UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as of December 29, 2014, and the unaudited pro forma condensed combined statement of operations for the fiscal year then ended are based on the historical consolidated financial statements of Papa Murphy’s Holdings, Inc. (the “Company”), the historical financial statements of Drake Enterprises, Incorporated (“Drake Enterprises”) and the historical financial statements of M2AD Management, Inc. (“M2AD Management”). On August 18, 2014, the Company completed the purchase of certain assets used in the operation of nine Papa Murphy's stores in the Minneapolis, MN area from Drake Enterprises, the previous operator of the nine Papa Murphy's stores (the “2014 Acquisition”). On March 9, 2015, the Company completed the purchase of certain assets used in the operation of six Papa Murphy's stores in the Seattle, WA area from M2AD Management, the previous operator of the six Papa Murphy's stores (the “2015 Acquisition” and together with the 2014 Acquisition, the “Acquisitions”). The unaudited pro forma condensed combined statement of operations gives effect to the Acquisitions as if each had occurred as of December 30, 2013. The unaudited pro forma condensed combined balance sheet gives pro forma effect to the 2015 Acquisition as if it had occurred as of December 29, 2014. The 2014 Acquisition was reflected in the Company's audited consolidated balance sheet as of December 29, 2014.
As a result of the Acquisitions, pro forma adjustments were made to the Company's historical results of operations to reflect:
| |
| ▪ | Changes in assets and liabilities to record the preliminary estimates of fair value of the Acquisitions at the date of closing; |
| |
| ▪ | Changes in depreciation and amortization expense resulting from preliminary estimates of fair value adjustments to net tangible assets and amortizable intangible assets of the Acquisitions; |
| |
| ▪ | The changes to our debt resulting from the Acquisitions; |
| |
| ▪ | The changes in interest expense resulting from the Acquisitions; and |
| |
| ▪ | The effect of the above adjustments on income tax expense. |
The Acquisitions were accounted for as business combinations using the acquisition method of accounting, which established a new basis of accounting for all assets acquired and liabilities assumed at fair value. The unaudited pro forma adjustments are based upon currently available information and certain assumptions that are factually supportable and that we believe are reasonable under the circumstances. The excess purchase consideration over the fair value of the net assets acquired is recorded as goodwill.
The unaudited pro forma condensed combined financial information is presented for informational purposes only and does not purport to present what our actual consolidated results of operations would have been had the Acquisitions occurred on the dates indicated, nor are they necessarily indicative of future results of operations. Historical results are not necessarily indicative of results that may be expected for any future period. The unaudited pro forma condensed combined financial information should be read in conjunction with the Company's historical consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2014, and the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2015, Drake Enterprises' historical financial statements and accompanying notes included in Exhibit 99.1 of the Company's Current Report on Form 8-K/A filed on November 3, 2014, and M2AD Management's historical financial statements and accompanying notes for the fiscal year ended December 29, 2014, included in this Current Report on Form 8‑K/A in Exhibit 99.1.
Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma condensed combined financial information.
|
|
| Papa Murphy’s Holdings, Inc. and Subsidiaries |
Unaudited Pro Forma Condensed Combined Statement of Operations
For the fiscal year ended December 29, 2014
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands, except share and per share data) | Historical Company(1) | | Historical M2AD Management(2) | | Historical Drake Enterprises(3) | | Acquisition Accounting Adjustments(4) | | Pro Forma |
| REVENUES | | | | | | | | | |
| Franchise royalties | $ | 39,305 |
| | $ | — |
| | $ | — |
| | $ | (426 | ) | (a) | $ | 38,879 |
|
| Franchise and development fees | 4,531 |
| | — |
| | — |
| | — |
| | 4,531 |
|
| Company-owned store sales | 50,598 |
| | 5,470 |
| | 3,062 |
| | — |
| | 59,130 |
|
| Lease income | 2,965 |
| | — |
| | — |
| | — |
| | 2,965 |
|
| Total revenues | 97,399 |
| | 5,470 |
| | 3,062 |
| | (426 | ) | | 105,505 |
|
| COSTS AND EXPENSES | | | | | | | | | |
| Store operating costs: | | | | | | | | | |
| Cost of food and packaging | 19,686 |
| | 1,845 |
| | 1,203 |
| | — |
| | 22,734 |
|
| Compensation and benefits | 12,673 |
| | 1,170 |
| | 694 |
| | — |
| | 14,537 |
|
| Advertising | 5,041 |
| | 285 |
| | 283 |
| | — |
| | 5,609 |
|
| Occupancy | 2,873 |
| | 298 |
| | 215 |
| | — |
| | 3,386 |
|
| Other store operating costs | 4,434 |
| | 1,236 |
| | 305 |
| | (426 | ) | (a) | 5,549 |
|
| Selling, general and administrative | 29,263 |
| | 318 |
| | 137 |
| | — |
| | 29,718 |
|
| Depreciation and amortization | 8,052 |
| | 73 |
| | 90 |
| | 294 |
| (b) | 8,509 |
|
| Loss on disposal or impairment of property and equipment | 72 |
| | 7 |
| | — |
| | — |
| | 79 |
|
| Total costs and expenses | 82,094 |
| | 5,232 |
| | 2,927 |
| | (132 | ) | | 90,121 |
|
| Operating income | 15,305 |
| | 238 |
| | 135 |
| | (294 | ) | | 15,384 |
|
| Interest expense | 8,098 |
| | 11 |
| | 6 |
| | 144 |
| (c) | 8,259 |
|
| Interest income | (73 | ) | | — |
| | — |
| | — |
| | (73 | ) |
| Loss on early retirement of debt | 4,619 |
| | — |
| | — |
| | — |
| | 4,619 |
|
| Other expense (income), net | 178 |
| | (7 | ) | | — |
| | — |
| | 171 |
|
| Income before income taxes | 2,483 |
| | 234 |
| | 129 |
| | (438 | ) | | 2,408 |
|
| Provision for income taxes | 1,235 |
| | — |
| | — |
| | (28 | ) | (d) | 1,207 |
|
| Net income | $ | 1,248 |
| | $ | 234 |
| | $ | 129 |
| | $ | (410 | ) | | $ | 1,201 |
|
| Loss per share of common stock | | | | | | | | | |
Basic(4) | $ | (0.07 | ) | | | | | | | | $ | (0.08 | ) |
Diluted(4) | $ | (0.07 | ) | | | | | | | | $ | (0.08 | ) |
| Weighted-average common stock outstanding | | | | | | | | | |
Basic(4) | 12,101,236 |
| | | | | | | | 12,101,236 |
|
Diluted(4) | 12,101,236 |
| | | | | | | | 12,101,236 |
|
See the accompanying notes to the unaudited pro forma condensed combined statement of operations.
(1) Historical Company
Represents the audited consolidated statement of operations of the Company for the fiscal year ended December 29, 2014.
(2) Historical M2AD Management
Represents the audited historical statement of operations of M2AD Management for the fiscal year ended December 29, 2014. This information should be read in conjunction with the historical financial statements of M2AD Management included in this Current Report on Form 8-K/A in Exhibit 99.1.
(3) Historical Drake Enterprises
Represents the historical statement of operations of Drake Enterprises for the period prior to the acquisition on August 18, 2014. This information should be read in conjunction with the historical financial statements of Drake Enterprises included in Exhibit 99.1 of the Company's Current Report on Form 8-K/A filed on November 3, 2014. The Drake Enterprises acquisition was consummated on August 18, 2014, and results of operations subsequent to the acquisition are reflected in the Company's historical statement of operations.
(4) Acquisition Accounting Adjustments
The following adjustments relate to the acquisition accounting effects of the Acquisitions:
| |
| (a) | M2AD Management and Drake Enterprises were franchise owners of the Company prior to the Acquisitions. The adjustment reflects the elimination of franchise royalty revenue of the Company and franchise royalty expense of M2AD Management and Drake Enterprises as follows (in thousands): |
|
| | | | | | | | | | | |
| | FISCAL YEAR ENDED DECEMBER 29, 2014 |
| | M2AD Management | | Drake Enterprises | | Total |
| Franchise royalty revenue (Company) | $ | 273 |
| | $ | 153 |
| | $ | 426 |
|
| Franchise royalty expense (Acquirees) | $ | 273 |
| | $ | 153 |
| | $ | 426 |
|
| |
| (b) | Reflects adjustments to depreciation of property and equipment and amortization of definite-life intangibles (reacquired franchise rights) resulting from the preliminary acquisition accounting related to the Acquisitions as follows (in thousands): |
|
| | | | | | | | | | | |
| | FISCAL YEAR ENDED DECEMBER 29, 2014 |
| | M2AD Management | | Drake Enterprises | | Total |
| Depreciation | $ | 70 |
| | $ | (36 | ) | | $ | 34 |
|
| Amortization | 162 |
| | 98 |
| | 260 |
|
| Total | $ | 232 |
| | $ | 62 |
| | $ | 294 |
|
| |
| (c) | Reflects additional interest expense related to notes issued in principal amount of $2.9 million bearing interest at 7.0% as part of the purchase consideration for Drake Enterprises. |
| |
| (d) | Reflects the estimated tax effects resulting from the pro forma adjustments related to the Acquisitions at the Company’s estimated statutory tax rate of 37.75% for 2014. Additionally, this adjustment reflects the pre-acquisition period tax effects of the historical results of operations of M2AD Management and Drake Enterprises at the Company’s estimated statutory tax rates as these businesses were non-taxable entities prior to their respective acquisitions by the Company. |
(4) Earnings Per Share
The unaudited pro forma condensed combined basic and diluted loss per share calculations are based on historical basic and diluted weighted-average shares of common stock. Pro forma basic and diluted loss per share was calculated by dividing pro forma net loss available to common stockholders by the historical basic and diluted weighted-average shares of common stock.
|
|
| Papa Murphy’s Holdings, Inc. and Subsidiaries |
Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 29, 2014
|
| | | | | | | | | | | | | | | |
| (In thousands) | Historical Company(1) | | Historical M2AD Management(2) | | Acquisition Accounting Adjustments(3) | | Pro Forma |
| ASSETS | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | $ | 5,056 |
| | $ | 248 |
| | $ | (4,311 | ) | (a) | $ | 993 |
|
| Accounts receivable, net | 5,661 |
| | — |
| | (9 | ) | (b) | 5,652 |
|
| Notes receivable, net | 62 |
| | — |
| | — |
| | 62 |
|
| Inventories | 640 |
| | 41 |
| | — |
| | 681 |
|
| Prepaid expenses and other current assets | 3,423 |
| | 4 |
| | (4 | ) | (d) | 3,423 |
|
| Advertising cooperative assets, restricted | 149 |
| | — |
| | — |
| | 149 |
|
| Current deferred tax asset | 1,338 |
| | — |
| | — |
| | 1,338 |
|
| Total current assets | 16,329 |
| | 293 |
| | (4,324 | ) | | 12,298 |
|
| Property and equipment, net | 12,120 |
| | 690 |
| | (285 | ) | (c) | 12,525 |
|
| Notes receivable, net | 225 |
| | — |
| | — |
| | 225 |
|
| Goodwill | 101,082 |
| | 260 |
| | 2,294 |
| (c) | 103,636 |
|
| Trade name and trademarks | 87,002 |
| | — |
| | — |
| | 87,002 |
|
| Definite-life intangibles, net | 44,515 |
| | 26 |
| | 1,114 |
| (c) | 45,655 |
|
| Deferred finance charges, net | 1,485 |
| | 3 |
| | (3 | ) | (d) | 1,485 |
|
| Other assets | 4,191 |
| | 11 |
| | (11 | ) | (d) | 4,191 |
|
| Total assets | $ | 266,949 |
| | $ | 1,283 |
| | $ | (1,215 | ) | | $ | 267,017 |
|
| | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | $ | 3,057 |
| | $ | 154 |
| | $ | (164 | ) | (b,d) | $ | 3,047 |
|
| Accrued and other liabilities | 9,600 |
| | 127 |
| | (121 | ) | (c,d) | 9,606 |
|
| Advertising cooperative liabilities | 253 |
| | — |
| | — |
| | 253 |
|
| Current portion of unearned franchise and development fees | 2,848 |
| | — |
| | — |
| | 2,848 |
|
| Current portion of long-term debt | 2,800 |
| | 99 |
| | (99 | ) | (d) | 2,800 |
|
| Total current liabilities | 18,558 |
| | 380 |
| | (384 | ) | | 18,554 |
|
| Long-term debt, net of current portion | 112,200 |
| | 33 |
| | (33 | ) | (d,e) | 112,200 |
|
| Unearned franchise and development fees, net of current portion | 640 |
| | — |
| | — |
| | 640 |
|
| Deferred tax liability | 42,069 |
| | — |
| | — |
| | 42,069 |
|
| Other long-term liabilities | 1,740 |
| | 73 |
| | 4 |
| (c,d) | 1,817 |
|
| Total liabilities | 175,207 |
| | 486 |
| | (413 | ) | | 175,280 |
|
| | | | | | | | |
| Shareholders' Equity: | | | | | | | |
| Common Stock | 169 |
| | 11 |
| | (11 | ) | (e) | 169 |
|
| Additional paid-in capital | 117,354 |
| | — |
| | — |
| | 117,354 |
|
| Stock subscription receivable | (100 | ) | | — |
| | — |
| | (100 | ) |
| (Accumulated deficit) retained earnings | (26,125 | ) | | 786 |
| | (791 | ) | (e,f) | (26,130 | ) |
| Total shareholders' equity | 91,298 |
| | 797 |
| | (802 | ) | | 91,293 |
|
| Noncontrolling interests | 444 |
| | — |
| | — |
| | 444 |
|
| Total equity | 91,742 |
| | 797 |
| | (802 | ) | | 91,737 |
|
| Total liabilities and shareholders' equity | $ | 266,949 |
| | $ | 1,283 |
| | $ | (1,215 | ) | | $ | 267,017 |
|
See the accompanying notes to the unaudited pro forma condensed combined balance sheet.
(1) Historical Company
Represents the audited consolidated balance sheet of the Company as of December 29, 2014.
(2) Historical M2AD Management
Represents the audited historical balance sheet as of December 29, 2014, of M2AD Management. This information should be read in conjunction with the historical financial statements of M2AD Management, included in this Current Report on Form 8-K/A in Exhibit 99.1.
(3) Acquisition Accounting Adjustments
The following adjustments relate to the acquisition accounting effects of the 2015 Acquisition:
| |
| (a) | Reflects the net effect of the purchase consideration of $4.1 million (see note (c) below), cash not acquired from the 2015 Acquisition of $0.2 million (see note (d) below) and payment of transaction costs of $5,000 (see note (f) below). |
| |
| (b) | Reflects the elimination of intercompany accounts between M2AD Management and the Company. |
| |
| (c) | Reflects the effect of the preliminary purchase consideration transferred and the preliminary fair value measurement of identifiable assets acquired and liabilities assumed under the acquisition method of accounting based on a valuation for the 2015 Acquisition as summarized below (in thousands): |
|
| | | |
| Cash consideration for 2015 Acquisition | $ | 4,058 |
|
| Deferred consideration / holdback | 6 |
|
| Total consideration transferred | $ | 4,064 |
|
| Book value of net assets acquired | |
| Historical book value of net assets acquired | 959 |
|
| Net liabilities not assumed (see note (d) below) | 161 |
|
| Adjusted book value of net assets acquired | 1,120 |
|
| Acquisition accounting adjustments to reflect fair value of net assets: | |
Property and equipment, net (i) | (285 | ) |
Reacquired franchise rights (ii) | 1,114 |
|
| Asset retirement obligation | (18 | ) |
| Goodwill | 2,133 |
|
| Total | $ | 2,944 |
|
| |
| (i) | Property and equipment from the 2015 Acquisition will be depreciated using a straight-line method over estimated useful lives, ranging from two to five years. |
| |
| (ii) | The reacquired franchise rights have weighted-average useful lives of seven years. |
| |
| (d) | The following assets and liabilities of M2AD Management were not acquired and not assumed by the Company in the 2015 Acquisition (in thousands): |
|
| | | |
| Cash and cash equivalents | $ | (248 | ) |
| Prepaid expenses and other current assets | (4 | ) |
| Other assets | (11 | ) |
| Deferred finance charges, net | (3 | ) |
| Accounts payable | 154 |
|
| Accrued expenses | 127 |
|
| Other long-term liabilities | 14 |
|
| Current portion of long-term debt | 99 |
|
| Long-term debt | 33 |
|
| Net liabilities not assumed | $ | 161 |
|
| |
| (e) | Reflects the elimination of the stockholder's equity of M2AD Management. |
| |
| (f) | Transaction costs were related to acquisition-related activities and are based on our current estimates. These estimates may be revised to reflect actual amounts. The total estimated transaction costs attributed to |
acquisition-related activities in connection with the 2015 Acquisition was approximately $5,000, reflected as a reduction of cash and retained earnings in the unaudited pro forma condensed combined balance sheet. The unaudited pro forma condensed combined statements of operations do not reflect the transaction fees attributed to acquisition-related activities, as these costs were deemed to be non-recurring.
