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 223 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	259,801		Southeastern states, primarily TN, MS, LA
June 11, 2019		13	15,788		Baltimore, Maryland
August 20, 2019	(2)	1	1,108		Pennsylvania
Total 2018 and 2019 Acquisitions		278	$	314,799


(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 $259.8 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, which were converted into approximately 7.5 million shares of common stock on August 29, 2019, and (iii) the retirement of approximately $114.5 million of the indebtedness of Cambridge, net of cash acquired. 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 Franchise Holdings LLC ("Cambridge Holdings") 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. The purchase price allocation values the common stock at $145.3 million based on the $9.81 closing price of the Company's stock on the date of acquisition.

The Company has engaged a third party valuation specialist to assist with the valuation of assets acquired, and the values of certain assets and liabilities are preliminary in nature at September 29, 2019. 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. The preliminary fair value of the right-of-use liability is based upon the lease payments over the remaining lease term discounted by the Company's incremental borrowing rate. 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 the excess of the purchase price over the aggregate fair value of net assets acquired and is related to the benefits expected as a result of the acquisition, including sales, operating synergies, development and growth opportunities. We believe that Cambridge's existing Burger King and Popeyes restaurant portfolios provide the Company with significant growth and development opportunities and due to the geographic location of the restaurants mitigate the dependence on the economic performance of any one particular geographic location or restaurant concept. Goodwill resulting from the purchase price allocation for the Cambridge Merger is not expected to be deductible for income tax purposes. An estimated deferred income tax liability of approximately $35.3 million was recorded during the three months ended September 29, 2019 representing book and tax differences primarily related to the estimated fair value of franchise rights.

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 September 29, 2019.



Inventory	$	2,915
Prepaid expenses	2,889
Other assets	2,877
Land and buildings	20,440
Restaurant equipment	24,584
Right-of-use assets	251,421
Leasehold improvements	3,941
Franchise fees	7,300
Franchise rights	144,499
Deferred income taxes	(35,264		)
Goodwill	104,996
Operating lease liabilities	(255,015		)
Accounts payable	(4,614		)
Accrued payroll, related taxes and benefits	(3,142		)
Other liabilities	(8,026		)
Net assets acquired	$	259,801

The Company allocated the aggregate purchase price for 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 September 29, 2019.



Inventory	$	158
Restaurant equipment	743
Restaurant equipment - subject to finance leases	150
Right-of-use assets	9,515
Leasehold improvements	6,205
Franchise fees	394
Franchise rights	9,809
Deferred income taxes	16
Goodwill	103
Operating lease liabilities	(9,968		)
Finance lease liabilities for restaurant equipment	(185		)
Accounts payable	(44		)
Net assets acquired	$	16,896

Goodwill recorded in connection with the 2019 acquisitions represents costs in excess of fair values assigned to the underlying net assets of acquired restaurants. Goodwill will not 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 differences 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 $89.6 million and $164.9 million in the three and nine months ended September 29, 2019, respectively, and contributed restaurant sales of $3.1 million and $3.5 million in the three and nine months ended September 30, 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 2018 and 2019 for the three and nine months ended September 29, 2019 and September 30, 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					Nine Months Ended
	September 29, 2019			September 30, 2018		September 29, 2019			September 30, 2018
Total revenue	$	402,607		$	382,738	$	1,167,461		$	1,133,957
Net income (loss)	$	(6,785	)	$	11,313	$	(10,234	)	$	30,278
Basic and diluted net income (loss) per share	$	(0.15	)	$	0.25	$	(0.25	)	$	0.67

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 $4.0 million during the nine months ended September 29, 2019 and $0.8 million and $1.0 million during the three and nine months ended September 30, 2018.