Business Combination

On June 30, 2015, the Company and DTH completed the Business Combination pursuant to the Merger Agreement under which the Company’s wholly-owned subsidiary, Levy Merger Sub, merged with and into DTH, with DTH surviving the merger as a wholly-owned subsidiary of the Company.

Concurrent with the execution of the Merger Agreement, Levy Epic Acquisition Company, LLC (“Levy Newco”), Levy Epic Acquisition Company II, LLC (“Levy Newco II” and with Levy Newco, the “Levy Newco Parties”), DTH and the DTH stockholders entered into a stock purchase agreement (the “Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, the Levy Newco Parties agreed to purchase 2,348,968 shares of DTH common stock from DTH for $91.2 million in cash, and to purchase 740,564 shares of DTH common stock directly from existing DTH shareholders for $28.8 million in cash (the “Initial Investment”). As a result of this Initial Investment, an aggregate of 3,089,532 shares of DTH common stock was purchased by the Levy Newco Parties for total cash consideration of $120.0 million. Concurrent with the consummation of the Initial Investment, DTH increased its borrowing capacity under its existing term loan credit facility by $25.1 million. Proceeds from the increased borrowings under the term loan, a $10.0 million revolver borrowing and the $91.2 million received by DTH from the sale of DTH common stock to the Levy Newco Parties was used to fully repay the outstanding balance of DTH’s subordinated notes (see Note 7), and pay approximately $15.7 million of transaction costs, which included $7.5 million of employee withholding taxes resulting from the acceleration of outstanding stock options and restricted stock units due to the change in control triggered by the Initial Investment. Employee equity redemptions were exchanged for such withholding taxes. The transactions described in this paragraph are hereafter collectively referred to as “Step 1.”

Also concurrent with Step 1, the Company entered into common stock purchase agreements pursuant to which certain investors committed to acquire 3,500,000 shares of the Company’s common stock upon the closing of the Business Combination for total consideration of $35 million (the “Step 2 Investment”). The additional funds provided by these investors were used as additional cash consideration in the Business Combination.

The consideration for the Business Combination was provided by (1) the funds remaining in the Company’s trust account of $150 million after Delaware franchise taxes, stockholder redemptions, and $10.2 million of expenses paid for by the Company, (2) the $35 million provided by the Step 2 Investment, and (3) shares of the Company’s common stock. The Levy Newco Parties received only stock merger consideration in the Business Combination. The common stock purchase agreements entered into in connection with the Step 1 Investment and the closing of the Business Combination is hereafter referred to as “Step 2.” Step 1 and Step 2 are collectively referred to herein as the “Transactions.”

Step 2 is accounted for as a business combination under the scope of the FASB’s ASC 805, Business Combinations, or ASC 805. Pursuant to ASC 805, the Company has been determined to be the accounting acquirer based on the evaluation of the following facts and circumstances:


•	The Company paid cash and equity consideration for all of the equity in DTH;


•	Investments by the Company and Levy Newco Parties were considered multiple arrangements that should be treated as a single transaction for accounting purposes; and


•	The existing stockholders of the Company and the Levy Newco Parties retain relatively more voting rights in the combined company than the historical DTH stockholders.

DTH constitutes a business, with inputs, processes, and outputs. Accordingly, the acquisition of DTH constitutes the acquisition of a business for purposes of ASC 805, and due to the change in control from the merger, is accounted for using the acquisition method.

The following summarizes the merger consideration paid to DTH stockholders (except for the Levy Newco Parties) (in thousands):



	Calculation of Purchase Price
Cash consideration paid ⁽¹⁾	$	105,164
Value of share consideration issued ⁽²⁾	69,305
Fair value of equity interests acquired in Step 1 ⁽³⁾	120,000
Less: Transaction expenses paid by the Company ⁽¹⁾	(10,164		)
Total purchase price	$	284,305

(1)

Each issued and outstanding share of DTH stock held by DTH stockholders other than the Levy Newco Parties was converted into the right to receive the per share merger consideration, which equaled $38.84 per DTH share, payable in cash and the Company’s common stock. Cash consideration was paid with respect to all common stock of DTH except for shares held by the Levy Newco Parties. The aggregate amount of cash consideration paid directly to DTH stockholders was $95 million. Total cash consideration paid also included $10.2 million of expenses paid by the Company for the closing of Step 2.

(2)

The stock merger consideration consisted of the Company’s common stock issued to DTH stockholders as part of the merger consideration in exchange for shares of DTH common stock. Company shares exchanged for the DTH shares held by the Levy Newco Parties are discussed in (3) below. The following summarizes the number of shares of the Company’s common stock issued to DTH stockholders other than the Levy Newco Parties:



(in thousands, except share and per share data)	Calculation of Share Consideration
Number of shares issued	4,553,540
Value per share as of June 30, 2015	$	15.22
Value of share consideration transferred	$	69,305

(3)

The Company exchanged its common stock for DTH shares held by the Levy Newco Parties acquired in Step 1. The Transactions were accounted for as related events transferring control of DTH to the Company through a minority investment in Step 1 and a controlling interest in Step 2. The Levy Newco Parties’ shares of DTH common stock were exchanged for shares of the Company’s common stock in the Business Combination, but represent a previously held equity interest in an acquired company. The previously held equity interest had the same value as its $120 million purchase price.

The Company recorded an allocation of the purchase price to DTH’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value as of the Closing Date. The final purchase price allocation is as follows (in thousands):



	Purchase Price Allocation
Cash and cash equivalents	$	5,173
Accounts receivable and other receivables	3,228
Inventories	2,541
Prepaid expenses and other current assets	4,266
Total current assets	15,208
Property and equipment	105,524
Intangible assets	250,490
Other assets	4,194
Total identifiable assets acquired	375,416
Accounts payable	(18,866		)
Other accrued liabilities	(26,607		)
Current portion of capital lease obligations and deemed landlord financing liabilities	(1,670		)
Long-term debt, capital lease obligations and deemed landlord financing liabilities	(246,562		)
Deferred income taxes	(80,254		)
Other long-term liabilities	(36,208		)
Net identifiable liabilities assumed	(34,751		)
Goodwill	319,056
Total gross consideration	$	284,305

The final values allocated to intangible assets and the useful lives are as follows (in thousands):



	Fair Value			Useful life
Favorable lease assets and other intangible assets	$	14,290		0.6 to 19 years
Trademarks	220,300			Indefinite
Franchise agreements	15,900			0.1 to 40 years
Total intangible assets	$	250,490
Unfavorable lease liabilities ⁽¹⁾	$	(23,652	)	1.5 to 19 years
Weighted average life of definite-lived intangibles				11 years


(1)	Included in other non-current liabilities on the consolidated balance sheets.

During the fifty-three weeks ended January 3, 2017 (Successor), the Company recorded a net $0.8 million adjustment to goodwill due to a change in estimate for the liability for deferred income taxes. The goodwill of $319.1 million arising from the Business Combination is primarily attributable to the market position and future growth potential of DTH for both company-operated and franchise-operated restaurants. Approximately $0.6 million of goodwill is expected to be deductible for income tax purposes.

For the fifty-three weeks ended January 3, 2017 (Successor), the Company recorded approximately $0.7 million of transactions expenses, of which $0.1 million related to the Business Combination. During the fifty-three weeks ended January 3, 2017 (Successor), the Company was able to recover legal defense costs related to a purported class action and derivative complaint (See Note 17 for further discussion) of $0.5 million from its insurance company related to costs previously expensed. For the twenty-six weeks ended December 29, 2015 (Successor) and the twenty-six weeks ended June 30, 2015 (Predecessor), the Company incurred approximately $12.3 million and $7.3 million, respectively, of transaction expenses directly related to Step 1 and Step 2 of the Business Combination. Also included in transaction related costs on the consolidated statements of comprehensive income (loss) for the twenty-six weeks ended December 29, 2015 (Successor) was $0.7 million of costs related to the secondary offering as described in Note 13.

LAC incurred $4.5 million of transaction related expenses not reported with DTH’s Predecessor consolidated statements of comprehensive income (loss) that were directly related to the Business Combination for the twenty-six weeks ended June 30, 2015 (Predecessor). Transaction related expenses, which were $2.9 million through the second fiscal quarter ended June 16, 2015 and $0.5 million for the fiscal year 2014, were reported by LAC in prior 10-Q and 10-K filings which are also not reported with DTH’s Predecessor consolidated statements of comprehensive income (loss). Cash outflows of $4.3 million related to transaction expenses previously expensed by LAC are reported as a cash outflows for operating activities for the twenty-six weeks ended December 29, 2015 (Successor). In addition, in connection with the Business Combination, the Company paid deferred underwriter compensation of $5.3 million in connection with the Company’s initial public offering in November 2013 as well as repaid working capital loans of $0.5 million to the Company’s sponsor, Levy Acquisition Sponsor LLC, both of which were accrued on LAC’s balance sheet at June 16, 2015, and not included with DTH’s Predecessor consolidated balance sheet. Both of these payments are included as cash outflows for financing activities for the twenty-six weeks ended December 29, 2015 (Successor).

The following unaudited pro forma combined financial information presents the Company’s results as though DTH and the Company had combined at January 1, 2014. The unaudited pro forma consolidated financial information has been prepared using the acquisition method of accounting in accordance with U.S. GAAP (in thousands):



	52 Weeks Ended December 29, 2015 (pro forma)			52 Weeks Ended December 30, 2014 (pro forma)
	(unaudited)
Total Revenue	$	424,002		$	396,024
Net loss	$	(137	)	$	(10,780	)