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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-36749

 

 

THE HABIT RESTAURANTS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware		36-4791171
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

17320 Red Hill Avenue, Suite 140, Irvine, CA 92614

(Address of Principal Executive Offices and Zip Code)

(949) 851-8881

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of August 6, 2015, there were 13,759,754 shares of the Registrant’s Class A Common Stock, par value $0.01 per share, outstanding and 12,241,482 shares of the Registrant’s Class B Common Stock, par value $0.01 per share, outstanding.

 

 

 

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THE HABIT RESTAURANTS, INC.

TABLE OF CONTENTS

 

				Page
		PART I – FINANCIAL INFORMATION			3
ITEM 1.		Financial Statements			3
		Condensed Consolidated Balance Sheets (Unaudited)			3
		Condensed Consolidated Statements of Income (Unaudited)			4
		Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)			5
		Condensed Consolidated Statements of Cash Flows (Unaudited)			6
		Notes to Condensed Consolidated Financial Statements (Unaudited)			7
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk			27
ITEM 4.		Controls and Procedures			28
		PART II – OTHER INFORMATION			29
ITEM 1.		Legal Proceedings			29
ITEM 1A.		Risk Factors			29
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			29
ITEM 3.		Defaults Upon Senior Securities			29
ITEM 4.		Mine Safety Disclosures			29
ITEM 5.		Other Information			29
ITEM 6.		Exhibits			30
		Signatures			31

 

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PART I-FINANCIAL INFORMATION

ITEM 1. Financial Statements

THE HABIT RESTAURANTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30, 2015 (Unaudited)				December 30, 2014
(in thousands, except share data)
ASSETS
Current assets
Cash and cash equivalents		$	52,435			$	49,469
Accounts receivable			2,895				3,187
Inventory			901				909
Prepaid expenses			2,461				1,117
Deferred tax assets			481				528
Total current assets			59,173				55,210
Property and equipment, net			69,292				65,668
Tradenames			12,500				12,500
Goodwill			9,967				9,967
Deposits and other assets, net			1,788				1,441
Deferred tax assets			95,950				13,836
Total long-term assets			189,497				103,412
Total assets		$	248,670			$	158,622
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	7,439			$	7,036
Employee-related accruals			4,050				3,617
Accrued expenses			4,615				4,218
Income tax payable			97				191
Sales taxes payable			1,312				1,633
Deferred franchise income			305				55
Total current liabilities			17,818				16,750
Deferred rent			10,170				8,844
Deemed landlord financing			2,460				2,478
Deferred franchise income			670				895
Amounts payable under Tax Receivable Agreement			88,551				12,698
Total liabilities			119,669				41,665
Commitments and contingencies
Stockholders’ equity:
Class A common stock, par value $0.01 per share; 70,000,000 shares authorized and 13,759,754 shares issued and outstanding at June 30, 2015 and 8,974,550 shares issued and outstanding at December 30, 2014.			138				90
Class B common stock, par value $0.01 per share; 70,000,000 shares authorized and 12,241,482 shares issued and outstanding at June 30, 2015 and 17,028,204 shares issued and outstanding at December 30, 2014.			122				170
Additional paid-in capital			71,058				41,317
Retained earnings (deficit)			1,329				(32	)
The Habit Restaurants, Inc. stockholders’ equity			72,647				41,545
Non-controlling interests			56,354				75,412
Total stockholders’ equity			129,001				116,957
Total liabilities and stockholders’ equity		$	248,670			$	158,622

See notes to condensed consolidated financial statements (unaudited).

 

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THE HABIT RESTAURANTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

		13 Weeks Ended								26 Weeks Ended
		June 30, 2015				July 1, 2014				June 30, 2015				July 1, 2014
(amounts in thousands except share and per share data)
Revenue		$	56,730			$	41,514			$	111,313			$	79,271
Operating expenses
Restaurant operating costs (excluding depreciation and amortization)
Food and paper cost			18,160				14,155				36,029				26,174
Labor and related expenses			16,950				12,197				33,374				23,553
Occupancy and other operating expenses			8,608				6,379				16,604				12,326
General and administrative expenses			5,716				3,925				10,921				7,420
Offering related expenses			651				—				1,134				—
Depreciation and amortization expense			2,660				1,942				5,327				3,831
Pre-opening costs			383				337				707				654
Loss on disposal of assets			20				31				34				39
Total operating expenses			53,148				38,966				104,130				73,997
Income from operations			3,582				2,548				7,183				5,274
Other expenses
Interest expense, net			115				245				232				477
Income before income taxes			3,467				2,303				6,951				4,797
Provision for income taxes			1,048				—				1,567				—
Net income		$	2,419			$	2,303			$	5,384			$	4,797
Less: net income attributable to non-controlling interests			(1,741	)			(2,303	)			(4,023	)			(4,797	)
Net income attributable to The Habit Restaurants, Inc.		$	678			$	—			$	1,361			$	—
Net income attributable to The Habit Restaurants, Inc. per share Class A common stock:
Basic		$	0.05				—			$	0.12				—
Diluted		$	0.05				—			$	0.12				—
Weighted average shares of Class A common stock outstanding:
Basic			13,286,492				—				11,130,521				—
Diluted			13,295,283				—				11,137,091				—

See notes to condensed consolidated financial statements (unaudited).

 

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THE HABIT RESTAURANTS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

		Common Stock A								Common Stock B								Additional Paid- in Capital				Retained Earnings				Non-controlling Interests				Total
(amounts in thousands except share data)		Shares				Amounts				Shares				Amounts
Stockholders’ equity (deficit) at December 30, 2014			8,974,550			$	90				17,028,204			$	170			$	41,317			$	(32	)		$	75,412			$	116,957
Net income			—				—				—				—				—				1,361				4,023				5,384
Deferred tax assets			—				—				—				—				7,781				—				—				7,781
Tax distributions			—				—				—				—				—				—				(1,570	)			(1,570	)
Other distributions			—				—				—				—				—				—				(60	)			(60	)
Follow-on offering			4,785,204				48				(4,785,204	)			(48	)			—				—				—				—
Non-controlling interests adjustment			—				—				—				—				21,946				—				(21,946	)			—
Forfeiture of Class B common stock			—				—				(1,518	)			—				—				—				—				—
Stock-based compensation			—				—				—				—				14				—				495				509
Stockholders’ equity at June 30, 2015			13,759,754			$	138				12,241,482			$	122			$	71,058			$	1,329			$	56,354			$	129,001

See notes to condensed consolidated financial statements (unaudited).

 

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THE HABIT RESTAURANTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		26 Weeks Ended
		June 30, 2015				July 1, 2014
(amounts in thousands)
Cash flows from operating activities:
Net income		$	5,384			$	4,797
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense			5,327				3,831
Amortization of financing fees			21				9
Stock-based compensation			509				111
Loss on disposal of assets			34				39
Deferred income taxes			1,567				—
Deferred rent			17				61
Changes in assets and liabilities:
Accounts receivable			1,476				1,053
Inventory			8				(36	)
Prepaid expenses			(1,344	)			(469	)
Deposits			(368	)			(201	)
Accounts payable			374				1,083
Employee-related accruals			433				(192	)
Accrued expenses			862				145
Income taxes payable			(94	)			—
Sales taxes payable			(321	)			(329	)
Net cash provided by operating activities			13,885				9,902
Cash flows from investing activities:
Purchase of property and equipment			(9,270	)			(8,579	)
Net cash used in investing activities			(9,270	)			(8,579	)
Cash flows from financing activities:
Proceeds from exercise of stock options			—				3
Tax distributions to LLC members			(1,570	)			(530	)
Other distributions to LLC members			(60	)			—
Payments on deemed landlord financing			(19	)			(12	)
Borrowings on long-term debt			—				1,000
Principal payments on long-term debt			—				(1,107	)
Net cash used in financing activities			(1,649	)			(646	)
Net change in cash and cash equivalents			2,966				677
Cash and cash equivalents, beginning of period			49,469				122
Cash and cash equivalents, end of period		$	52,435			$	799
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest		$	40			$	451
Cash paid for income taxes		$	94			$	—
NON-CASH FINANCING
Unpaid purchase of property and equipment		$	286			$	1,204

See notes to condensed consolidated financial statements (unaudited).

 

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THE HABIT RESTAURANTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Nature of Operations and Basis of Presentation

The condensed consolidated financial statements of The Habit Restaurants, Inc. include the accounts of The Habit Restaurants, LLC and its wholly-owned subsidiary (collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The Habit Restaurants, Inc. was formed as a Delaware corporation on July 24, 2014, as a holding company for the purposes of facilitating an initial public offering (the “IPO”) of shares of common stock. The Company acquired, by merger, entities that were members of The Habit Restaurants, LLC. The Company accounted for the merger as a non-substantive transaction in a manner similar to a transaction between entities under common control pursuant to Accounting Standards Codification (“ASC”) ASC 805-50 Transactions between Entities under Common Control, and as such, recognized the assets and liabilities transferred at their carrying amounts on the date of transfer. The Company is a holding company with no direct operations that holds as its principal assets an equity interest in The Habit Restaurants, LLC and shares of subsidiaries, each of which in turn holds as its principal asset an equity interest in The Habit Restaurants, LLC, and relies on The Habit Restaurants, LLC to provide the Company with funds necessary to meet any financial obligations. As such, the Company has no independent means of generating revenue. Our condensed consolidated financial statements for periods prior to the IPO represent the historical operating results and financial position of The Habit Restaurants, LLC. In November 2014, the Company completed its IPO of shares of its Class A common stock.

In November 2014, the Company completed its initial public offering of 5,750,000 shares of Class A common stock, for net proceeds of $92.3 million. After the completion of the initial public offering:

 

•

The public investors collectively had 22.1% of the voting power in The Habit Restaurants, Inc.;

 

•

the existing owners of The Habit Restaurants, LLC (the “Continuing LLC Owners”), through their holdings of our Class B common stock, collectively had 65.5% of the voting power in The Habit Restaurants, Inc.;

 

•

The Habit Restaurants, Inc. directly or indirectly held 8,974,550 common units in The Habit Restaurants, LLC (“LLC Units”), representing 34.5% of the economic interest in The Habit Restaurants, LLC, and exercises exclusive control over The Habit Restaurants, LLC, as its sole managing member.

In April 2015, the Company completed a follow-on offering of 5,750,000 shares of Class A common stock at a price of $30.96 per share. As part of the follow-on offering, 4,785,204 LLC units, with a corresponding number of shares of Class B common stock, were exchanged and cancelled for shares of Class A common stock that were then sold on the open market. All of the shares in the offering were offered by selling stockholders, the Company did not receive any proceeds from the offering. The selling stockholders received net proceeds of approximately $170.9 million, after deducting underwriting discounts and commissions. The Company bore the costs, other than underwriting and commissions, associated with the sale of shares by the selling stockholders. Upon completion of this follow-on offering:

 

•

the public collectively owned 11,500,000 shares of our Class A common stock;

 

•

the Continuing LLC Owners collectively held 12,243,000 LLC Units in The Habit Restaurants, LLC, representing 47.1% of the economic interest in The Habit Restaurants, LLC;

 

•

the public shareholders collectively had 44.2% of the voting power in The Habit Restaurants, Inc.;

 

•

the Continuing LLC Owners, through their holdings of our Class B common stock, collectively had 47.1% of the voting power in The Habit Restaurants, Inc.;

 

•

one or more historic investors collectively held 8.7% voting power in The Habit Restaurants, Inc.; and

 

•

Affiliates of KarpReilly, LLC (“KarpReilly”), beneficially owned approximately 16.4% of our outstanding Class A common stock and 62.8% of our outstanding Class B common stock, which aggregated to 38.2% of our voting power. Upon the completion of the follow-on offering, because affiliates of KarpReilly collectively owned less than 50% of the total voting power of our common stock, we are no longer a “controlled company” within the meaning of the Nasdaq listing standards.

 

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•

The Habit Restaurants, Inc. directly or indirectly held 13,759,754 LLC Units, representing 52.9% of the economic interest in The Habit Restaurants, LLC, and exercises exclusive control over The Habit Restaurants, LLC, as its sole managing member.

The Habit Restaurants, LLC limited liability company agreement was amended and restated to, among other things, create a single new class of non-voting LLC Units. The existing owners of The Habit Restaurants, LLC continue to hold LLC Units, and such existing owners (other than The Habit Restaurants, Inc. and its wholly-owned subsidiaries) were issued a number of shares of our Class B common stock equal to the number of LLC Units held by them. These LLC Units and corresponding Class B common stock continue to be subject to any vesting, forfeiture, repurchase or similar provisions pursuant to the Pre-IPO agreement. Each share of Class B common stock provides its holder with no economic rights but entitles the holder to one vote on matters presented to The Habit Restaurants, Inc.’s stockholders. Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law. The Class B common stock is not publicly traded and does not entitle its holders to receive dividends or distributions upon a liquidation, dissolution or winding up of The Habit Restaurants, Inc.

As the sole managing member of The Habit Restaurants, LLC, the Company has the right to determine when distributions will be made to the unit holders of The Habit Restaurants, LLC, and the amount of any such distributions (in each case subject to the requirements with respect to the tax distributions described below). If The Habit Restaurants, Inc. authorizes a distribution, such distribution will be made to the unit holders of The Habit Restaurants, LLC, including The Habit Restaurants, Inc., pro rata in accordance with their respective ownership of the LLC Units (other than, for clarity, certain non-pro rata distributions to us to satisfy certain of our obligations). Notwithstanding the foregoing, The Habit Restaurants, LLC will bear the cost of or reimburse The Habit Restaurants, Inc. for certain expenses incurred by The Habit Restaurants, Inc. The Company also entered into a tax receivable agreement (“TRA”).

The Habit Restaurants, LLC is treated by its members as a partnership for federal and applicable state income tax purposes and, as such, generally is not expected to be subject to income tax (except that it may be required to withhold and remit tax as a withholding agent). Instead, taxable income is allocated to holders of LLC Units, including the Company. Accordingly, the Company incurs income taxes on its allocable share of any net taxable income of The Habit Restaurants, LLC and also incurs expenses related to its operations. Pursuant to the limited liability company agreement of The Habit Restaurants, LLC (the “LLC Agreement”), The Habit Restaurants, LLC is required to make tax distributions to the holders of LLC Units, except that The Habit Restaurants, LLC’s ability to make such distributions may be subject to various limitations and restrictions, including the operating results of its subsidiaries, its cash requirements and financial condition, the applicable provisions of Delaware law that may limit the amount of funds available for distribution to its members, compliance by The Habit Restaurants, LLC and its subsidiaries with restrictions, covenants and financial ratios related to existing or future indebtedness, and other agreements entered into by The Habit Restaurants, LLC or its subsidiaries with third parties. In addition to tax expenses, The Habit Restaurants, Inc. will incur expenses related to its operations, plus payments under the TRA, which the Company expects will be significant. The Company intends to cause The Habit Restaurants, LLC to make distributions or, in the case of certain expenses, payments in an amount sufficient to allow The Habit Restaurants, Inc. to pay its taxes and operating expenses, including distributions to fund any ordinary course payments due under the TRA.

The Company is headquartered in Irvine, California, and, as of June 30, 2015, managed and operated 117 fast casual restaurants as “The Habit Burger Grill” in California, Arizona, Utah, New Jersey and Florida. The restaurant’s menu includes charbroiled hamburgers, specialty sandwiches, fresh salads, and shakes and malts. Under the terms of the Company’s LLC Agreement, no member shall be obligated personally for any debt, obligation, or liability of the Company.

Additionally, with the formation of its wholly-owned subsidiary in February 2013, HBG Franchise, LLC (“Franchise”), The Company began franchising its restaurant concept. Franchise was organized as a Delaware limited liability company and its future operations are dependent upon the success of the Company’s restaurant concept. The Company has entered into three licensing and three franchise agreements through June 30, 2015. The Company opened its first licensed location in fiscal year 2014 and expects to open its first franchised restaurants in 2015.

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. It is the Company’s opinion that all adjustments considered necessary for the fair presentation of its results of operations, financial position, and cash flows for the periods presented have been included and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 30, 2014, included in our annual report on Form 10-K. The Company uses a 52 or 53-week fiscal year ending on the last Tuesday of the calendar year. In a 52-week fiscal year, each quarter includes 13 weeks of operations. In a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations. Fiscal year 2014, which ended on December 30, 2014, was a 52-week fiscal year. Fiscal year 2015 is a 52-week fiscal year.

 

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Note 2—Summary of Significant Accounting Policies

Use of estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications—Certain comparative prior year amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the current year presentation. These reclassifications have no effect on previously-reported net income, earnings per share, or stockholders’ equity.

Concentration of credit risk—Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. At June 30, 2015, the Company maintained approximately $17 million of its day-to-day operating cash balances with a major financial institution. The remaining $35 million is invested with a major financial institution and consists entirely of U.S. Treasury instruments with a maturity of three months or less at the date of purchase. The Company had no investments in U.S. Treasury instruments at December 30, 2014. At June 30, 2015 and December 30, 2014 and at various times during the periods then ended, cash and cash equivalents balances were in excess of Federal Depository Insurance Corporation insured limits. While the Company monitors the cash balances in its operating accounts on a daily basis and adjusts the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating accounts.

Fair value measurements—The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to the short maturities of these instruments.

Income taxes—The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company may record a valuation allowance, if conditions are applicable, to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

Non-controlling interests—The non-controlling interests on the condensed consolidated statement of income represents the portion of earnings or loss attributable to the economic interest in the Company’s subsidiary, The Habit Restaurants, LLC, held by the non-controlling LLC Unit holders. Non-controlling interests on the condensed consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling LLC Unit holders, based on the portion of the LLC Units owned by such unit holders. There was no non-controlling interest for the 26 weeks ended July 1, 2014 because the Company operated as The Habit Restaurants, LLC during that period and The Habit Restaurants, Inc. was not formed at the time. As of June 30, 2015 and December 30, 2014, the non-controlling interest was 47.1% and 65.5%, respectively. The percentages calculated below represent the average non-controlling interests ownership during the periods stated.

Net income attributable to non-controlling interests is computed as follows (dollar amounts in thousands):

 

		13 Weeks Ended June 30, 2015				26 Weeks Ended June 30, 2015
Income before income taxes		$	3,467			$	6,951
Non-controlling interests ownership percentage			50.2	%			57.9	%
Net income attributable to non-controlling interests		$	1,741			$	4,023

Earnings per Share—Basic earnings per share (“basic EPS”) is computed by dividing net income attributable to The Habit Restaurants, Inc. by the weighted average number of shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect during the reporting period to all dilutive potential shares outstanding resulting from employee stock-based awards. The following table sets forth the calculation of basic and diluted earnings per share for the 13 and 26-week periods ended June 30, 2015:

 

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(amounts in thousands, except share and per share data)		13 Weeks Ended June 30, 2015				26 Weeks Ended June 30, 2015
Numerator:
Net income attributable to controlling and non-controlling interests		$	2,419			$	5,384
Less: net income attributable to non-controlling interests		$	(1,741	)		$	(4,023	)
Net income attributable to The Habit Restaurants, Inc.		$	678			$	1,361
Denominator:
Weighted average shares of Class A common stock outstanding
Basic			13,286,492				11,130,521
Diluted			13,295,283				11,137,091
Net income attributable to The Habit Restaurants, Inc. per share Class A common stock
Basic		$	0.05			$	0.12
Diluted		$	0.05			$	0.12
Below is a reconciliation of basic and diluted share counts
Basic			13,286,492				11,130,521
Dilutive effect of stock options			8,791				6,570
Diluted			13,295,283				11,137,091

The Company’s Class B common stock represent voting interests and do not participate in the earnings of the Company. Accordingly, there is no earnings per share related to the Company’s Class B common stock. Diluted earnings per share of Class A common stock is computed similarly to basic earnings per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents using the treasury method, if dilutive. The Company’s LLC Units are considered common stock equivalents for this purpose. The number of additional shares of Class A common stock related to these common stock equivalents is calculated using the if converted method. The potential impact of the exchange of the 12,241,482 LLC Units on the diluted EPS had no impact and were therefore excluded from the calculation.

The Company completed its IPO on November 25, 2014. Since that date, the Company has consolidated its results into the results of The Habit Restaurants, LLC. As a result, only the net income attributable to the Company’s controlling interest from the period subsequent to the IPO is considered in the earnings per share calculation.

As of June 30, 2015, there were 2,525,275 options authorized under our 2014 Omnibus Incentive Plan of which 199,436 had been granted as of June 30, 2015. The number of dilutive shares of Class A common stock related to these options was calculated using the treasury stock method.

Recent Accounting Pronouncements—In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02, “Consolidation: Amendments to the Consolidation Analysis.” This update improves targeted areas of the consolidation guidance and reduces the number of consolidation models. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2015, with early adoption permitted. The adoption of ASU 2015-02 is not expected to have a material impact on our consolidated financial position or results of operations.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The FASB has approved a one year deferral of this standard, and this pronouncement is now effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. Accordingly, the Company will adopt this ASU on December 27, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the impact of the adoption of this standard on its consolidated results of operation and financial position, as well as which transition approach to use.

 

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Note 3—Fair Value Measurements

Fair value measurements enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The fair values of the Company’s investments in marketable securities are based on quoted prices in active markets for identical assets. The fair value of the investments in marketable securities at June 30, 2015 was $35.0 million and the Company classified such investments as Level 1. There were no investments at December 30, 2014.

Note 4—Property and Equipment, net

Property and equipment consists of the following (amounts in thousands):

 

		June 30, 2015				December 30, 2014
Leasehold improvements		$	48,678			$	44,779
Equipment			24,090				22,125
Furniture and fixtures			15,756				14,945
Buildings under deemed landlord financing			2,548				2,548
Smallwares			893				831
Vehicles			687				686
Construction in progress			5,631				3,469
			98,283				89,383
Less: Accumulated depreciation and amortization			(28,991	)			(23,715	)
		$	69,292			$	65,668

Depreciation expense was approximately $2,660,000 and $1,942,000 and $5,327,000 and $3,831,000 for the 13 and 26 weeks ended June 30, 2015 and July 1, 2014, respectively.

As a result of the application of build-to-suit lease guidance contained in ASC 840-40-55, the Company has determined that it is the accounting owner of a total of seven buildings under deemed landlord financing as of June 30, 2015 and December 30, 2014, and are included in the Company’s property and equipment. Included in the buildings under deemed landlord financing is the estimated construction costs of the landlord for the shell building.

Note 5—Income Taxes

The Habit Restaurants, Inc. is subject to U.S. federal and state income taxation on its allocable portion of the income of The Habit Restaurants, LLC. The “Provision for income taxes” in the accompanying condensed consolidated statements of income for the 13 and 26 weeks ended June 30, 2015 is based on an estimate of the Company’s annualized effective income tax rate. The Company’s effective tax rate includes a rate benefit attributable to the fact that the Company’s subsidiary, The Habit Restaurants, LLC, operates as a limited liability company which is not itself subject to federal income tax. Accordingly, the portion of the Company’s subsidiary earnings attributable to the non-controlling interests are subject to tax when reported as a component of the non-controlling interests’ taxable income.

As a result of the recapitalization and the IPO that occurred in the fiscal year ended 2014, the portion of The Habit Restaurants, LLC’s income attributable to The Habit Restaurants Inc. is now subject to U.S. federal, state and local income taxes and is taxed at the prevailing corporate tax rates. The income tax provision reflects a tax rate of 30.23% and 22.55% for the 13 and 26 weeks ended June 30, 2015, respectively. The effective tax rate varies significantly from the federal statutory rate due to the income attributable to the non-controlling interests which is not taxed at the entity level. The income tax provision would reflect an effective tax rate of 47.42% for both of the 13 and 26 week periods ended June 30, 2015, respectively, if all of the income was taxed at Habit Restaurants, Inc. and the impact of the non-controlling interests was disregarded. Prior to July 24, 2014, The Habit Restaurants, LLC had not been subject to U.S. federal income taxes as it is organized as a limited liability company, and is treated as a partnership for federal and state income tax purposes, and therefore, there was no provision in the 13 and 26 weeks ended July 1, 2014.

The Habit Restaurants, Inc. files, income tax returns in the U.S. federal jurisdiction and various state jurisdictions and such filings include an amount from The Habit Restaurants, LLC earnings based upon the Company’s ownership. The federal statute of limitations for the Company’s subsidiaries remain open for the tax years 2008 and forward as a result of net operating losses generated within those years. The statute of limitations for state and local jurisdictions generally remain open for tax years 2010 and forward.

 

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Tax Receivable Agreement

In connection with the IPO that occurred in the fiscal year ended 2014, the Company entered into a Tax Receivable Agreement (“TRA”). Under the TRA, the Company generally will be required to pay to the Continuing LLC Owners 85% of the amount of cash savings, if any, in U.S. federal, state or local tax that the Company actually realize directly or indirectly (or are deemed to realize in certain circumstances) as a result of (i) certain tax attributes created as a result of the IPO and any sales or exchanges (as determined for U.S. federal income tax purposes) to or with the Company of their interests in The Habit Restaurants, LLC for shares of our Class A common stock or cash, including any basis adjustment relating to the assets of The Habit Restaurants, LLC and (ii) tax benefits attributable to payments made under the TRA (including imputed interest). The Habit Restaurants, Inc. generally will retain 15% of the applicable tax savings. The amount payable to the Continuing LLC Owners under the TRA is disclosed on the Company’s balance sheet. In addition, the TRA provides for interest, at a rate equal to one year LIBOR, accrued from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. To the extent that the Company is unable to timely make payments under the TRA for any reason, such payments will be deferred and will accrue interest at a rate equal to one year LIBOR plus 200 basis points until paid (although a rate equal to one year LIBOR will apply if the inability to make payments under the TRA is due to limitations imposed on the Company or any of our subsidiaries by a debt agreement in effect on the date of the IPO). The Company’s ability to make payments under the TRA and to pay its tax liabilities to taxing authorities generally will depend on our receipt of cash distributions from The Habit Restaurants, LLC.

Pursuant to the LLC Agreement, the Continuing LLC Owners will have the right, from and after the expiration of the lock-up agreements described below, to exchange their LLC Units, together with a corresponding number of shares of Class B common stock (which will be cancelled in connection with any such exchange) for, at the option of The Habit Restaurants, Inc. (such determination to be made by the disinterested members of our board of directors), (i) cash consideration (calculated based on the volume-weighted average price of the Class A common stock of The Habit Restaurants, Inc., as displayed under the heading Bloomberg VWAP on the Bloomberg page designated for the Class A common stock of The Habit Restaurants, Inc. for the 15 trading days immediately prior to the delivery date of a notice of exchange) or (ii) shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. These exchanges are expected to result in increases in the tax basis of the assets of The Habit Restaurants, LLC that otherwise would not have been available. Increases in tax basis resulting from such exchanges may reduce the amount of tax that The Habit Restaurants, Inc. would otherwise be required to pay in the future. This tax basis may also decrease gains (or increase losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets.

If the IRS or a state or local taxing authority challenges the tax basis adjustments that give rise to payments under the TRA and the tax basis adjustments are subsequently disallowed, the recipients of payments under the agreement will not reimburse us for any payments the Company previously made to them. Any such disallowance would be taken into account in determining future payments under the TRA and would, therefore, reduce the amount of any such future payments. Nevertheless, if the claimed tax benefits from the tax basis adjustments are disallowed, the Company’s payments under the TRA could exceed its actual tax savings, and the Company may not be able to recoup payments under the TRA that were calculated on the assumption that the disallowed tax savings were available.

The TRA provides that (i) in the event that the Company materially breach the TRA, (ii) if, at any time, the Company elects an early termination of the TRA, or (iii) upon certain mergers, asset sales, other forms of business combinations or other changes of control, the Company’s (or our successor’s) obligations under the TRA (with respect to all LLC Units, whether or not LLC Units have been exchanged or acquired before or after such transaction) would accelerate and become payable in a lump sum amount equal to the present value of the anticipated future tax benefits calculated based on certain assumptions, including that the Company would have sufficient taxable income to fully utilize the deductions arising from the tax deductions, tax basis and other tax attributes subject to the TRA. The Company’s payment obligations under the TRA with respect to interests in The Habit Restaurants, LLC treated as sold for U.S. federal income tax purposes to the Company in connection with the initial public offering are expected to be calculated based on the initial public offering price of our Class A common stock net of underwriting discounts.

As a result of the foregoing, (i) the Company could be required to make payments under the TRA that are greater than or less than the specified percentage of the actual tax savings the Company realizes in respect of the tax attributes subject to the agreements and (ii) the Company may be required to make an immediate lump sum payment equal to the present value of the anticipated future tax savings, which payment may be made years in advance of the actual realization of such future benefits, if any of such benefits are ever realized. In these situations, the Company’s obligations under the TRA could have a substantial negative impact on its liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that the Company will be able to finance its obligations under the TRA in a manner that does not adversely affect its working capital and growth requirements.

Payments under the TRA are intended to be treated as additional consideration for the applicable interests in The Habit Restaurants, LLC treated as sold or exchanged (as determined for U.S. federal income tax purposes) to or with the Company, except with respect to certain actual or imputed interest amounts payable under the TRA.

 

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As of June 30, 2015, the Company recorded a liability of $88,551,000, representing the payments due to the Continuing LLC Owners under the TRA. The increase in the TRA liability during the 13 weeks ended June 30, 2015 is a result of the follow-on offering that was completed in April 2015. As of June 30, 2015, the Company estimates that it will not have an amount payable pursuant to the TRA within the next 12-month period.

Payments are due under the TRA for a given year if the Company has a net realized tax benefit. The realized tax benefit is intended to measure the decrease or increase in the actual tax liability of the Company attributable to the tax benefits defined in the TRA (i.e., basis adjustments and imputed interest), using a “with and without” methodology. Payments are anticipated to be made under the TRA for approximately 20-25 years, with the first potential payment becoming due after the filing of the Company’s 2015 federal income tax return, which will be due on September 15, 2016 (including extensions). The payments are to be made in accordance with the terms of the TRA. The Company shall pay or cause to be paid within five business days after the obligations became due (i.e. payable within 95-125 calendar days after the due date of the federal income tax return (taking into account valid extensions) dependent upon the type of holder of the TRA). The timing of the payments are subject to certain contingencies including whether the Company will have sufficient taxable income to utilize all of the tax benefits defined in the TRA.

Obligations pursuant to the TRA are obligations of the Company. They do not impact the non-controlling interest. These obligations are not income tax obligations and have no impact on the tax provision or the allocation of taxes.

Note 6—Long-Term Debt

On July 23, 2014, the Company refinanced its long-term debt with California Bank & Trust into a $35 million Credit Facility (“Credit Facility”) that matures on July 23, 2017. Term debt of $11.1 million outstanding at the time of the refinancing became the initial borrowings under the Credit Facility. All borrowings under the Credit Facility generally bear interest at a variable rate based upon the Company’s election, of (i) the base rate plus, or (ii) LIBOR, plus, in either case, an applicable margin based on certain financial results of the Company (as defined in the Credit Facility agreement). The Company’s Credit Facility also requires payment for commitment fees that accrue on the daily unused commitment of the lender at 0.25%, payable quarterly. This Credit Facility was paid down in November 2014 with a portion of the net proceeds from the IPO. As of June 30, 2015, there were no borrowings outstanding against the Credit Facility.

The long-term debt is secured by all the assets of the Company and the Company must comply with certain financial covenants. The long-term debt contains customary representations, warranties, negative and affirmative covenants, including a funded debt to EBITDA ratio of 2.00 to 1.00, a fixed charge coverage ratio of 1.25 to 1.00 and a requirement that EBITDA must be greater than zero for 75% or more of all restaurants open at least six months. As of June 30, 2015, the Company was in compliance with all covenants.

Note 7—Commitments and Contingencies

Future commitments—The Company’s growth strategy includes new restaurant openings during fiscal year 2015 and beyond. In connection with the build out of the restaurants, the Company may be obligated for a portion of the start-up and/or construction costs. As of June 30, 2015, the Company had approximately $4.5 million in such commitments related to new restaurants.

Litigation—The Company is involved in various claims and legal actions that arise in the ordinary course of business. Management does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s consolidated financial position, results of operations, liquidity and capital resources. A significant increase in the number of litigated claims or an increase in amounts owing under successfully litigated claims could materially adversely affect the Company’s business, financial condition, results of operations, and cash flows.

Note 8—Management Incentive Plans

2014 Omnibus Incentive Plan

Prior to the completion of the Company’s IPO, the board of directors adopted The Habit Restaurants, Inc. 2014 Omnibus Incentive Plan (the “2014 Omnibus Incentive Plan”) and, subsequent to the IPO, all equity-based awards will be granted under the 2014 Omnibus Incentive Plan. The 2014 Omnibus Incentive Plan will also permit grants of cash bonuses beginning in fiscal year 2015. This plan authorizes 2,525,275 total options and restricted stock units. No awards may be granted under the plan after November 19, 2024.

 

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The purpose of the 2014 Omnibus Incentive Plan is to advance the Company’s interests by providing for the grant to eligible individuals of equity-based and other incentive awards.

The 2014 Omnibus Incentive Plan will be administered by our board of directors or a committee of our board of directors (the “Administrator”). The Administrator will have the authority to, among other things, interpret the 2014 Omnibus Incentive Plan, determine eligibility for, grant and determine the terms of awards under the 2014 Omnibus Incentive Plan, and to do all things necessary to carry out the purposes of the 2014 Omnibus Incentive Plan. The Administrator’s determinations under the 2014 Omnibus Incentive Plan will be conclusive and binding.

Compensation expense related to incentive stock options issued under the 2014 Omnibus Incentive Plan was $92,000 and $98,000 for the 13 and 26 weeks ended June 30, 2015, respectively, and is included in general and administrative expenses on the accompanying condensed consolidated statements of income.

Non-Qualified Stock Options:

The following table sets forth information about the fair value of the non-qualified stock option grants on the date of grant using the Black-Scholes option-pricing model and the weighted average assumptions used for such a grant for the 13 and 26 weeks ended June 30, 2015:

 

		Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding and expected to vest at December 30, 2014			16,666			$	18.00
Granted			136,094			$	32.42
Forfeited			—
Exercised			—
Outstanding and expected to vest at June 30, 2015			152,760			$	30.85				9.76			$	67,414
Exercisable at June 30, 2015			—

The aggregate intrinsic value in the table above is obtained by subtracting the weighted average exercise price from the estimated fair value of the underlying common stock as of June 30, 2015 and multiplying this result by the related number of options outstanding and expected to vest at June 30, 2015. The estimated fair value of the common stock as of June 30, 2015 used in the above calculation was $31.29 per share, the closing price of the Company’s common stock on June 30, 2015, the last trading day of the second quarter.

There was approximately $1.1 million of total unrecognized compensation costs related to options granted under the Plan as of June 30, 2015. That cost is expected to be recognized over future years.

Restricted Stock Units:

A summary of stock-based compensation activity related to restricted stock units for the 13 and 26 weeks ended June 30, 2015 are as follows:

 

		Units				Weighted Average Fair Value				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding and expected to vest at December 30, 2014			—
Granted			46,676			$	32.47
Forfeited			—
Vested			—
Outstanding and expected to vest at June 30, 2015			46,676			$	32.47				9.81			$	—

The aggregate intrinsic value in the table above is obtained by subtracting the weighted average fair value at grant date from the estimated fair value of the underlying common stock as of June 30, 2015 and multiplying this result by the related number of units outstanding and expected to vest at June 30, 2015. The estimated fair value of the common stock as of June 30, 2015 used in the above calculation was $31.29 per share, the closing price of the Company’s common stock on June 30, 2015, the last trading day of the second quarter.

 

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The fair value of the restricted stock units is the quoted market value of our common stock on the date of grant. As of June 30, 2015, total unrecognized stock-based compensation expense related to non-vested restricted stock units was approximately $1.4 million. That cost is expected to be recognized over future years.

The stock-based compensation expense related to units issued under The Habit Restaurants, LLC Management Incentive Plan for the 13 and 26 weeks ended June 30, 2015 and July 1, 2014 amounted to $206,000 and $58,000 and $412,000 and $111,000, respectively, and is included in general and administrative expenses on the accompanying condensed consolidated statements of income. In connection with the IPO, the Company converted all of the outstanding vested and unvested Class C units with an amount of vested and unvested common units of The Habit Restaurants, LLC, respectively. As of June 30, 2015 there was approximately $2.9 million of total unrecognized stock-based compensation expense related to these units. That cost is expected to be recognized over future years.

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Habit Restaurants, Inc. was formed July 24, 2014 and prior to the IPO had not conducted any activities, other than (i) those incident to its formation, (ii) the merger transactions resulting in it holding interests, indirectly through its wholly-owned subsidiaries, in the Habit Restaurants, LLC (such interests collectively representing a less than 20% interest in the Habit Restaurants, LLC) and (iii) the preparation of the IPO registration statement. We conduct our business through The Habit Restaurants, LLC and its consolidated subsidiaries. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our business and other factors which could cause actual results to differ materially from the results referred to in the historical information and the forward-looking statements presented herein, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 30, 2014 (our “Annual Report”) and those set forth under “Cautionary Note Regarding Forward-Looking Statements” contained in this report.

We operate on a 52- or 53-week fiscal year that ends on the last Tuesday of the calendar year. Each quarterly period has 13 weeks, except for a 53-week year when the fourth quarter has 14 weeks. Our 2014 fiscal year consisted of 52 weeks and our 2015 fiscal year will consist of 52 weeks.

Unless the context requires otherwise, references to ‘‘The Habit Burger Grill,’’ ‘‘The Habit,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘our’’ or ‘‘us’’ refer collectively to The Habit Restaurants, Inc. and its consolidated subsidiaries.

Overview

The Habit Burger Grill is a high-growth, fast casual restaurant concept that specializes in preparing fresh, made-to-order char-grilled burgers and sandwiches featuring USDA choice tri-tip steak, grilled chicken and sushi-grade albacore tuna cooked over an open flame. In addition, we feature freshly prepared salads and an appealing selection of sides, shakes and malts. The char-grilled preparation of our fresh burgers topped with caramelized onions and fresh produce has generated tremendous consumer response resulting in our burger being named the “best tasting burger in America” in July 2014 in a comprehensive survey conducted by one of America’s leading consumer magazines. We operate in the approximately $39 billion fast casual restaurant segment, which we believe has created significant recent disruption in the restaurant industry and is rapidly gaining market share from adjacent restaurant segments, resulting in significant growth opportunities for restaurant concepts such as The Habit.

History and Operations

The first location opened in Santa Barbara, California in 1969. Our restaurant concept has been, and continues to be built around a distinctive and diverse menu, headlined by fresh, char-grilled burgers and sandwiches made-to-order over an open flame and topped with fresh ingredients. Our Chief Executive Officer, Russell W. Bendel, joined The Habit in 2008, after KarpReilly, LLC (“KarpReilly”), a private investment firm based in Greenwich, Connecticut, acquired an equity interest in us in 2007. At the time of KarpReilly’s investment, we had 17 locations. Since then, we have grown our brand on a disciplined basis designed to capitalize on the large market opportunity available to us and, as of June 30, 2015, we had 118 locations. Our highly experienced management team has created and refined the infrastructure to create replicable restaurant-level systems, processes and training procedures that can deliver a high-quality experience that is designed to consistently exceed our customers’ expectations.

 

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Growth Strategies and Outlook

We plan to continue to expand our business, drive comparable restaurant sales growth and enhance our competitive positioning by executing on the following strategies:

 

•

expand our restaurant base;

 

•

increase our comparable restaurant sales; and

 

•

enhance operations and leverage our infrastructure to improve long-term profitability.

We had 118 restaurants in 11 markets in five states as of June 30, 2015, including licensed locations (excluding the five licensed locations in Santa Barbara County, California). We opened eight restaurants from December 31, 2014 through June 30, 2015, and we expect to open a total of 18 to 20 additional company-owned restaurants and three to five franchised/licensed restaurants through the remainder of 2015. As of June 30, 2015, we had one licensed restaurant from which we earn revenue located on the campus of The University of Southern California. Over the next four years, we plan to double the number of The Habit locations. To increase comparable restaurant sales, we plan to continue delivering superior execution, increasing customer frequency, attracting new customers and improving per customer spend. We believe we are well positioned for future growth, with a developed corporate infrastructure capable of supporting our expanding restaurant base. Additionally, we believe we have an opportunity to enhance our profitability as we benefit from increased economies of scale. However, these growth rates cannot be guaranteed.

Recapitalization and IPO

The Habit Restaurants, Inc. was formed July 24, 2014 and prior to the IPO had not conducted any activities, other than (i) those incident to its formation, (ii) the merger transactions resulting in it holding interests, indirectly through its wholly-owned subsidiaries, in the Habit Restaurants, LLC (such interests collectively representing a less than 20% interest in the Habit Restaurants, LLC) and (iii) the preparation of the IPO registration statement.

The Habit Restaurants, Inc. is a holding company, and has a controlling direct and indirect equity interest in The Habit Restaurants, LLC. As the sole managing member of The Habit Restaurants, LLC, The Habit Restaurants, Inc. operates and controls all of the business and affairs of The Habit Restaurants, LLC and, through The Habit Restaurants, LLC and its subsidiaries, conducts our business. The Habit Restaurants, Inc. consolidates the financial results of The Habit Restaurants, LLC in its consolidated financial statements and reports non-controlling interests related to the LLC Units held by the Continuing LLC Owners on its consolidated financial statements.

On November 25, 2014, we completed our IPO of 5,750,000 shares of our Class A common stock at a price of $18.00 per share. We received net proceeds of approximately $92.3 million, and we used the net proceeds to purchase, directly and indirectly, LLC Units from The Habit Restaurants, LLC. The Habit Restaurants, LLC subsequently used a portion of such proceeds to repay all of the borrowings outstanding under our existing credit facility with California Bank & Trust, to extinguish the approximately $30 million balance on the Bridge Loan with California Bank & Trust incurred in connection with a distribution to the members of The Habit Restaurants, LLC made immediately prior to the completion of the IPO and, with the remaining proceeds, will continue to support our growth, for working capital and general corporate purposes.

Follow-on Offering

In April 2015, we completed a follow-on offering of 5,750,000 shares of Class A common stock at a price of $30.96 per share, which included 750,000 shares sold by the selling stockholders pursuant to an option granted to the underwriters, which was exercised concurrently with the completion of the follow-on offering. As part of the follow-on offering, 4,785,204 LLC Units were exchanged, and a corresponding number of shares of Class B common stock were cancelled, for shares of Class A common stock that were then sold pursuant to the offering. All of the shares in the offering were offered by selling stockholders, and the Company did not receive any proceeds from the offering. The selling stockholders received net proceeds of approximately $170.9 million, after deducting underwriting discounts and commissions. The Company bore the costs, other than underwriting and commissions, associated with the sale of shares by the selling stockholders.

Tax Receivable Agreement (“TRA”)

In connection with the IPO, we entered into the TRA. Under the TRA, we generally will be required to pay to the continuing LLC Owners 85% of the amount of cash savings, if any, in U.S. federal, state or local tax that we actually realize directly or indirectly (or are deemed to realize in certain circumstances) as a result of (i) certain tax attributes created as a result of the IPO and any sales or exchanges (as determined for U.S. federal income tax purposes) to or with us of their interests in The Habit Restaurants, LLC for shares of our Class A common stock or cash, including any basis adjustment relating to the assets of The Habit Restaurants, LLC and (ii) tax benefits attributable to payments made under the TRA (including imputed interest). The Habit Restaurants, Inc. and its subsidiaries generally will retain 15% of the applicable tax savings.

The Habit Restaurants, Inc. may accumulate cash balances in future years resulting from distributions from The Habit Restaurants, LLC

 

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exceeding our tax or other liabilities. To the extent The Habit Restaurants, Inc. does not use such cash balances to pay a dividend on Class A common stock and instead decides to hold such cash balances, Continuing LLC Owners who exchange LLC Units for shares of Class A common stock in the future could also benefit from any value attributable to such accumulated cash balances.

Key Measures We Use to Evaluate Our Performance

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are revenue, comparable restaurant sales growth, restaurant contribution and number of new restaurant openings.

Revenue

Revenue consists of sales of food and beverages in company-owned restaurants and mobile event based catering trucks, net of promotional allowances and employee meals. Several factors impact our revenue in any period, including the number of restaurants in operation and per restaurant sales.

Comparable Restaurant Sales Growth

Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base. We include restaurants in the comparable restaurant base in the accounting period following its 18th full period of operations. Each of our periods is the applicable four or five week reporting period, except for the 12th period of a 53-week year, which contains six weeks. As of the end of fiscal years 2010, 2011, 2012, 2013 and 2014 there were 21, 30, 36, 51 and 68 company-owned restaurants, respectively, in our comparable restaurant base and as of the end of the 26 weeks ended June 30, 2015 there were 81 company-owned restaurants in the comparable restaurant base. This measure highlights performance of existing restaurants, as the impact of new restaurant openings is excluded.

Comparable restaurant sales growth is generated by increases in customer traffic or increases in per customer spend. Per customer spend can be influenced by changes in menu prices and/or the mix and number of items sold per transaction.

Measuring our comparable restaurant sales growth allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:

 

•

our ability to operate restaurants effectively and efficiently to meet consumer expectations;

 

•

opening of new restaurants in the vicinity of existing locations;

 

•

consumer recognition of our brand and our ability to respond to changing consumer preferences;

 

•

pricing;

 

•

customer traffic;

 

•

per customer spend and average transaction amount;

 

•

local competition;

 

•

marketing and promotional efforts;

 

•

introduction of new menu items; and

 

•

overall economic trends, particularly those related to consumer spending.

 

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The following table shows our quarterly comparable restaurant sales growth since 2010:

 

		Fiscal Year 2010																Fiscal Year 2011																Fiscal Year 2012
		Q1				Q2				Q3				Q4				Q1				Q2				Q3				Q4				Q1				Q2				Q3				Q4
Comparable Restaurant Sales Growth			5.9	%			3.5	%			5.8	%			6.5	%			8.8	%			10.2	%			8.8	%			7.5	%			4.9	%			3.6	%			2.7	%			3.0	%
Comparable Restaurants			20				20				21				21				22				24				28				30				31				33				34				36

 

		Fiscal Year 2013																Fiscal Year 2014																26 Weeks Ended June 30, 2015
		Q1				Q2				Q3				Q4				Q1				Q2				Q3				Q4				Q1				Q2
Comparable Restaurant Sales Growth			1.5	%			3.4	%			3.6	%			5.5	%			6.0	%			6.3	%			16.2	%			13.2	%			12.6	%			8.9	%
Comparable Restaurants			39				45				47				51				56				60				66				68				72				81

Restaurant Contribution

Restaurant contribution is defined as revenue less restaurant operating costs, which are food and paper costs, labor and related expenses, occupancy and other operating expenses. We expect restaurant contribution to increase in proportion to the number of new company-owned restaurants we open and our comparable restaurant sales growth. Fluctuations in restaurant contribution margin can also be attributed to those factors discussed below for the components of restaurant operating costs.

Number of New Restaurant Openings

The number of company-owned restaurant openings reflects the number of restaurants opened during a particular reporting period. Before we open new company-owned restaurants, we incur pre-opening costs. Some of our restaurants open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. Typically, our new restaurants have stabilized sales after approximately 13 to 26 weeks of operation, at which time the restaurant’s sales typically begin to grow on a consistent basis. In new markets, the length of time before average sales for new restaurants stabilize is less predictable and can be longer as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. New restaurants may not be profitable, and their sales performance may not follow historical patterns. The number and timing of restaurant openings has had, and is expected to continue to have, an impact on our results of operations. The following table shows the growth in our restaurant base for the fiscal years 2012, 2013 and 2014, respectively and for the 26 weeks ended June 30, 2015.

 

		26 Weeks Ended				Fiscal Year Ended
		June 30, 2015				2014				2013				2012
Company-owned restaurant base
Beginning of period			109				85				63				46
Openings			8				24				22				17
Restaurants at end of period			117				109				85				63
Franchised/licensed retaurants(1)
Beginning of period			1				—				—				—
Openings			—				1				—				—
Restaurants at end of period			1				1				—				—
Total restaurants
Beginning of period			110				85				63				46
Openings			8				25				22				17
Restaurants at end of period			118				110				85				63
Year-over-year growth
Total restaurants							29.4	%			34.9	%			37.0	%

 

(1)	Does not include the five licensed locations in Santa Barbara County, California

 

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EBITDA and Adjusted EBITDA

EBITDA represents net income before interest expense, net, provision for income taxes, depreciation and amortization. Adjusted EBITDA represents net income before interest expense, net, provision for income taxes, depreciation, amortization and certain items that we do not consider representative of our ongoing operating performance, as identified in the reconciliation table below.

EBITDA and Adjusted EBITDA as presented in this report are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these or other unusual or nonrecurring items.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP, including that (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures prominently.

We believe EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe investors will find these measures useful in assessing our ability to service or incur indebtedness and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to evaluate our operating performance or compare our performance to that of our competitors.

 

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The following table sets forth reconciliations of EBITDA and Adjusted EBITDA to our net income:

 

		13 Weeks Ended								26 Weeks Ended
Adjusted EBITDA Reconciliation		June 30, 2015				July 1, 2014				June 30, 2015				July 1, 2014
(amounts in thousands)
Net income		$	2,419			$	2,303			$	5,384			$	4,797
Non-GAAP adjustments:
Provision for income taxes			1,048				—				1,567				—
Interest expense, net			115				245				232				477
Depreciation and amortization			2,660				1,942				5,327				3,831
EBITDA			6,242				4,490				12,510				9,105
Stock-based compensation expense(a)			297				58				509				111
Management fees(b)			—				40				—				80
Loss on disposal of assets(c)			20				31				34				39
Pre-opening costs(d)			383				337				707				654
Offering related costs(e)			651				—				1,134				—
Adjusted EBITDA		$	7,593			$	4,956			$	14,894			$	9,989

 

(a)	Includes non-cash, stock-based compensation.

(b)	Includes management fees and other out-of-pocket costs incurred by us and payable to KarpReilly. This management agreement was terminated upon the completion of the IPO.

(c)	Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacements or write-offs of leasehold improvements, furniture, fixtures or equipment.

(d)

Pre-opening costs consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs and other related pre-opening costs. These are generally incurred over the three to five months prior to opening. Pre-opening costs also include occupancy costs incurred between the date of possession and opening date of our restaurants.

(e)	Costs associated with public offerings of Class A common stock.

Critical Accounting Policies

Our discussion and analysis of operating results and financial condition are based upon our condensed consolidated financial statements. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Our critical accounting policies are those that materially affect our financial statements and involve difficult, subjective or complex judgments by management. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may be materially different from the estimates. There have been no significant changes to our critical accounting estimates as discussed in our Annual Report on From 10-K for the fiscal year ended December 30, 2014.

Income Taxes and Tax Receivable Agreement

We are subject to U.S. federal income taxes, in addition to state and local taxes, with respect to our allocable share of any net taxable income of The Habit Restaurants, LLC. The provision for income taxes in the accompanying condensed consolidated statements of income for the 13 and 26 weeks ended June 30, 2015, respectively is based on an estimate of the Company’s annualized effective income tax rate. The Company’s effective tax rate includes a rate benefit attributable to the fact that the Company’s subsidiary, The Habit Restaurants, LLC, operates as a limited liability company which is not itself subject to federal income tax. Accordingly, the portion of The Habit Restaurants, LLC earnings attributable to the non-controlling interests are subject to tax when reported as a component of the non-controlling interests’ taxable income.

As a result of the recapitalization and IPO that occurred in the fiscal year ended 2014, our allocable share of the taxable income of The Habit Restaurants, LLC is now subject to U.S. federal, state and local income taxes and is taxed at the prevailing corporate tax rates. The income tax provision reflects a tax rate of 30.23% and 22.55% for the 13 and 26 weeks ended June 30, 2015, respectively. The effective tax rate varies significantly from the federal statutory rate due to the income attributable to the non-controlling interests which is not taxed at the entity level. The income tax provision would reflect an effective tax rate of 47.42% for both of the 13 and 26 week periods

 

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ended June 30, 2015, respectively, if all of the income was taxed at Habit Restaurants, Inc. and the impact of the non-controlling interests was disregarded. Prior to July 24, 2014, The Habit Restaurants, LLC had not been subject to U.S. federal income taxes as it is organized as a limited liability company, and treated as a partnership for federal and state income tax purposes, and therefore, there was no provision in the 13 and 26 weeks ended July 1, 2014.

The Company accounts for uncertain tax positions in accordance with ASC 740, Income Taxes. ASC 740 prescribes a recognition threshold and measurement process for accounting for uncertain tax positions and also provides guidance on various related matters such as derecognition, interest, penalties, and required disclosures. The Company recorded an uncertain tax liability of $167,000 relating to underpayment of prior years’ state income taxes at December 30, 2014, which if recognized would have a favorable impact on the effective income tax rate. There was no significant change in the Company’s gross unrecognized tax benefits during the 13 and 26 weeks ended June 30, 2015. The Company recognizes interest and penalties, if any, related to unrecognized tax positions in the provision for income taxes in the accompanying condensed consolidated statements of income. No interest or penalties were accrued as of December 30, 2014 or June 30, 2015.

The Company files tax returns in U.S. federal and state jurisdictions. Generally, the Company is subject to examination by U.S. federal (or state and local) income tax authorities for three to four years from the filing of a tax return.

In connection with the IPO, we entered into the TRA. Under the TRA, we generally are required to pay to the Continuing LLC Owners 85% of the amount of cash savings, if any, in U.S. federal, state or local tax that we actually realize directly or indirectly (or are deemed to realize in certain circumstances) as a result of (i) certain tax attributes created as a result of the IPO and any sales or exchanges (as determined for U.S. federal income tax purposes) to or with us of their interests in The Habit Restaurants, LLC for shares of our Class A common stock or cash, including any basis adjustment relating to the assets of The Habit Restaurants, LLC and (ii) tax benefits attributable to payments made under the TRA (including imputed interest). The Habit Restaurants, Inc. generally will retain 15% of the applicable tax savings. In addition, the TRA provides for interest, at a rate equal to one year LIBOR, accrued from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. To the extent that we are unable to timely make payments under the TRA for any reason, such payments will be deferred and will accrue interest at a rate equal to one year LIBOR plus 200 basis points until paid (although a rate equal to one year LIBOR will apply if the inability to make payments under the TRA is due to limitations imposed on us or any of our subsidiaries by a debt agreement in effect on the date of the IPO prospectus). Our ability to make payments under the TRA and to pay our own tax liabilities to taxing authorities generally will depend on our receipt of cash distributions from The Habit Restaurants, LLC. See the section entitled “Item 1A, Risk Factors—Risks Related to Our Business and Industry.”

Pursuant to the LLC Agreement, the Continuing LLC Owners will have the right to exchange their LLC Units, together with a corresponding number of shares of Class B common stock (which will be cancelled in connection with any such exchange) for, generally, at the option of The Habit Restaurants, Inc. (such determination to be made by the disinterested members of our board of directors), (i) cash consideration (generally calculated based on the volume-weighted average price of the Class A common stock of The Habit Restaurants, Inc., as displayed under the heading Bloomberg VWAP on the Bloomberg page designated for the Class A common stock of The Habit Restaurants, Inc. for the 15 trading days immediately prior to the delivery date of a notice of exchange) or (ii) shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. These exchanges are expected to result in increases in the tax basis of the assets of The Habit Restaurants, LLC that otherwise would not have been available. Increases in tax basis resulting from such exchanges may reduce the amount of tax that The Habit Restaurants, Inc. would otherwise be required to pay in the future. This tax basis may also decrease gains (or increase losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets.

If the IRS or a state or local taxing authority challenges the tax basis adjustments that give rise to payments under the TRA and the tax basis adjustments are subsequently disallowed, the recipients of payments under the agreement will not reimburse us for any payments we previously made to them. Any such disallowance would be taken into account in determining future payments under the TRA and would, therefore, reduce the amount of any such future payments. Nevertheless, if the claimed tax benefits from the tax basis adjustments are disallowed, our payments under the TRA could exceed our actual tax savings, and we may not be able to recoup payments under the TRA that were calculated on the assumption that the disallowed tax savings were available.

The TRA provides that (i) in the event that we materially breach the TRA, (ii) if, at any time, we elect an early termination of the TRA, or (iii) upon certain mergers, asset sales, other forms of business combinations or other changes of control, our (or our successor’s) obligations under the TRA (with respect to all LLC Units, whether or not LLC Units have been exchanged or acquired before or after such transaction) would accelerate and become payable in a lump sum amount equal to the present value of the anticipated future tax benefits calculated based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions arising from the tax deductions, tax basis and other tax attributes subject to the TRA.

As a result of the foregoing, (i) we could be required to make payments under the TRA that are greater than or less than the specified percentage of the actual tax savings we realize in respect of the tax attributes subject to the agreements and (ii) we may be required to make an immediate lump sum payment equal to the present value of the anticipated future tax savings, which payment may be made

 

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years in advance of the actual realization of such future benefits, if any of such benefits are ever realized. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to finance our obligations under the TRA in a manner that does not adversely affect our working capital and growth requirements.

Payments under the TRA are intended to be treated as additional consideration for the applicable interests in The Habit Restaurants, LLC treated as sold or exchanged (as determined for U.S. federal income tax purposes) to or with us, except with respect to certain actual or imputed interest amounts payable under the TRA.

Results of Operations

Thirteen Weeks Ended June 30, 2015 Compared to Thirteen Weeks Ended July 1, 2014

The following table presents selected consolidated comparative results of operations for the 13 weeks ended June 30, 2015 compared to the 13 weeks ended July 1, 2014. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the table below may not sum to exactly 100% due to rounding.

 

Consolidated Statement of Operations Data:		13 Weeks Ended																Increase / (Decrease)
(amounts in thousands, operating results are presented as a % of restaurant revenue)		June 30, 2015								July 1, 2014								$				%
Revenue
Restaurant revenue		$	56,716				100.0	%		$	41,503				100.0	%		$	15,213				36.7	%
Franchise/license revenue			14				0.0	%			11				0.0	%			3				27.3	%
Total revenue			56,730				100.0	%			41,514				100.0	%			15,216				36.7	%
Operating expenses
Restaurant operating costs (excluding depreciation and amortization)
Food and paper costs			18,160				32.0	%			14,155				34.1	%			4,005				28.3	%
Labor and related expenses			16,950				29.9	%			12,197				29.4	%			4,753				39.0	%
Occupancy and other operating expenses			8,608				15.2	%			6,379				15.4	%			2,229				34.9	%
General and administrative expenses			5,716				10.1	%			3,925				9.5	%			1,791				45.6	%
Offering related expenses			651				1.1	%			—				0.0	%			651				*
Depreciation and amortization expense			2,660				4.7	%			1,942				4.7	%			718				37.0	%
Pre-opening costs			383				0.7	%			337				0.8	%			46				13.6	%
Loss on disposal of assets			20				0.0	%			31				0.1	%			(11	)			-35.5	%
Total operating expenses			53,148				93.7	%			38,966				93.9	%			14,182				36.4	%
Income from operations			3,582				6.3	%			2,548				6.1	%			1,034				40.6	%
Other expenses
Interest expense, net			115				0.2	%			245				0.6	%			(130	)			-53.1	%
Income before income taxes			3,467				6.1	%			2,303				5.5	%			1,164				50.5	%
Provision for income taxes			1,048				1.8	%			—				0.0	%			1,048				*
Net income		$	2,419				4.3	%		$	2,303				5.5	%		$	116				5.0	%

 

*	Not calculable

Restaurant revenue. Restaurant revenue increased $15.2 million, or 36.7%, for the 13 weeks ended June 30, 2015 as compared to the 13 weeks ended July 1, 2014, primarily due to a $3.3 million increase in sales from new restaurants which were opened in the current year and an $8.6 million increase in sales from restaurants open for all of the 2015 period that were not open for all of the 2014 period and did not fall into the comparable restaurant base. Comparable restaurant sales increased $3.1 million, or 8.9%, in the 13 weeks ended June 30, 2015 as compared to the comparable 2014 period. Comparable restaurant sales growth was primarily due to an increase in traffic of 3.8% and an increase in average transaction amount of 5.1% in the 13 weeks ended June 30, 2015 as compared to the comparable 2014 period.

Franchise/license revenue. Franchise/license revenue was $14,000 for the 13 weeks ended June 30, 2015 compared to $11,000 for the comparable 2014 period. We currently have one licensed location from which we earn revenue that was opened in January 2014.

 

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Food and paper costs. Food and paper costs increased $4.0 million, or 28.3%, for 13 weeks ended June 30, 2015 as compared to the comparable 2014 period, primarily due to the increase in restaurant sales. As a percentage of revenue, food and paper costs decreased to 32.0% in the 13 weeks ended June 30, 2015 from 34.1% in the prior year quarter. This decrease was primarily driven by decreases in chicken, other proteins, produce and dairy costs partially offset by higher beef costs in the current period.

Labor and related expenses. Labor and related expenses increased $4.8 million, or 39.0%, for the 13 weeks ended June 30, 2015 as compared to the comparable 2014 period, primarily due to the increased labor costs needed to support new restaurants and higher restaurant sales. As a percentage of revenue, labor and related expenses increased to 29.9% in the second quarter of 2015 compared to 29.4% in the comparable quarter of 2014. Labor costs were higher primarily due to wage rate increases for hourly employees.

Occupancy and other operating expenses. Occupancy and other operating expenses increased $2.2 million, or 34.9%, for the 13 weeks ended June 30, 2015 as compared to the comparable period in 2014, primarily due to new restaurants. As a percentage of revenue, occupancy and other operating expenses decreased to 15.2% in the second quarter of 2015 from 15.4% in second quarter of 2014 primarily due to leverage from sales increases.

General and administrative expenses. General and administrative expenses increased $1.8 million, or 45.6%, for the second quarter of 2015 as compared to the prior year quarter, partially due to costs associated with supporting an increased number of restaurants, including the increasing number of administrative employees and field and corporate supervision. The increase was also attributable to legal, accounting, insurance and other costs incurred because of regulatory obligations in connection with becoming a public company of $0.7 million. As a percentage of revenue, general and administrative expenses increased to 10.1% in the second quarter of 2015 from 9.5% in the prior year quarter, primarily due to the items mentioned above.

Offering related expenses. Offering related expenses were $0.7 million higher than the prior year. This is primarily due to the follow-on offering of the Company’s Class A common stock that was completed on April 15, 2015. There were no offering related expenses in the corresponding 2014 period.

Depreciation and amortization expenses. Depreciation and amortization increased $0.7 million, or 37.0%, for the second quarter of 2015 as compared to the prior year quarter, primarily due to the increased number of restaurants. As a percentage of revenue, depreciation and amortization remained flat at 4.7% in the second quarter of 2015 compared to the comparable quarter of 2014.

Pre-opening costs. Pre-opening costs were $0.4 million for the second quarter of 2015 as compared to $0.3 million in the prior year quarter. The company opened four new company-owned restaurants in the second quarter of 2015 compared to six new company-owned restaurants that opened in the second quarter of 2014. The current period pre-opening costs also includes rent expense for six restaurants set to open compared to three restaurants set to open in the prior year period. As a percentage of revenue, pre-opening costs decreased to 0.7% in the second quarter of 2015, from 0.8% in the prior year quarter.

Interest expense, net. Interest expense, net decreased $0.1 million, or 53.1%, for the second quarter of 2015 as compared to the second quarter of 2014, primarily due to decreased borrowings and the associated interest expense. The Company paid down its credit facility in November of 2014 upon completion of the IPO. As a percentage of revenue, interest expense, net decreased to 0.2% in the second quarter of 2015 compared to 0.6% in the 2014 quarter.

Provision for income taxes. Income tax expense was $1.0 million for the second quarter of 2015. There was no provision for income taxes for second quarter of 2014 because we were treated by the holders of our LLC Units as a partnership for federal and applicable state income tax purposes and, as such, were not subject to income tax.

Twenty Six Weeks Ended June 30, 2015 Compared to Twenty Six Weeks Ended July 1, 2014

The following table presents selected consolidated comparative results of operations for the 26 weeks ended June 30, 2015 compared to the 26 weeks ended July 1, 2014. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the table below may not sum to exactly 100% due to rounding.

 

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Consolidated Statement of Operations Data:		26 Weeks Ended																Increase / (Decrease)
(amounts in thousands, operating results are presented as a % of restaurant revenue)		June 30, 2015								July 1, 2014								$				%
Revenue
Restaurant revenue		$	111,282				100.0	%		$	79,228				99.9	%		$	32,054				40.5	%
Franchise/license revenue			31				0.0	%			43				0.1	%			(12	)			-27.9	%
Total revenue			111,313				100.0	%			79,271				100.0	%			32,042				40.4	%
Operating expenses
Restaurant operating costs (excluding depreciation and amortization)
Food and paper costs			36,029				32.4	%			26,174				33.0	%			9,855				37.7	%
Labor and related expenses			33,374				30.0	%			23,553				29.7	%			9,821				41.7	%
Occupancy and other operating expenses			16,604				14.9	%			12,326				15.6	%			4,278				34.7	%
General and administrative expenses			10,921				9.8	%			7,420				9.4	%			3,501				47.2	%
Offering related expenses			1,134				1.0	%			—				0.0	%			1,134				*
Depreciation and amortization expense			5,327				4.8	%			3,831				4.8	%			1,496				39.0	%
Pre-opening costs			707				0.6	%			654				0.8	%			53				8.1	%
Loss on disposal of assets			34				0.0	%			39				0.0	%			(5	)			-12.8	%
Total operating expenses			104,130				93.6	%			73,997				93.4	%			30,133				40.7	%
Income from operations			7,183				6.5	%			5,274				6.7	%			1,909				36.2	%
Other expenses
Interest expense, net			232				0.2	%			477				0.6	%			(245	)			-51.4	%
Income before income taxes			6,951				6.2	%			4,797				6.1	%			2,154				44.9	%
Provision for income taxes			1,567				1.4	%			—				0.0	%			1,567				*
Net income		$	5,384				4.8	%		$	4,797				6.1	%		$	587				12.2	%

 

*	Not calculable

Restaurant revenue. Restaurant revenue increased $32.1 million, or 40.5%, for the 26 weeks ended June 30, 2015 as compared to the 26 weeks ended July 1, 2014, primarily due to a $5.2 million increase in sales from new restaurants which were opened in the current period and an $19.7 million increase in sales from restaurants open for all of the 2015 period that were not open for all of the 2014 period and did not fall into the comparable restaurant base. Comparable restaurant sales increased $6.9 million, or 10.6%, in the 26 weeks ended June 30, 2015 as compared to the comparable 2014 period. Comparable restaurant sales growth was primarily due to an increase in traffic of 5.2% and an increase in average transaction amount of 5.4% in the 26 weeks ended June 30, 2015 as compared to the 26 weeks ended July 1, 2014.

Franchise/license revenue. Franchise/license revenue was $31,000 for the 26 weeks ended June 30, 2015 compared to $43,000 for the comparable 2014 period. The amount in the prior period was higher as we opened our first licensed location from which we earn revenue in January 2014 and recognized $15,000 in franchise fee revenue during that period.

Food and paper costs. Food and paper costs increased $9.9 million, or 37.7%, for the 26 weeks ended June 30, 2015 as compared to the comparable 2014 period, primarily due to the increase in restaurant sales. As a percentage of revenue, food and paper costs decreased to 32.4% in the 26 weeks ended June 30, 2015 from 33.0% in prior year period. This decrease was primarily driven by decreases in other proteins and dairy costs partially offset by higher beef costs in the current period.

Labor and related expenses. Labor and related expenses increased $9.8 million, or 41.7%, for the 26 weeks ended June 30, 2015 as compared to the comparable 2014 period, primarily due to the increased labor costs needed to support new restaurants and higher restaurant sales. As a percentage of revenue, labor and related expenses increased to 30.0% in the 26 weeks ended June 30, 2015 compared to 29.7% in the comparable period of 2014. Labor costs were higher primarily due to wage rate increases for hourly employees.

Occupancy and other operating expenses. Occupancy and other operating expenses increased $4.3 million, or 34.7%, for the 26 weeks ended June 30, 2015 as compared to the comparable period in 2014, primarily due to new restaurants. As a percentage of revenue, occupancy and other operating expenses decreased to 14.9% in the 26 weeks ended June 30, 2015 from 15.6% in the 26 week period ended July 1, 2014 primarily due to leverage from sales increases.

 

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General and administrative expenses. General and administrative expenses increased $3.5 million, or 47.2%, for the 26 weeks ended June 30, 2015 as compared to the prior year period, primarily due to costs associated with supporting an increased number of restaurants, including the increasing number of administrative employees and field and corporate supervision. The increase was also attributable to legal, accounting, insurance and other costs incurred because of regulatory obligations in connection with becoming a public company of $1.4 million. As a percentage of revenue, general and administrative expenses increased to 9.8% in the 26 weeks ended June 30, 2015 from 9.4% in the prior year, primarily due to the items mentioned above.

Offering related expenses. Offering related expenses were $1.1 million higher than the prior year. This is primarily due to the follow-on offering of the Company’s Class A common stock that was completed on April 15, 2015. There were no offering related expenses in the corresponding 2014 period.

Depreciation and amortization expenses. Depreciation and amortization increased $1.5 million, or 39.0%, for the 26 weeks ended June 30, 2015 as compared to the prior year period, primarily due to the increased number of restaurants. As a percentage of revenue, depreciation and amortization remained flat at 4.8% for the 26 weeks ended June 30, 2015 compared to the prior year period.

Pre-opening costs. Pre-opening costs remained flat at $0.7 million for the 26 weeks ended June 30, 2015 as compared to the prior year period. The company opened eight new company-owned restaurants in the 26 weeks ended June 30, 2015 compared to nine new company-owned restaurants that opened in the 26 weeks ended July 1, 2014. As a percentage of revenue, pre-opening costs decreased to 0.6% in the 26 weeks ended June 30, 2015, from 0.8% in the prior year period.

Interest expense, net. Interest expense, net decreased $0.2 million, or 51.4%, for the 26 weeks ended June 30, 2015 as compared to the 26 weeks ended July 1, 2014, primarily due to decreased borrowings and the associated interest expense. The Company paid down its credit facility in November of 2014 upon completion of the IPO. As a percentage of revenue, interest expense, net decreased to 0.2% in the 26 weeks ended June 30, 2015 compared to 0.6% in the 2014 period.

Provision for income taxes. Income tax expense was $1.6 million for the 26 weeks ended June 30, 2015. There was no provision for income taxes for the 2014 period because we were treated by the holders of our LLC Units as a partnership for federal and applicable state income tax purposes and, as such, were not subject to income tax.

Liquidity and Capital Resources

Our primary uses of cash are for operational expenditures and capital investments, including new stores, store remodels, store relocations, store fixtures and ongoing infrastructure improvements. Historically, our main source of liquidity has been cash flows from operations.

The significant components of our working capital are liquid assets such as cash, cash equivalents, current marketable securities and receivables, reduced by accounts payable and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale, while we typically have longer payment terms with our vendors.

Potential Impacts of Market Conditions on Capital Resources

We have continued to experience positive trends in consumer traffic and increases in comparable restaurant sales, operating cash flows and restaurant contribution margin. However, the restaurant industry continues to be challenged and uncertainty exists as to the sustainability of these favorable trends.

We believe that expected cash flow from operations, proceeds from the IPO and planned borrowing capacity are adequate to fund operating lease obligations, capital expenditures and working capital obligations for at least the next 12 months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow and our ability to manage costs and working capital successfully.

Summary of Cash Flows

Our primary sources of liquidity and cash flows are derived from our operating cash flows and our credit facility. We use these to fund capital expenditures for new company-owned restaurant openings, reinvest in our existing restaurants, invest in infrastructure and information technology and maintain working capital. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have 20 to 30 days to pay our vendors.

 

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The material changes in working capital from June 30, 2015 to December 30, 2014 were comprised of a $4.0 million increase in current assets and a $1.1 million increase in current liabilities. The increase in current assets was primarily due to a $3.0 million increase in cash primarily attributed to the cash flow from the restaurants and timing of payables and accrued expenses, combined with an increase in prepaid expenses of $1.3 million due to the timing of rent payments. The increase in current liabilities was primarily due to higher employee-related accruals of $0.4 million which were primarily due to the timing of our pay dates and a $0.8 million increase in accounts payable and accrued expenses which is primarily due to the timing of payments.

 

		26 Weeks Ended
(amounts in thousands)		June 30, 2015				July 1, 2014
Consolidated Statement of Cash Flows Data:
Net cash provided by operating activities		$	13,885			$	9,902
Net cash used in investing activities			(9,270	)			(8,579	)
Net cash used in financing activities		$	(1,649	)		$	(646	)

Cash Flows Provided by Operating Activities

Net cash provided by operating activities increased by $4.0 million to $13.9 million for the 26 weeks ended June 30, 2015 from $9.9 million for the 26 weeks ended July 1, 2014. The increase was primarily driven by an increase in restaurant contribution partially offset by increased general and administrative expenses. The net effect of these changes created an increase in cash provided by operations of $4.0 million.

In addition, cash increased for the 26 weeks ended June 30, 2015 compared to the period ended July 1, 2014 due to a $0.4 million change in accounts receivable. This increase was partially offset by a $0.9 million change in prepaid expenses which is primarily driven by the timing of rent payments.

Cash Flows Used in Investing Activities

Net cash used in investing activities increased by $0.7 million to $9.3 million for the 26 weeks ended June 30, 2015 from $8.6 million for the 26 weeks ended July 1, 2014. The increase was primarily due to construction costs for eight new company-owned restaurants opened during the 26 weeks ended June 30, 2015, as well as capital expenditures for future restaurant openings, maintaining our existing restaurants and other projects.

Cash Flows Used in Financing Activities

Net cash used in financing activities was $1.6 million for the 26 weeks ended June 30, 2015 compared to $0.6 million for the prior year period ended July 1, 2014. This change was primarily due to tax distributions to LLC members of $1.6 million that were made in the current period compared to $0.5 million in the prior year period.

Credit Facility

We entered into a new credit facility on July 23, 2014 with California Bank & Trust, which expires on July 23, 2017. The credit facility provides for up to $35 million in borrowing capacity to fund the development of new restaurants with borrowings limited to the lesser of 50% or $500,000 of the cost of each new restaurant. Borrowings under the facility are collateralized by substantially all assets of the Company including cash accounts, accounts receivable, general intangibles, inventory, equipment, furniture and fixtures. We rolled over our existing term loans with California Bank & Trust into the credit facility, and therefore this credit facility is our only outstanding loan agreement. The amount previously outstanding under the term loans is considered a drawn-upon portion of the credit facility.

The credit facility contains customary representations, warranties, negative and affirmative covenants, including a funded debt to EBITDA ratio of 2.00 to 1.00, a fixed charge coverage ratio of 1.25 to 1.00 and a requirement that EBITDA must be greater than zero for 75% or more of all restaurants open at least six months. We are required to make monthly payments of accrued unpaid interest due as of each payment date, but are not required to pay the outstanding principal, if any, until the maturity date. Borrowings under the credit facility bear interest, at our option, at either (i) a rate determined by reference to the applicable LIBOR rate plus an applicable margin or (ii) a prime rate as published by the Wall Street Journal in its “Money Rates” or similar chart. In addition we pay a fee equal to 0.25% per annum of the unused portion of the facility. In addition we are required to pay a fee of $125,000 on the maturity date of the facility or when this facility is paid in full and retired.

As of June 30, 2015, we had no outstanding debt under the credit facility.

 

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Contractual Obligations

There have been no material changes to our contractual obligations from what was previously reported in our Annual Report.

Off-Balance Sheet Arrangements

As of June 30, 2015, we did not have any material off-balance sheet arrangements, except for restaurant leases.

JOBS Act

We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Subject to certain conditions set forth in the JOBS Act, we are also eligible for and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We may take advantage of these exemptions until we are no longer an emerging growth company. We will continue to be an emerging growth company until the earliest to occur of (i) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, (ii) the last day of the fiscal year in which we had total annual gross revenue of $1 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering.

 

ITEM 3.

Quantitative and Qualitative Disclosure about Market Risk

Interest Rate Risk

We are exposed to market risk from changes in interest rates on debt and changes in commodity prices. As of June 30, 2015, we had no outstanding borrowings.

We manage our interest rate risk through normal operating and financing activities and, when determined appropriate, through the use of derivative financial instruments.

Inflation

The primary inflationary factors affecting our operations are food, labor costs, energy costs and materials used in the construction of new restaurants. Increases in the minimum wage directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflationary increases in the costs of labor and material. Over the past five years, inflation has not significantly affected our operating results.

Commodity Price Risk

We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements we use contain risk management techniques designed to minimize price volatility. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase restaurant operating costs as a percentage of restaurant sales.

 

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ITEM 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of the our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2015, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II-OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

We are currently involved in various claims and legal actions that arise in the ordinary course of business, most of which are covered by insurance. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our business, financial condition, results of operations, liquidity or capital resources nor do we believe that there is a reasonable possibility that we will incur material loss as a result of such actions. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims could have a material adverse effect on our business, financial condition and results of operations.

 

ITEM 1A.

Risk Factors.

A description of the risk factors associated with our business is contained in the “Risk Factors” section of our Annual Report on Form 10-K for our fiscal year ended December 30, 2014. There have been no material changes to our Risk Factors as previously reported.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sales of Unregistered Securities

During the past two years, The Habit Restaurants, LLC, issued unregistered securities to its directors, officers, employees and consultants as set forth below.

Class C Units

Prior to the Recapitalization, in fiscal year 2014, we issued 14,574 Class C units of The Habit Restaurants, LLC to our directors, officers, employees and consultants. In each case, once vested, the Class C units were convertible to Class A units of The Habit Restaurants, LLC at a conversion price ranging from $405 to $544 per Class A unit. All such Class C units and Class A units have been converted to common units in connection with the Recapitalization. Those units that have not yet vested remain subject to vesting.

These Class C units were issued in transactions exempt from registration under the Securities Act pursuant to Rule 701 of the Securities Act. The Habit Restaurants, LLC only received proceeds upon the conversion of the Class C units to Class A units.

 

ITEM 3.

Defaults Upon Senior Securities.

None.

 

ITEM 4.

Mine Safety Disclosures.

None.

 

ITEM 5.

Other Information.

None.

 

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ITEM 6.

Exhibits

 

Description of Exhibit Incorporated Herein by Reference

Exhibit Number

Exhibit Description

Form

File No.

Filing Date

Exhibit Number

Filed Herewith

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

32.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

32.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

101.INS*

XBRL Instance Document

X

101.SCH*

XBRL Taxonomy Extension Schema Document

X

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

X

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

X

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

X

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

X

 

*

Pursuant to Rule 406T of Regulation S-T (17 C.F.R. § 232.406T), this interactive data file is deemed furnished, not filed. It is deemed not to be part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, is deemed not filed for purposes of section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.

 

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Signatures

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				The Habit Restaurants, Inc.
				(Registrant)
August 6, 2015				/s/ Ira Fils
Date				Ira Fils
				Chief Financial Officer and Secretary
				(On behalf of the Registrant and as Principal Financial Officer)

 

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