
3.2
%
Domestic comparable stores
1,366

 
1,315

 
1,366

 
1,315

System-wide sales (in thousands)
$
203,078

 
$
194,033

 
$
653,462

 
$
610,734

Number of system-wide stores at period end
1,500

 
1,437

 
1,500

 
1,437

Adjusted EBITDA (in thousands)
$
6,144

 
$
5,633

 
$
20,591

 
$
18,855

Average Weekly Sales
Average Weekly Sales (“ AWS ”) consists of the average weekly sales of domestic franchised and Company-owned stores over a specified period of time. AWS is calculated by dividing the total net sales of our domestic system-wide stores for the relevant time period by the number of weeks these same stores were open in such time period. This measure allows management to assess changes in customer traffic and spending patterns at our domestic system-wide stores.
Comparable Store Sales Growth
Comparable store sales growth represents the change in year-over-year sales for comparable stores. A comparable store is a store that has been open for at least 52 full weeks from the comparable date (the Tuesday following the opening date). This measure highlights the performance of existing stores, while excluding the effect of newly opened or closed stores. Comparable store sales growth reflects changes in the number of transactions and in customer spend per transaction at existing stores. Customer spend per transaction is affected by changes in menu prices, sales mix and the number of items sold per customer.
System-Wide Sales
System-wide sales include net sales by all of our system-wide stores. This measure allows management to assess the health of our brand, our relative position to competitors and changes in our royalty revenues.
Store Openings, Closures, Acquisitions and Divestitures
We review the number of new stores, the number of closed stores, and the number of acquisitions and divestitures of stores to assess growth in system-wide sales, royalty revenues and Company-owned store sales.
The following table sets forth the changes in the number of stores in our system as well as the rate of new store openings for the nine months ended September 28, 2015 .
 
Domestic Company Stores
 
Domestic Franchise
 
Total Domestic
 
International
 
Total
 
Annualized New Store Opening Rate
Store count at December 29, 2014
91

 
1,342

 
1,433

 
28

 
1,461

 
 
Openings
14

 
45

 
59

 
6

 
65

 
5.9
%
Closings
(1
)
 
(25
)
 
(26
)
 

 
(26
)
 
 
Net transfers
22

 
(22
)
 

 

 

 
 
Store count at September 28, 2015
126

 
1,340

 
1,466

 
34

 
1,500

 
 
EBITDA and Adjusted EBITDA
To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles in the U.S. (“ GAAP ”), we consider certain financial measures that are not prepared in accordance with

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GAAP . These non- GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly-titled measures presented by other companies.
Adjusted EBITDA ” is calculated as net income (loss) before interest expense, income taxes, depreciation and amortization (“ EBITDA ”) as adjusted for:
all non-cash losses or expenses (including non-cash share-based compensation expenses and the non-cash portion of rent expenses relating to the difference between GAAP and cash rent expenses), excluding any non-cash loss or expense that is an accrual of a reserve for a cash expenditure or payment to be made, or anticipated to be made, in a future period;
non-recurring or unusual cash fees, costs, charges, losses and expenses;
fees, costs and expenses related to acquisitions;
pre-opening costs with respect to new stores;
historical management fees and expenses incurred under our advisory services and monitoring agreement with Lee Equity , which terminated in connection with the IPO ; and
fees and expenses incurred in connection with the issuance of debt.
Adjusted EBITDA eliminates the effects of items that we do not consider indicative of our operating performance. Adjusted EBITDA is a supplemental measure of operating performance that does not represent and should not be considered as an alternative to net income (loss) , as determined by GAAP , and our calculation of Adjusted EBITDA may not be comparable to that reported by other companies.
Adjusted EBITDA is a non- GAAP financial measure. Management believes that this financial measure, when viewed with our results of operations in accordance with GAAP and our reconciliation of Adjusted EBITDA to net income (loss) , provides additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future. By providing this non- GAAP financial measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives. We believe Adjusted EBITDA is used by investors as a supplemental measure to evaluate the overall operating performance of companies in our industry.
Management uses Adjusted EBITDA and other similar measures:
as a measurement used in comparing our operating performance on a consistent basis;