May 6, 2020 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 29, 2020

☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-21660

PAPA JOHN’S INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware		61-1203323
(State or other jurisdiction of		(I.R.S. Employer Identification
incorporation or organization)		number)

2002 Papa John’s Boulevard

Louisville, Kentucky 40299-2367

(Address of principal executive offices)

(502) 261-7272

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common stock, $0.01 par value	PZZA	The NASDAQ Stock Market LLC

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 ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☐
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

At April 28, 2020, there were outstanding 32,466,249 shares of the registrant’s common stock, par value $0.01 per share.

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INDEX

		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets — March 29, 2020 and December 29, 2019	3

	Condensed Consolidated Statements of Operations — Three months ended March 29, 2020 and March 31, 2019	4

	Condensed Consolidated Statements of Comprehensive Loss — Three months ended March 29, 2020 and March 31, 2019	5

	Condensed Consolidated Statements of Stockholders’ Deficit — Three months ended March 29, 2020 and March 31, 2019	6

	Condensed Consolidated Statements of Cash Flows — Three months ended March 29, 2020 and March 31, 2019	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	38

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 6.	Exhibits	39

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets



	March 29,		December 29,
(In thousands, except per share amounts)	2020		2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	36,376	$	27,911
Accounts receivable, net		77,607		80,921
Notes receivable, current portion		9,343		7,790
Income tax receivable		4,101		4,024
Inventories		29,810		27,529
Prepaid expenses and other current assets		27,956		33,371
Total current assets		185,193		181,546
Property and equipment, net		205,035		211,741
Finance lease right-of-use assets, net		9,365		9,383
Operating lease right-of-use assets		144,160		148,229
Notes receivable, less current portion, net		36,527		33,010
Goodwill		79,739		80,340
Deferred income taxes		1,694		1,839
Other assets		56,555		64,633
Total assets	$	718,268	$	730,721

Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit
Current liabilities:
Accounts payable	$	33,745	$	29,141
Income and other taxes payable		8,167		7,599
Accrued expenses and other current liabilities		121,835		120,566
Current deferred revenue		6,250		5,624
Current finance lease liabilities		1,913		1,789
Current operating lease liabilities		23,118		23,226
Current portion of long-term debt		20,623		20,000
Total current liabilities		215,651		207,945
Deferred revenue		12,694		14,722
Long-term finance lease liabilities		7,555		7,629
Long-term operating lease liabilities		121,368		125,297
Long-term debt, less current portion, net		342,611		347,290
Deferred income taxes		607		2,649
Other long-term liabilities		86,227		84,927
Total liabilities		786,713		790,459

Series B Convertible Preferred Stock; $0.01 par value; 260.0 shares authorized, 252.5 shares issued and outstanding at March 29, 2020 and December 29, 2019		251,893		251,133
Redeemable noncontrolling interests		5,962		5,785

Stockholders’ deficit:
Common stock ($0.01 par value per share; issued 44,775 at March 29, 2020 and 44,748 at December 29, 2019)		448		447
Additional paid-in capital		220,187		219,047
Accumulated other comprehensive loss		(20,768)		(10,185)
Retained earnings		202,287		205,697
Treasury stock (12,805 shares at March 29, 2020 and 12,854 shares at December 29, 2019, at cost)		(744,463)		(747,327)
Total stockholders’ deficit		(342,309)		(332,321)
Noncontrolling interests in subsidiaries		16,009		15,665
Total Stockholders’ deficit		(326,300)		(316,656)
Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit	$	718,268	$	730,721

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)



	Three Months Ended
		March 29,	March 31,
(In thousands, except per share amounts)	2020		2019

Revenues:
Domestic Company-owned restaurant sales	$	161,440	$	161,803
North America franchise royalties and fees		19,440		17,530
North America commissary revenues		155,422		148,904
International revenues		26,059		25,667
Other revenues		47,498		44,501
Total revenues		409,859		398,405
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses		129,111		133,053
North America commissary expenses		144,272		138,557
International expenses		15,101		14,305
Other expenses		45,957		44,097
General and administrative expenses		47,651		51,135
Depreciation and amortization		12,295		11,749
Total costs and expenses		394,387		392,896
Operating income		15,472		5,509
Net interest expense		(3,967)		(6,276)
Income (loss) before income taxes		11,505		(767)
Income tax expense		2,512		831
Net income (loss) before attribution to noncontrolling interests		8,993		(1,598)
Net income attributable to noncontrolling interests		(550)		(133)
Net income (loss) attributable to the Company	$	8,443	$	(1,731)

Calculation of net income (loss) for earnings per share:
Net income (loss) attributable to the Company	$	8,443	$	(1,731)
Preferred stock dividends and accretion		(3,471)		(2,070)
Net income (loss) attributable to common shareholders	$	4,972	$	(3,801)

Basic earnings (loss) per common share	$	0.15	$	(0.12)
Diluted earnings (loss) per common share	$	0.15	$	(0.12)

Basic weighted average common shares outstanding		32,093		31,554
Diluted weighted average common shares outstanding		32,320		31,554

Dividends declared per common share	$	0.225	$	0.225

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)


	Three Months Ended
	March 29,		March 31,
(In thousands)	2020		2019

Net income (loss) before attribution to noncontrolling interests	$	8,993	$	(1,598)
Other comprehensive loss, before tax:
Foreign currency translation adjustments		(2,825)		1,733
Interest rate swaps (1)		(10,919)		(3,955)
Other comprehensive loss, before tax		(13,744)		(2,222)
Income tax effect:
Foreign currency translation adjustments		650		(399)
Interest rate swaps (2)		2,511		918
Income tax effect		3,161		519
Other comprehensive loss, net of tax		(10,583)		(1,703)
Comprehensive loss before attribution to noncontrolling interests		(1,590)		(3,301)
Less: comprehensive (income) loss, redeemable noncontrolling interests		(176)		119
Less: comprehensive (income), nonredeemable noncontrolling interests		(374)		(252)
Comprehensive loss attributable to the Company	$	(2,140)	$	(3,434)

(1)Amounts reclassified out of accumulated other comprehensive loss into net interest expense included ($330) and $148 for the three months ended March 29, 2020 and March 31, 2019, respectively.

(2)The income tax effects of amounts reclassified out of accumulated other comprehensive loss were $80 and $94 for the three months ended March 29, 2020 and March 31, 2019, respectively.

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

(Unaudited)


	Papa John’s International, Inc.
	Common					Accumulated
	Stock			Additional		Other						Noncontrolling		Total
(In thousands)	Shares	Common		Paid-In		Comprehensive		Retained		Treasury		Interests in		Stockholders’
For the three months ended March 29, 2020	Outstanding	Stock		Capital		Loss		Earnings		Stock		Subsidiaries		Deficit
Balance at December 29, 2019	31,894	$	447	$	219,047	$	(10,185)	$	205,697	$	(747,327)	$	15,665	$	(316,656)
Cumulative effect of adoption of ASU 2016-13 (1)	—		—		—		—		(1,066)		—		—		(1,066)
Adjusted balance at December 30, 2019	31,894		447		219,047		(10,185)		204,631		(747,327)		15,665		(317,722)
Net income (2)	—		—		—		—		8,443		—		374		8,817
Other comprehensive loss	—		—		—		(10,583)		—		—		—		(10,583)
Cash dividends on common stock	—		—		55		—		(7,292)		—		—		(7,237)
Cash dividends on preferred stock	—		—		—		—		(3,412)		—		—		(3,412)
Exercise of stock options	27		1		1,240		—		—		—		—		1,241
Stock-based compensation expense	—		—		3,950		—		—		—		—		3,950
Issuance of restricted stock	47		—		(2,707)		—		—		2,707		—		—
Tax effect of restricted stock awards	—		—		(1,383)		—		—		—		—		(1,383)
Distributions to noncontrolling interests	—		—		—		—		—		—		(30)		(30)
Other	3		—		(15)		—		(83)		157		—		59
Balance at March 29, 2020	31,971	$	448	$	220,187	$	(20,768)	$	202,287	$	(744,463)	$	16,009	$	(326,300)

(1)	As of December 30, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”.

(2)	Net income to the Company at March 29, 2020 excludes $176 allocable to the redeemable noncontrolling interests for our joint venture arrangements.

At March 29, 2020, the accumulated other comprehensive loss of $20,768 was comprised of net unrealized foreign currency translation loss of $7,774 and net unrealized loss on the interest rate swap agreements of $12,994.

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit (continued)

(Unaudited)


	Papa John’s International, Inc.
	Common					Accumulated
	Stock			Additional		Other						Noncontrolling		Total
(In thousands)	Shares	Common		Paid-In		Comprehensive		Retained		Treasury		Interests in		Stockholders’
For the three months ended March 31, 2019	Outstanding	Stock		Capital		Loss		Earnings		Stock		Subsidiaries		Deficit
Balance at December 30, 2018	31,372	$	443	$	192,984	$	(3,143)	$	242,182	$	(751,704)	$	15,225	$	(304,013)
Net loss (1)	—		—		—		—		(1,731)		—		252		(1,479)
Other comprehensive loss	—		—		—		(1,703)		—		—		—		(1,703)
Cash dividends on common stock	—		—		36		—		(7,161)		—		—		(7,125)
Cash dividends on preferred stock	—		—		—		—		(2,040)		—		—		(2,040)
Exercise of stock options	3		—		51		—		—		—		—		51
Stock-based compensation expense	—		—		3,731		—		—		—		—		3,731
Issuance of restricted stock	42		—		(2,454)		—		—		2,454		—		—
Tax effect of restricted stock awards	—		—		(869)		—		—		—		—		(869)
Distributions to noncontrolling interests	—		—		—		—		—		—		(19)		(19)
Other	3		—		(236)		—		189		255		—		208
Balance at March 31, 2019	31,420	$	443	$	193,243	$	(4,846)	$	231,439	$	(748,995)	$	15,458	$	(313,258)

(1)	Net loss to the Company at March 31, 2019 excludes ($119) allocable to the redeemable noncontrolling interests for our joint venture arrangements.

At March 31, 2019, the accumulated other comprehensive loss of $4,846 was comprised of net unrealized foreign currency translation loss of $5,525, partially offset by net unrealized gain on the interest rate swap agreements of $679.

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Three months ended
	March 29,		March 31,
(In thousands)	2020		2019

Operating activities
Net income (loss) before attribution to noncontrolling interests	$	8,993	$	(1,598)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision (credit) for uncollectible accounts and notes receivable		768		(50)
Depreciation and amortization		12,295		11,749
Deferred income taxes		1,185		(1,309)
Preferred stock option mark-to-market adjustment		—		5,914
Stock-based compensation expense		3,950		3,731
Other		234		838
Changes in operating assets and liabilities:
Accounts receivable		(1,839)		(3,443)
Income tax receivable		932		10,715
Inventories		(2,281)		810
Prepaid expenses		6,118		7,888
Other current assets		(532)		(13,855)
Other assets and liabilities		2,670		(3,258)
Accounts payable		4,604		8,108
Income and other taxes payable		568		746
Accrued expenses and other current liabilities		(1,903)		(11,003)
Deferred revenue		(2,028)		(2,170)
Net cash provided by operating activities		33,734		13,813
Investing activities
Purchases of property and equipment		(5,933)		(8,658)
Loans issued		(7,413)		(859)
Repayments of loans issued		3,790		925
Other		1		329
Net cash used in investing activities		(9,555)		(8,263)
Financing activities
Proceeds from issuance of preferred stock		—		252,530
Repayments of term loan		(5,000)		(5,000)
Net proceeds (repayments) of revolving credit facilities		640		(240,026)
Dividends paid to common stockholders		(7,237)		(7,125)
Dividends paid to preferred stockholders		(3,412)		(2,040)
Issuance costs associated with preferred stock		—		(7,179)
Tax payments for equity award issuances		(1,383)		(869)
Proceeds from exercise of stock options		1,241		51
Distributions to noncontrolling interest holders		(30)		(19)
Other		(350)		50
Net cash used in financing activities		(15,531)		(9,627)
Effect of exchange rate changes on cash and cash equivalents		(183)		92
Change in cash and cash equivalents		8,465		(3,985)
Cash and cash equivalents at beginning of period		27,911		33,258
Cash and cash equivalents at end of period	$	36,376	$	29,273

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 29, 2020

1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three months ended March 29, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 27, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for Papa John’s International, Inc. (referred to as the “Company”, “Papa John’s” or in the first-person notations of “we”, “us” and “our”) for the year ended December 29, 2019.

2.	Update to Significant Accounting Policies

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant items that are subject to such estimates and assumptions include allowance for doubtful accounts and notes receivable, intangible assets, contract assets and contract liabilities, including the online customer loyalty program obligation, right-of-use assets and lease liabilities, gift card breakage, insurance reserves and tax reserves. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates.

Variable Interest Entity

Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even as it spends all annual contributions received from the system. PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States for the purpose of designing and administering advertising and promotional programs. PJMF is a variable interest entity (“VIE”) that funds its operations with ongoing financial support and contributions from the domestic restaurants, of which approximately 80% are franchised, and does not have sufficient equity to fund its operations without these ongoing financial contributions. Based on an assessment of the governance structure and operating procedures of PJMF, the Company determined it has the power to control certain significant activities of PJMF, and therefore, is the primary beneficiary. The Company has consolidated PJMF in its financial results in accordance with Accounting Standards Codification (“ASC”) 810, “Consolidations.”

Noncontrolling Interests

Papa John’s has four joint venture arrangements in which there are noncontrolling interests held by third parties that include 192 restaurants at March 29, 2020. At March 31, 2019, there were 183 restaurants held in three joint ventures.

Consolidated net income (loss) is required to be reported separately at amounts attributable to both the Company and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of the Company and the interests of the noncontrolling owners, including a disclosure on the face of the Condensed Consolidated Statements of Operations of income attributable to the noncontrolling interest holders.

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The income before income taxes attributable to these joint ventures for the three months ended March 29, 2020 and March 31, 2019 was as follows (in thousands):



	Three Months Ended
	March 29,		March 31,
	2020		2019

Papa John’s International, Inc.	$	1,131	$	464
Noncontrolling interests		550		133
Total income before income taxes	$	1,681	$	597

The following summarizes the redemption feature, location and related accounting within the Condensed Consolidated Balance Sheets for these joint venture arrangements:



Type of Joint Venture Arrangement	Location within the Balance Sheets	Recorded Value

Joint ventures with no redemption feature	Permanent equity	Carrying value
Joint ventures with option to require the Company to purchase the noncontrolling interest - not currently redeemable or redemption not probable	Temporary equity	Carrying value

Deferred Income Tax Accounts and Tax Reserves

We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining Papa John’s provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred. We use an estimated annual effective rate based on expected annual income to determine our quarterly provision for income taxes. The effective income tax rate includes the estimated domestic state effective income tax rate and applicable foreign income tax rates. The effective income tax rate is also impacted by various permanent items and credits, net of any related valuation allowances, and can vary based on changes in estimated annual income. Discrete items are recorded in the quarter in which they occur.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax attribute carryforwards (e.g., net operating losses, capital losses, and foreign tax credits). The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize.

Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues on a quarterly basis to adjust for events, such as statute of limitations expirations, court or state rulings or audit settlements, which may impact our ultimate payment for such exposures.

Fair Value Measurements and Disclosures

The Company is required to determine the fair value of financial 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. Fair value is a market-based measurement, not an entity-specific measurement. The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash and cash equivalents, accounts receivable, net of allowances, and accounts payable. The carrying value of notes receivable, net of allowances, also approximates fair value. The fair value of the amounts outstanding under our term debt and revolving credit facility approximate their carrying values due to the variable market-based interest rate (Level 2).

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Certain assets and liabilities are measured at fair value on a recurring basis and are required to be classified and disclosed in one of the following categories:

●

Level 1: Quoted market prices in active markets for identical assets or liabilities.

●

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

●

Level 3: Unobservable inputs that are not corroborated by market data.

Our financial assets and liabilities that were measured at fair value on a recurring basis as of March 29, 2020 and December 29, 2019 are as follows (in thousands):


	Carrying		Fair Value Measurements
	Value		Level 1		Level 2		Level 3
March 29, 2020
Financial assets:
Cash surrender value of life insurance policies (a)	$	27,787	$	27,787	$	—	$	—

Financial liabilities:
Interest rate swaps (b)		17,020		—		17,020		—

December 29, 2019
Financial assets:
Cash surrender value of life insurance policies (a)	$	33,220	$	33,220	$	—	$	—

Financial liabilities:
Interest rate swaps (b)		6,168		—		6,168		—

(a)	Represents life insurance policies held in our non-qualified deferred compensation plan.

(b)	The fair value of our interest rate swaps is based on the sum of all future net present value cash flows. The future cash flows are derived based on the terms of our interest rate swaps, as well as considering published discount factors, and projected London Interbank Offered Rates (“LIBOR”).

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Accounting Standards Adopted

Financial Instruments – Credit Losses

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected versus incurred losses for financial assets held. The Company adopted ASU 2016-13 as of December 30, 2019 (the first day of fiscal 2020) under the modified retrospective transition method. Financial instruments subject to ASU 2016-13 include trade accounts receivable, notes receivable and interest receivable (classified as Other assets in the Condensed Consolidated Balance Sheet) from franchisees. The impact of the adoption was not material to our condensed consolidated financial statements. Upon adoption, the Company recorded a cumulative effect adjustment to retained earnings of $1.1 million, net of $0.3 million of income taxes, on the opening Condensed Consolidated Balance Sheet as of December 30, 2019.

Estimates of expected credit losses, even if remote, are based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics, and macroeconomic factors. Credit quality is monitored through the timing of payments compared to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer.

The following table summarizes changes in our allowances for credit losses for accounts receivable, notes receivable and interest receivable:



(in thousands)	Accounts Receivable		Notes Receivable		Interest Receivable
Balance at December 29, 2019	$	7,341	$	3,572	$	910
Cumulative effect of adoption of ASU 2016-13		911		463		-
Balance at December 30, 2019		8,253		4,035		910

Current period provision for expected credit losses		625		-		144
Write-offs charged against the allowance		(380)		-		-
Recoveries collected		-		(22)		-
Balance at March 29, 2020	$	8,498	$	4,013	$	1,054

Accounting Standards to be Adopted in Future Periods

Reference Rate Reform – Hedging

In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU is intended to provide temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. This guidance was effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its condensed consolidated financial statements and related disclosures.

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3. Leases

Lessor Operating Leases

We sublease certain retail space to our franchisees in the United Kingdom which are primarily operating leases. At March 29, 2020, we leased and subleased approximately 370 Papa John’s restaurants to franchisees in the United Kingdom. The initial lease terms on the franchised sites in the United Kingdom are generally 15 years. The Company has the option to negotiate an extension toward the end of the lease term at the landlord’s discretion. Rental income, primarily derived from properties leased and subleased to franchisees in the United Kingdom, is recognized on a straight-line basis over the respective operating lease terms. We recognized total sublease income of $2.5 million and $2.3 million as of March 29, 2020 and March 31, 2019, respectively.

Lease Guarantees

As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants, we are contingently liable for payment of approximately 113 domestic leases. These leases have varying terms, the latest of which expires in 2036. As of March 29, 2020, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $17.9 million. This contingent liability is not included in the Condensed Consolidated Balance Sheet as it is not probable to occur. The fair value of the guarantee is not material.

Supplemental Cash Flow & Other Information

Supplemental cash flow information related to leases for the periods reported is as follows:


	Three Months Ended
(in thousands)		March 29, 2020		March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	151	$	—
Financing cash flows from finance leases		466		—
Operating cash flows from operating leases (a)		9,480		10,116
Right-of-use assets obtained in exchange for new finance lease liabilities		19		—
Right-of-use assets obtained in exchange for new operating lease liabilities		7,451		1,040
Cash received from sublease income		2,494		2,061

(a) Included within the change in Other assets and liabilities within the Condensed Consolidated Statements of Cash Flows offset by non-cash operating lease asset amortization and liability accretion.

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4. Papa John’s Marketing Fund, Inc.

PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States, for the purpose of designing and administering advertising and promotional programs for all participating domestic restaurants. Contributions and expenditures are reported on a gross basis in the Condensed Consolidated Statements of Operations within Other revenues and Other expenses.

Assets and liabilities of PJMF, which are restricted in their use, included in the Condensed Consolidated Balance Sheets were as follows (in thousands):



	March 29,		December 29,
	2020		2019

Assets
Current assets:
Cash and cash equivalents	$	3,677	$	4,569
Accounts receivable, net		10,408		11,196
Income tax receivable		103		103
Prepaid expenses		649		1,316
Total current assets		14,837		17,184
Deferred income taxes, net		419		410
Total assets	$	15,256	$	17,594


Liabilities
Current liabilities:
Accounts payable	$	755	$	764
Accrued expenses and other current liabilities		12,478		14,287
Current deferred revenue		3,914		3,252
Debt		623		-
Total current liabilities		17,770		18,303
Deferred revenue

Form: 10-Q

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