Note 2 – Acquisition

Hearthstone Merger

On April 1, 2015, Cosi, Inc. (the “Company”) closed the previously-announced merger of Hearthstone Associates, LLC (“Associates”) with and into a wholly-owned subsidiary of the Company, with Associates continuing as the surviving entity (the “Merger”). Upon consummation of the Merger, Associates became a wholly-owned subsidiary of the Company, and Hearthstone Partners, LLC (“Partners”), a wholly-owned subsidiary of Associates, became an indirect wholly-owned subsidiary of the Company. As a result of this acquisition, the Company acquired 13 stores from Associates.

As consideration for the Merger, an aggregate of 1,790,993 shares (fair value of approximately $4.7 million at closing) of the Company’s common stock, $0.01 par value, were distributed to the owners of Associates. The shares were fully vested upon issuance and were not restricted. The shares were unregistered when issued and subsequently registered under a registration statement effective June 2, 2015.

In connection with the Merger, and as a condition of obtaining the consent of Partners’ lender, the Company agreed to guarantee the obligations of Partners under certain loan documents previously entered into by Partners with First Franchise Capital Corporation (“Lender”).

The Company accounted for this transaction in accordance with ASC 805, Business Combinations (ASC 805), by allocating the purchase price to the assets purchased and liabilities assumed based upon their estimated fair values as of the date of the acquisition, which were determined in conjunction with an independent third party valuation, as follows:

Accounts Receivable	$	348
Inventory		134
Prepaid Expensesand Other Current Assets		226
Property and Equipment		3,857
Intangible Assets		3,100
Goodwill		9,600
Other Long Term assets		154
Total Assets		17,419

Accounts Payable		1,156
Accrued Expenses		777
Long-term Debt		10,821
Total Liabilities		12,754
Purchase Price	$	4,665

The Company has allocated the cost to its identifiable tangible and intangible assets and liabilities, with the remaining amount classified as goodwill. Fair value of intangible assets was determined using a combination of the income approach and the cost approach. The resulting goodwill is derived from the expected value of the acquired franchise locations and management know-how. The goodwill is not deductible for income tax purposes. The Company incurred indirect transaction costs related to the acquisition of approximately $0.2 million through April 1, 2015, and these costs are included in general and administrative expense in the accompanying consolidated statement of operations.

Management is responsible for the valuation of net assets acquired and considered a number of factors, including valuations and appraisals, when estimating the fair values and estimated useful lives of acquired assets and liabilities assumed.

In connection with the Membership Agreement, on March 31, 2015, the Company and Associates entered into Amendment No. 1 (“Amendment”) to the previously disclosed Election to Cause Merger Agreement, pursuant to which the parties confirmed the allocation of the shares to be issued to the owners of Associates upon consummation of the Merger.

The operations of Associates have been included in the Company’s consolidated financial statements from the date of acquisition.

As part of the Merger, the Company entered into an Indemnification and Holdback Agreement with our Chief Executive Officer (“CEO”), who was also the principle owner of Associates. Pursuant to this agreement, the CEO agreed to indemnify the Company for certain matters.

In accordance with the Indemnification and Holdback Agreement, the Company held back a portion of the shares (“Holdback Shares”) which would otherwise have been distributed upon consummation of the Merger. The Company has held back $0.5 million of shares relating to a disputed claim at the time of the Merger and the amount of the claim, if any, remains unknown at this time. In accordance with ASC Topic 450, “Contingencies” (ASC 450) the Company evaluated the claim and determined that a loss was not probable and as a result did not record an asset related to the indemnification.

The Company has also held back $0.5 million of shares relating to excess accounts payable at the time of the Merger. As part of the Merger the Company assumed all of the sellers accounts payable and has been indemnified for certain balances. As of June 29, 2015 the Company paid all of the outstanding accounts payable assumed in the Merger. The parties are continuing to negotiate in good faith to determine the amount of seller’s liability, if any, relating to excess accounts payable, and the amount of seller’s liability, if any, remains unknown at this time. As of June 29, 2015, the Company has not recorded an indemnification asset due to the uncertainty of the potential claim.

Other intangible assets, net, excluding goodwill and assembled workforce, are being amortized on a straight-line basis over their estimated lives, and were comprised of the following at June 29, 2015 (in thousands):

Identified Intangible Asset	Estimated Lives Useful life (years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Net Favorable Leases	2 to 5 Years	$	500	$	31	$	469
Reacquired Franchise Rights (Old Locations)	4 Years		1,500		94		1,406
Reacquired Franchise Rights (New Locations)	10 years		1,100		30		1,070
		$	3,100	$	155	$	2,945

Pro forma results of operations for this acquisition have not been presented because the effect of this acquisition was not material to the Company's financial condition or results of operations for any of the periods presented.

For the three and six-months ended June 29, 2015 approximately $4.4 million of revenue from the franchise restaurants acquired in the Merger, is included in the Company’s consolidated statement of operations and comprehensive loss.

The Company has omitted earnings information related to its acquisitions as it does not separately track earnings from each of its acquisitions that would provide meaningful disclosure. The Company considers it to be impracticable to compile such information on an acquisition-by-acquisition basis since activities of integration and use of shared costs and services across the Company’s business are not allocated to each acquisition and are not managed to provide separate identifiable earnings from the date of acquisition.