2. Acquisition

On May 30, 2012, the Company completed the acquisition of 278 restaurants from BKC for a purchase price consisting of (i) a 28.9% equity ownership interest in the Company, (ii) $3.8 million for cash on hand and inventory at the acquired restaurants and (iii) $9.4 million of franchise fees and $3.6 million for BKC’s assignment of its right of first refusal on franchisee restaurant transfers in 20 states ("ROFR") pursuant to an operating agreement dated May 30, 2012 (the "operating agreement") with BKC entered into at closing. The ROFR is payable in quarterly payments over five years and the first quarterly payment of $0.2 million was made at closing (the "acquisition"). The Company also entered into new franchise agreements pursuant to the purchase and operating agreements and entered into new leases with BKC for all of the acquired restaurants, including leases for 81 restaurants owned in fee by BKC and subleases for 197 restaurants under terms substantially the same as BKC’s underlying leases for those properties. Pursuant to the operating agreement, the Company also agreed to remodel 455 Burger King restaurants to BKC’s 20/20 restaurant image.

The Company believes the acquisition created a strategic opportunity to add a significant number of Burger King restaurants in areas that are either in or adjacent to the Company's pre-existing restaurant base. In addition, the acquisition allowed the Company to leverage its investment in restaurant-level systems and processes and operational oversight. The acquisition is accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations.” The aggregate purchase price was $74.5 million as follows:



Equity consideration - Issuance of 100 shares of Series A Convertible Preferred Stock	$	57,711
Cash purchase price	16,826
Total consideration	$	74,537

The total cash consideration paid at closing, net of cash acquired, is reconciled as follows:



Cash purchase price	$	16,826
Less: Cash acquired	(417		)
Less: Additional consideration accrued but not paid	(4,274		)
Net cash paid for the acquisition	$	12,135

The value of the Series A Convertible Preferred Stock ("Preferred Stock") was based on 9.4 million shares of common stock, the number of common shares the preferred stock would be convertible into at the stock price of $6.13 per share on the closing date of the acquisition. See Note 16—Preferred Stock for further information.

Under the acquisition method of accounting, the aggregate purchase price is allocated to the net tangible and intangible assets based upon their fair values on the acquisition date. The Company engaged a third party valuation specialist to assist with the valuation of franchise rights, leasehold improvements and favorable and unfavorable leases. The Company estimated that BKC's carrying value of restaurant equipment, subject to certain adjustments, and restaurant equipment subject to capital leases was equivalent to fair value of this equipment at the date of the acquisition. The fair value determination of franchising fees for certain restaurants was based on the amounts paid for such fees as the terms were at market rates.

The following table summarizes the final allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed:



Cash	$	417
Inventory	3,336
Leasehold improvements	7,640
Restaurant equipment	20,955
Restaurant equipment - subject to capital lease	10,751
Franchise fees	8,597
Franchise rights	30,700
Favorable leases	3,470
Deferred tax assets	2,465
Goodwill	6,712
Capital lease obligation for equipment	(10,779		)
Other liabilities	(174		)
Unfavorable leases	(9,553		)
Net assets acquired	$	74,537

Adjustments to the purchase price allocation during the period ended December 30, 2012 were primarily related to changes in the valuations in the preliminary appraisals of franchise rights, the Company's determination of the fair value of restaurant equipment and the valuation of leasehold improvements and favorable and unfavorable lease arrangements. The impact of these adjustments included a reduction of rent expense of $186 and a reduction of depreciation expense of $678 pertaining to the second and third quarters of 2012. The excess of the purchase price over the aggregate fair value of net assets acquired of $6.7 million was recognized as goodwill, a portion of which is expected to be deductible for tax purposes. Deferred tax assets relative to the acquisition are due to the book and tax bases difference of net favorable and unfavorable leases.

The fair value of the favorable and unfavorable leases acquired, as well as the fair value of the leasehold improvements and restaurant equipment acquired, were measured using significant inputs not observable in the open market. As such, the Company categorizes these as Level 2 inputs under ASC 820.

The results of operations of the acquired restaurants are included in the Company's consolidated statements of operations from May 31, 2012, the day following the closing of the acquisition. The acquired restaurants contributed revenues of $174.3 million since the acquisition. It is impracticable to disclose net earnings for the post-acquisition period for these acquired restaurants as net earnings of these restaurants were not tracked on a collective basis due to the integration of administrative functions, including field supervision. During the years ended December 30, 2012 and January 1, 2012, approximately $1.2 million and $0.4 million, respectively, of pretax transaction-related costs related to the acquisition were recorded in general and administrative expense.

The pro forma impact on the results of operations is included in the below table for the annual period prior to the date of the closing of the acquisition on May 30, 2012 in which the acquisition was not previously consolidated. The pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisition been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. The following table summarizes the Company's unaudited proforma operating results (in thousands):



		Year Ended
		December 30, 2012			January 1, 2012
Restaurant sales		$	665,032		$	642,398
Net loss from continuing operations	`	$	(24,935	)	$	(14,509	)
Net loss per share from continuing operations, basic and diluted		$	(1.10	)	$	(0.67	)

This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings that may be associated with the acquisition or any integration costs we may incur related to the acquisition.