Summary of Refranchising, Assets Held for Sale and Franchise Acquisitions

Refranchising

In connection with the sale of company-operated restaurants to franchisees, the Company typically enters into several agreements, in addition to an asset purchase agreement, with franchisees including franchise and lease agreements. The Company typically sells the restaurants' inventory and equipment and retains ownership of the leasehold interest on the real estate of the lease and/or sublease to the franchisee. The Company has determined that its restaurant dispositions usually represent multiple-element arrangements, and as such, the cash consideration is allocated to the separate elements based on their relative selling price. Cash consideration generally includes up-front consideration for the sale of the restaurants and franchise fees and future cash consideration for royalties and lease payments. The Company considers the future lease payments in allocating the initial cash consideration received. The Company compares the stated rent under the lease and/or sublease agreements with comparable market rents, and the Company records sublease assets/liabilities with a corresponding offset to the gain or loss on the sale of the company-operated restaurants. Sublease assets represent subleases with stated rent above comparable market rents. Sublease assets are amortized to sublease income over the term of the related sublease. Sublease liabilities represent subleases with stated rent below comparable market rents and are amortized to sublease income over the term of the related sublease. Both sublease assets and sublease liabilities arise from the sale of company-operated restaurants to franchisees. The cash consideration per restaurant for franchise fees is consistent with the amounts stated in the related franchise agreements, which are also charged for separate standalone arrangements. Therefore, the Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement. Future royalty income is also recognized in revenue as earned.

The Company sold 31 company-operated restaurants to franchisees during the fifty-two weeks ended December 31, 2019 and 5 company-operated restaurants to franchisees during the fifty-two weeks ended January 2, 2018. The Company did not sell any company-operated restaurants to franchisees during the fifty-two weeks ended January 1, 2019. The following table provides detail of the related gain (loss) recognized during the fifty-two weeks ended December 31, 2019, January 1, 2019 and January 2, 2018 (dollars in thousands):



	52 Weeks Ended December 31, 2019			52 Weeks Ended January 1, 2019		52 Weeks Ended January 2, 2018
Company-operated restaurants sold to franchisees	31			—		5

Proceeds from the sale of company-operated restaurants, net of selling costs	$	7,310		$	—	$	2,192
Net assets sold (primarily furniture, fixtures and equipment)	(4,952		)	—		(1,261		)
Goodwill related to the company-operated restaurants sold to franchisees	(6,078		)	—		(247		)
Allocation to deferred franchise fees	(771		)	—		—
Sublease liabilities, net ^(a)	(50		)	—		(548		)
Other direct costs	(123		)	—		(5		)
(Loss) gain on sale of company-operated restaurants ^(b)	$	(4,664	)	$	—	$	131

^(a) During the fifty-two weeks ended December 31, 2019, the Company recorded sublease assets of $1.2 million and sublease liabilities of $1.3 million. During the fifty-two weeks ended January 2, 2018, the Company recorded sublease assets of $0.1 million and sublease liabilities of $0.6 million.

^(b) Included in loss on disposal of assets and adjustments to assets held for sale, net on the consolidated statements of comprehensive (loss) income.

Assets Held for Sale

Assets held for sale include the net book value of property and equipment for Company-operated restaurants that the Company plans to sell within the next year to new or existing franchisees. Long-lived assets that meet the criteria are held for sale and reported at the lower of their carrying value or fair value less estimated cost to sell.

During the fifty-two weeks ended December 31, 2019, the Company reclassified approximately $6.8 million of property and equipment and approximately $14.8 million of goodwill related to the Company-operated restaurants the Company plans to sell to assets held for sale, and also recorded an $8.7 million adjustment to the assets held for sale in order to record the assets held for sale at their estimated net realizable value, net of estimated direct selling costs and estimated sublease assets and liabilities. The estimated fair value of assets held for sale is based upon Level 2 inputs, which include an asset purchase agreement and negotiated or proposed letters of intent. During the fourth quarter of fiscal 2019, the Company sold 18 restaurants that had been reclassified to assets held for sale during the fifty-two weeks ended December 31, 2019, decreasing the asset held for sale balance by $4.5 million (see the discussion above under Refranchising for further information).

During the fifty-two weeks ended December 31, 2019, the Company entered into three sale-leaseback arrangements with third party private investors, with two arrangements completed during the first quarter of fiscal 2019 and one during the second quarter of fiscal 2019. These sale-leaseback transactions do not provide for any continuing involvement by the Company other than normal leases where the Company intends to use the property during the lease term. The leases have been accounted for as operating leases. The net proceeds from the transactions totaled approximately $12.7 million. Under two of the arrangements, the Company sold the land and buildings related to restaurants constructed during 2018 and leased them back for a term of 20 years. Under one of the arrangements, the Company sold the land related to a restaurant constructed during 2018 and leased it back for a term of 20 years. The sale of these properties resulted in a loss of approximately $0.2 million which is included in loss on disposal of assets and adjustments to assets held for sale, net in the consolidated statements of comprehensive (loss) income. The assets sold were included in assets held for sale as of January 1, 2019.

Assets held for sale at December 31, 2019 and January 1, 2019 consisted of the following (in thousands):



	December 31, 2019		January 1, 2019
Other property and equipment held for sale	$	4,025	$	2,023
Goodwill ^(a)	4,386		—
Assets held for sale and leaseback	—		12,771
Assets held for sale	$	8,411	$	14,794

^(a) During the fifty-two weeks ended December 31, 2019, the Company reclassified $14.8 million of goodwill to assets held for sale, including $6.1 million related to 18 stores that were subsequently sold during the fifty-two weeks ended December 31, 2019. The Company also recorded an $8.7 million adjustment to the goodwill component of assets held for sale to record the assets at their estimated net realizable value and relieved $1.7 million from the goodwill component of assets held for sale upon the sale of 18 stores that were classified as held for sale.

Franchise Acquisitions

The Company acquired four franchise-operated restaurants during the fifty-two weeks ended December 31, 2019, three franchise-operated restaurant during the fifty-two weeks ended January 1, 2019 and one franchise-operated restaurants during the fifty-two weeks ended January 2, 2018. The Company accounts for the acquisition of franchise-operated restaurants using the acquisition method of accounting for business combinations. The purchase price allocations were based on fair value estimates determined using significant unobservable inputs (Level 3). The goodwill recorded primarily relates to the market position and future growth potential of the markets acquired and is expected to be deductible for income tax purposes.

The following table provides detail of the combined acquisitions for the fifty-two weeks ended December 31, 2019, January 1, 2019 and January 2, 2018 (dollars in thousands):



	52 Weeks Ended December 31, 2019			52 Weeks Ended January 1, 2019		52 Weeks Ended January 2, 2018
Franchise-operated restaurants acquired from franchisees	4			3		1

Goodwill	$	4,302		$	893	$	860
Property and equipment	660			798		360
Reacquired franchise rights	—			150		—
Operating lease right-of-use assets	2,006			—		—
Operating lease liabilities	(2,006		)	—		—
Unfavorable lease liabilities ^(a)	(130		)	—		(85		)
Liabilities assumed	—			—		(7		)
Total Consideration	$	4,832		$	1,841	$	1,128

^(a) Unfavorable lease liabilities of $0.1 million for the fifty-two weeks ended December 31, 2019 were recorded as an adjustment to the respective operating lease right-of-use asset.

During the fifty-two weeks ended January 1, 2019, the Company wrote-off $0.6 million of unfavorable lease liabilities related to franchise subleases, offset by $0.1 million of straight line deferred rent assets (included in other assets) which were terminated in connection with the Company's acquisition of the related franchise-operated restaurants.