Acquisitions

In 2012, as part of an acquisition of restaurants from Burger King Corporation ("BKC"), the Company was assigned BKC's right of first refusal on the sale of franchisee-operated restaurants in 20 states (the "ROFR"). Since the beginning of 2018, the Company has acquired an aggregate of 222 Burger King restaurants and 55 Popeyes restaurants from other franchisees in the following transactions, some of which were acquired pursuant to the exercise of the ROFR (in thousands, except number of restaurants):



Closing Date		Number of Restaurants	Purchase Price		Market Location
2018 Acquisitions:
February 13, 2018	(1)	1	$	—	New York
August 21, 2018	(2)	2	1,666		Detroit, Michigan
September 5, 2018	(2)	31	25,930		Western Virginia
October 2, 2018		10	10,506		South Carolina and Georgia
		44	38,102
2019 Acquisitions:
April 30, 2019	(3)	220	257,525		Southeastern states
June 11, 2019		13	15,788		Baltimore, Maryland
Total 2018 and 2019 Acquisitions		277	$	311,415


(1)	The Company recorded a bargain purchase gain because the fair value of assets acquired, largely representing a franchise right asset of $0.3 million, exceeded the total fair value of consideration paid by $0.2 million.


(2)	Acquisitions resulting from the exercise of the ROFR with Burger King.


(3)	During the second quarter of 2019, the Company completed the merger with New CFH, LLC (“Cambridge”) and acquired 165 Burger King restaurants and 55 Popeyes restaurants. See further discussion below.

2019 Acquisitions

On April 30, 2019 the Company completed a merger with Cambridge ("the Cambridge Merger") for a purchase price of $257.5 million through the issuance of shares of stock which consisted of (i) approximately 7.4 million shares of common stock, (ii) 10,000 shares of the Company's newly designated Series C Convertible Preferred Stock, convertible into approximately 7.5 million shares of common stock, and (iii) the retirement of approximately $112.2 million of the outstanding indebtedness of Cambridge. The conversion of the Series C Preferred Stock will be subject to a vote of the Company's stockholders at the Company’s 2019 Annual Meeting of Stockholders to be held on August 29, 2019 (and to the extent not approved, at any stockholder meeting thereafter), and will automatically convert into the Company's common stock upon stockholder approval of such conversion. All shares issued are subject to a two year restriction on sale or transfer subject to certain limited exceptions. As part of the transaction, Cambridge has the right to designate up to two director nominees and two Cambridge Holdings executives joined the Company's Board of Directors on April 30, 2019.

Under the purchase method of accounting, the aggregate purchase price is allocated to the net tangible and intangible assets based on their estimated fair values on the acquisition date. For purposes of estimating the total purchase price in connection with the Cambridge merger, we have assumed the issuance of 14.9 million shares of common stock which includes the conversion of the Company's Series C Preferred Stock into common stock as the Company believes this is the most likely scenario. If the conversion does not occur at the 2019 Annual Meeting of Stockholders on August 29, 2019, the fair value of the Series C Preferred Stock could be adjusted; which would impact the allocation of the purchase price for the Cambridge Merger. The value for the common stock of $145.3 million was based on the $9.81 closing price of the Company's stock on the date of acquisition. See Note 12—Preferred Stock for further information.

The Company has engaged a third party valuation specialist to assist with the valuation of assets acquired. As the values of certain assets and liabilities are preliminary in nature, the fair values for the equity consideration, property and equipment, favorable and unfavorable leases which are an adjustment to the right-of-use assets under ASC 842, restaurant equipment, franchise rights and goodwill are subject to adjustment as additional information is obtained. The preliminary fair value of property and equipment, franchise agreements, and favorable and unfavorable lease value of the right-of-use assets was based on the assets carrying value due to recent valuations completed by Cambridge on the acquisition of 132 restaurants and construction of 33 new restaurants in the last three years. When the independent valuation is finalized, changes to the preliminary valuation of assets acquired or liabilities assumed may result in material adjustments to the estimated fair value of identifiable assets acquired, including franchise rights, goodwill, and the related deferred taxes.

Goodwill recorded in connection with the Cambridge Merger represents a preliminary assessment of costs in excess of fair values assigned to the underlying net assets of acquired restaurants. Goodwill is not expected to be deductible for income tax purposes for the Cambridge Merger.

The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the Cambridge Merger at their estimated fair values. The following table summarizes the preliminary allocation of the aggregate purchase price for the Cambridge Merger reflected in the condensed consolidated balance sheets as of June 30, 2019.



Inventory	$	2,865
Prepaid expenses	3,074
Other assets	2,230
Land and buildings	19,746
Restaurant equipment	26,729
Right-of-use assets	250,544
Leasehold improvements	3,941
Franchise fees	7,308
Franchise rights	144,499
Goodwill	67,639
Operating lease liabilities	(255,015		)
Accounts payable	(5,229		)
Accrued payroll, related taxes and benefits	(2,990		)
Other liabilities	(7,816		)
Net assets acquired	$	257,525

The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the 2019 acquisitions (other than the Cambridge Merger) at their estimated fair values. The following table summarizes the preliminary allocation of the aggregate purchase price for the 2019 acquisitions reflected in the condensed consolidated balance sheets as of June 30, 2019.



Inventory	$	147
Restaurant equipment	706
Restaurant equipment - subject to finance leases	150
Right-of-use assets	9,515
Leasehold improvements	6,205
Franchise fees	358
Franchise rights	8,849
Goodwill	55
Operating lease liabilities	(9,968		)
Finance lease liabilities for restaurant equipment	(185		)
Accounts payable	(44		)
Net assets acquired	$	15,788

Goodwill recorded in connection with the 2019 acquisitions represents costs in excess of fair values assigned to the underlying net assets of acquired restaurants. The Company is evaluating if goodwill will be deductible for income tax purposes for the 2019 acquisitions. Deferred income tax assets and liabilities are due primarily to the book and tax bases difference of franchise rights, property and equipment, net favorable and unfavorable leases.

2018 Acquisitions

The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the acquisitions at their estimated fair values. The following table summarizes the final allocation of the aggregate purchase price for the 2018 acquisitions reflected in the condensed consolidated balance sheets as of December 30, 2018.



Inventory	$	401
Restaurant equipment	2,092
Restaurant equipment - subject to finance leases	43
Leasehold improvements	1,329
Franchise fees	1,264
Franchise rights	31,275
Favorable leases	587
Deferred income taxes	346
Goodwill	1,677
Finance lease liabilities for restaurant equipment	(49		)
Unfavorable leases	(624		)
Accounts payable	(9		)
Net assets acquired	$	38,332

The results of operations for the restaurants acquired are included from the closing date of the respective acquisition. The 2018 and 2019 acquired restaurants contributed restaurant sales of $65.7 million and $78.6 million in the three and six months ended June 30, 2019, respectively, and contributed restaurant sales of $0.3 million and $0.4 million in the three and six months ended July 1, 2018, respectively. It is impracticable to disclose net earnings for the post-acquisition period for the 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.

The unaudited pro forma impact on the results of operations for the restaurants acquired in 2019 for the three and six months ended June 30, 2019 and July 1, 2018 is included below. The unaudited pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions 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 pro forma operating results:



	Three Months Ended					Six Months Ended
	June 30, 2019			July 1, 2018		June 30, 2019			July 1, 2018
Restaurant sales	$	397,213		$	394,283	$	764,014		$	750,412
Net income (loss)	$	(926	)	$	13,535	$	(8,440	)	$	14,655
Basic and diluted net income (loss) per share	$	(0.02	)	$	0.30	$	(0.22	)	$	0.32

This unaudited pro forma financial information does not give effect to any anticipated synergies, operating efficiencies, cost savings or any integration costs related to the acquired restaurants.

The unaudited pro forma financial results exclude transaction costs recorded as general and administrative expenses of $1.4 million and $4.0 million during the three and six months ended June 30, 2019 and $0.1 million and $0.2 million during the three and six months ended July 1, 2018.