habt-10q_20180925.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 25, 2018

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No   

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of October 29, 2018, there were 20,651,872 shares of the Registrant’s Class A common stock, par value $0.01 per share, outstanding and 5,397,396 shares of the Registrant’s Class B common stock, par value $0.01 per share, outstanding.

 

 

 


 

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 Operations (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

 

18

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

31

ITEM 4.

 

Controls and Procedures

 

31

 

 

PART II – OTHER INFORMATION

 

33

ITEM 1.

 

Legal Proceedings

 

33

ITEM 1A.

 

Risk Factors

 

33

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

ITEM 3.

 

Defaults Upon Senior Securities

 

33

ITEM 4.

 

Mine Safety Disclosures

 

33

ITEM 5.

 

Other Information

 

33

ITEM 6.

 

Exhibits

 

34

 

 

Signatures

 

35

 

2


 

PART I-FINANCIAL INFORMATION

ITEM 1. Financial Statements

THE HABIT RESTAURANTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

September 25,

 

 

December 26,

 

 

 

2018

 

 

2017

 

(in thousands, except share data)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,524

 

 

$

28,277

 

Accounts receivable

 

 

8,083

 

 

 

8,278

 

Inventory

 

 

1,801

 

 

 

1,733

 

Prepaid expenses and other current assets

 

 

2,362

 

 

 

1,845

 

Total current assets

 

 

42,770

 

 

 

40,133

 

Property and equipment, net

 

 

156,609

 

 

 

139,956

 

Tradenames

 

 

12,500

 

 

 

12,500

 

Goodwill

 

 

9,967

 

 

 

9,967

 

Deposits and other assets, net

 

 

3,692

 

 

 

3,395

 

Deferred tax assets

 

 

88,286

 

 

 

86,173

 

Total long-term assets

 

 

271,054

 

 

 

251,991

 

Total assets

 

$

313,824

 

 

$

292,124

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,176

 

 

$

12,976

 

Employee-related accruals

 

 

15,277

 

 

 

7,464

 

Accrued expenses

 

 

6,951

 

 

 

6,908

 

Income tax payable

 

 

139

 

 

 

153

 

Amounts payable to related parties under Tax Receivable Agreement,

   current portion

 

 

1,242

 

 

 

1,908

 

Sales taxes payable

 

 

3,114

 

 

 

2,750

 

Deferred rent, current portion

 

 

1,793

 

 

 

1,283

 

Deferred franchise income, current portion

 

 

733

 

 

 

149

 

Total current liabilities

 

 

43,425

 

 

 

33,591

 

Deferred rent, net of current portion

 

 

20,454

 

 

 

19,043

 

Deemed landlord financing

 

 

17,988

 

 

 

13,700

 

Deferred franchise income, net of current portion

 

 

740

 

 

 

1,788

 

Amounts payable to related parties under Tax Receivable Agreement,

   net of current portion

 

 

82,744

 

 

 

79,853

 

Total liabilities

 

 

165,351

 

 

 

147,975

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Class A common stock, par value $0.01 per share; 70,000,000 shares authorized and 20,644,982 shares issued and outstanding at September 25, 2018 and 20,378,452 shares issued and outstanding at December 26, 2017.

 

 

206

 

 

 

204

 

Class B common stock, par value $0.01 per share; 70,000,000 shares authorized and 5,403,729 shares issued and outstanding at September 25, 2018 and 5,646,572 shares issued and outstanding at December 26, 2017.

 

 

54

 

 

 

56

 

Additional paid-in capital

 

 

116,481

 

 

 

113,475

 

Retained earnings

 

 

6,235

 

 

 

4,144

 

The Habit Restaurants, Inc. stockholders’ equity

 

 

122,976

 

 

 

117,879

 

Non-controlling interests

 

 

25,497

 

 

 

26,270

 

Total stockholders’ equity

 

 

148,473

 

 

 

144,149

 

Total liabilities and stockholders’ equity

 

$

313,824

 

 

$

292,124

 

See notes to condensed consolidated financial statements (unaudited).

3


 

THE HABIT RESTAURANTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

September 25,

 

 

September 26,

 

 

September 25,

 

 

September 26,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

(amounts in thousands except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

104,639

 

 

$

84,610

 

 

$

299,439

 

 

$

246,537

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant operating costs (excluding depreciation and

   amortization)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and paper cost

 

 

30,992

 

 

 

26,861

 

 

 

89,524

 

 

 

75,955

 

Labor and related expenses

 

 

35,133

 

 

 

28,532

 

 

 

101,122

 

 

 

81,566

 

Occupancy and other operating expenses

 

 

19,436

 

 

 

14,781

 

 

 

53,174

 

 

 

41,469

 

General and administrative expenses

 

 

9,843

 

 

 

8,281

 

 

 

28,590

 

 

 

24,369

 

Exchange related expenses

 

 

 

 

 

155

 

 

 

130

 

 

 

390

 

Depreciation and amortization expense

 

 

6,348

 

 

 

4,777

 

 

 

17,952

 

 

 

13,492

 

Pre-opening costs

 

 

658

 

 

 

813

 

 

 

2,384

 

 

 

1,943

 

Asset impairment

 

 

3,082

 

 

 

 

 

 

3,082

 

 

 

 

Loss on disposal of assets

 

 

46

 

 

 

19

 

 

 

59

 

 

 

43

 

Total operating expenses

 

 

105,538

 

 

 

84,219

 

 

 

296,017

 

 

 

239,227

 

Income (loss) from operations

 

 

(899

)

 

 

391

 

 

 

3,422

 

 

 

7,310

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Receivable Agreement liability adjustment

 

 

 

 

 

688

 

 

 

1,473

 

 

 

688

 

Interest expense, net

 

 

272

 

 

 

185

 

 

 

749

 

 

 

381

 

Income (loss) before income taxes

 

 

(1,171

)

 

 

(482

)

 

 

1,200

 

 

 

6,241

 

Provision (benefit) for income taxes

 

 

(307

)

 

 

(906

)

 

 

(1,454

)

 

 

1,397

 

Net income (loss)

 

$

(864

)

 

$

424

 

 

$

2,654

 

 

$

4,844

 

Less: net income (loss) attributable to non-controlling interests

 

 

244

 

 

 

(56

)

 

 

(563

)

 

 

(1,561

)

Net income (loss) attributable to The Habit Restaurants, Inc.

 

$

(620

)

 

$

368

 

 

$

2,091

 

 

$

3,283

 

Net income (loss) attributable to The Habit Restaurants, Inc. per share

   Class A common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03

)

 

$

0.02

 

 

$

0.10

 

 

$

0.16

 

Diluted

 

$

(0.03

)

 

$

0.02

 

 

$

0.10

 

 

$

0.16

 

Weighted average shares of Class A common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,552,532

 

 

 

20,329,919

 

 

 

20,498,945

 

 

 

20,259,507

 

Diluted

 

 

20,552,532

 

 

 

20,386,655

 

 

 

20,577,722

 

 

 

20,311,264

 

See notes to condensed consolidated financial statements (unaudited).

4


 

THE HABIT RESTAURANTS, INC.

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

 

 

 

Common Stock A

 

 

Common Stock B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(amounts in thousands except share data)

 

Shares

 

 

Amounts

 

 

Shares

 

 

Amounts

 

 

Additional Paid-

in Capital

 

 

Retained Earnings

 

 

Non-controlling

Interests

 

 

Total

 

Stockholders’ equity at

   December 26, 2017

 

 

20,378,452

 

 

$

204

 

 

 

5,646,572

 

 

$

56

 

 

$

113,475

 

 

$

4,144

 

 

$

26,270

 

 

$

144,149

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,091

 

 

 

563

 

 

 

2,654

 

Deferred tax assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(92

)

 

 

 

 

 

 

 

 

(92

)

Tax distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(130

)

 

 

(130

)

Other distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(132

)

 

 

(132

)

Exchanges

 

 

211,765

 

 

 

2

 

 

 

(211,765

)

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock units vested

 

 

54,765

 

 

 

1

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Non-controlling interests

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,484

 

 

 

 

 

 

(1,484

)

 

 

 

Forfeiture of Class B

   common stock

 

 

 

 

 

 

 

 

(31,078

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based

   compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,615

 

 

 

 

 

 

410

 

 

 

2,025

 

Stockholders’ equity at

   September 25, 2018

 

 

20,644,982

 

 

$

206

 

 

 

5,403,729

 

 

$

54

 

 

$

116,481

 

 

$

6,235

 

 

$

25,497

 

 

$

148,473

 

See notes to condensed consolidated financial statements (unaudited).

5


 

THE HABIT RESTAURANTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

39 Weeks Ended

 

 

 

September 25,

 

 

September 26,

 

 

 

2018

 

 

2017

 

(amounts in thousands)

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,654

 

 

$

4,844

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

17,952

 

 

 

13,492

 

Amortization of financing fees

 

 

99

 

 

 

20

 

Stock-based compensation

 

 

2,025

 

 

 

1,846

 

Tax Receivable Agreement liability adjustment

 

 

1,473

 

 

 

688

 

Asset impairment

 

 

3,082

 

 

 

 

Loss on disposal of assets

 

 

59

 

 

 

43

 

Deferred income taxes

 

 

(1,454

)

 

 

1,397

 

Deferred rent

 

 

(273

)

 

 

362

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,388

 

 

 

1,305

 

Inventory

 

 

(69

)

 

 

(38

)

Prepaid expenses

 

 

(516

)

 

 

58

 

Deposits and other assets

 

 

(396

)

 

 

(199

)

Accounts payable

 

 

1,423

 

 

 

1,444

 

Employee-related accruals

 

 

7,813

 

 

 

3,230

 

Accrued expenses

 

 

300

 

 

 

1,160

 

Income taxes payable

 

 

(15

)

 

 

(6

)

Sales taxes payable

 

 

365

 

 

 

323

 

Net cash provided by operating activities

 

 

36,910

 

 

 

29,969

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(34,243

)

 

 

(30,648

)

Proceeds on sale of assets

 

 

 

 

 

12

 

Net cash used in investing activities

 

 

(34,243

)

 

 

(30,636

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Tax distributions to LLC members

 

 

(130

)

 

 

(921

)

Other distributions to LLC members

 

 

(132

)

 

 

(190

)

Payments on deemed landlord financing

 

 

(158

)

 

 

(63

)

Financing fees on long-term debt

 

 

 

 

 

(262

)

Net cash used in financing activities

 

 

(420

)

 

 

(1,436

)

Net change in cash and cash equivalents

 

$

2,247

 

 

$

(2,103

)

Cash and cash equivalents, beginning of period

 

 

28,277

 

 

 

44,192

 

Cash and cash equivalents, end of period

 

$

30,524

 

 

$

42,089

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

735

 

 

$

637

 

Cash paid for income taxes

 

$

15

 

 

$

6

 

NON-CASH FINANCING

 

 

 

 

 

 

 

 

Deemed landlord financing

 

$

4,446

 

 

$

5,946

 

Unpaid purchase of property and equipment

 

$

3,107

 

 

$

5,104

 

See notes to condensed consolidated financial statements (unaudited).

6


 

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 subsidiaries (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 Class A 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 Habit Restaurants, Inc. 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. In February 2013, HBG Franchise, LLC (“Franchise”), a wholly-owned subsidiary of The Habit Restaurants, LLC and a Delaware limited liability company, was formed to begin franchising the Company’s restaurant concept.

During the 39-week period ended September 25, 2018, 211,765 common units in The Habit Restaurants, LLC (“LLC Units”) were exchanged by the existing owners of The Habit Restaurants, LLC (the “Continuing LLC Owners”) for shares of Class A common stock, and a corresponding number of shares of Class B common stock were cancelled in connection with such exchanges. In addition, during the 39-week period ended September 25, 2018, 54,765 restricted stock units vested, 31,078 LLC Units were forfeited, and a corresponding number of shares of Class B common stock were then cancelled in connection with the forfeitures. As a result of these exchanges, vesting of restricted stock units and forfeitures, as of September 25, 2018, The Habit Restaurants, Inc. directly or indirectly held 20,644,982 LLC Units, representing a 79.3% economic interest in The Habit Restaurants, LLC, and continues to exercise exclusive control over the Habit Restaurants, LLC, as its sole managing member.

In connection with the Company’s recapitalization and IPO, The Habit Restaurants, LLC limited liability company agreement (the “LLC 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 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 the Company to satisfy certain of the Company’s obligations). Notwithstanding the foregoing, The Habit Restaurants, LLC bears the cost of or reimburses The Habit Restaurants, Inc. for certain expenses incurred by The Habit Restaurants, Inc. The Company also entered into a tax receivable agreement (“TRA”).

7


 

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 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. incurs 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. Under the terms of the Company’s LLC Agreement, no member shall be obligated personally for any debt, obligation, or liability of the Company.

The Company is headquartered in Irvine, California, and, as of September 25, 2018, managed and operated 219 fast casual restaurants as “The Habit Burger Grill” in California, Arizona, Utah, New Jersey, Florida, Idaho, Virginia, Maryland and Pennsylvania. The restaurant’s menu includes charbroiled hamburgers, specialty sandwiches, fresh salads, and shakes and malts.

Additionally, with the formation of Franchise, the Company began franchising its restaurant concept. Franchise’s future operations are dependent upon the success of the Company’s restaurant concept. The Company entered into a new license agreement and two new franchise agreements during the quarter and as of September 25, 2018 had five licensing and seven franchise agreements. The Company had four licensed locations and 19 franchised locations from which it generates revenues as of September 25, 2018, which operate in California, Arizona, Nevada, Washington, the United Arab Emirates and China.

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 26, 2017, included in the Company’s 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 2017, which ended on December 26, 2017, was a 52-week fiscal year. Fiscal year 2018, which will end on December 25, 2018, is also a 52-week fiscal year.

Note 2—Summary of Significant Accounting Policies

Use of Estimates—The preparation of financial statements in conformity with 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. The Company’s significant estimates include estimates for impairment of property and equipment, workers’ compensation insurance reserves and income tax receivable liabilities.

Concentration of Credit Risk—Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. At September 25, 2018 and December 26, 2017, the Company maintained approximately $15.2 million and $7.2 million, respectively, of its day-to-day operating cash balances with a major financial institution, of which $0.2 million and $0.2 million, respectively, represents restricted cash in an impound account for franchisees in the state of Washington. The remaining $15.3 million and $21.1 million at September 25, 2018 and December 26, 2017, respectively, was invested with a major financial institution and consisted entirely of U.S. Treasury instruments with a maturity of three months or less at the date of purchase. At September 25, 2018 and December 26, 2017 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.

8


 

Impairment of Long-lived AssetsThe Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related assets to its estimated fair value. Fair value is generally based on an undiscounted cash flow analysis. Based on its review, the Company determined that the carrying value of three restaurants in the Orlando, Florida market were not recoverable, and as a result, recorded a non-cash impairment charge of $3.1 million in the third quarter of 2018.

Self-insurance Program—Beginning in fiscal year 2018, the Company began a modified self-insurance workers’ compensation program. In order to minimize the exposure under the self-insurance program, the Company purchased stop-loss coverage both on a per-occurrence and on an aggregate basis. The self-insured losses under the program are accrued based on the Company’s estimate of the expected liability for both claims incurred and incurred but not reported basis. The accruals for the modified self-insurance program involve certain management judgments and assumptions regarding the frequency and severity of claims, recent historical patterns of claim development, independent actuarial assessments, and the Company’s experience with claim-reserve management and settlement practices. These accruals are included in employee-related accruals in the accompanying condensed consolidated balance sheet for the fiscal 2018 year. As of September 25, 2018, the accrual related to the self-insurance workers’ compensation program was $2.5 million. The Company’s actual losses may be significantly different than the estimates currently recorded.

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 statements of operations represents the portion of earnings or loss before income taxes attributable to the economic interest in the Company’s subsidiary, The Habit Restaurants, LLC, held by the Continuing LLC Owners. Non-controlling interests on the condensed consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling Continuing LLC Owners, based on the portion of the LLC Units owned by such unit holders. As of September 25, 2018 and September 26, 2017, the non-controlling interest was 20.7% and 21.8%, respectively.

9


 

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 39 weeks ended September 25, 2018 and September 26, 2017, respectively:

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

September 25,

 

 

September 26,

 

 

September 25,

 

 

September 26,

 

(amounts in thousands, except share and per share data)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to controlling and

   non-controlling interests

 

$

(864

)

 

$

424

 

 

$

2,654

 

 

$

4,844

 

Less: net income (loss) attributable to non-controlling

   interests

 

$

244

 

 

$

(56

)

 

$

(563

)

 

$

(1,561

)

Net income (loss) attributable to The Habit Restaurants, Inc.

 

$

(620

)

 

$

368

 

 

$

2,091

 

 

$

3,283

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of Class A common stock

   outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,552,532

 

 

 

20,329,919

 

 

 

20,498,945

 

 

 

20,259,507

 

Diluted

 

 

20,552,532

 

 

 

20,386,655

 

 

 

20,577,722

 

 

 

20,311,264

 

Net income (loss) attributable to The Habit Restaurants, Inc.

   per share Class A common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03

)

 

$

0.02

 

 

$

0.10

 

 

$

0.16

 

Diluted

 

$

(0.03

)

 

$

0.02

 

 

$

0.10

 

 

$

0.16

 

Below is a reconciliation of basic and diluted

   share counts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,552,532

 

 

 

20,329,919

 

 

 

20,498,945

 

 

 

20,259,507

 

Dilutive effect of stock options and restricted stock units

 

 

 

 

 

56,736

 

 

 

78,777

 

 

 

51,757

 

Diluted

 

 

20,552,532

 

 

 

20,386,655

 

 

 

20,577,722

 

 

 

20,311,264

 

 

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 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. 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 5,403,729 LLC Units on the diluted EPS had no impact and were therefore excluded from the calculation.

As of September 25, 2018, there were 2,525,275 options authorized under our 2014 Omnibus Incentive Plan of which 1,870,309 and 1,275,013 had been granted as of September 25, 2018 and September 26, 2017, respectively. See Note 9 - Management Incentive Plans for additional information. The number of dilutive shares of Class A common stock related to these options was calculated using the treasury stock method and 2,274 and 1,409 shares and 27,036 and 42,927 shares have been excluded from the diluted EPS for the 13 and 39 weeks ended September 25, 2018 and September 26, 2017, respectively, because they were anti-dilutive.

Recent Accounting PronouncementsIn February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 Leases, which supersedes ASC 840 Leases and creates a new topic, ASC 842 Leases. This update requires lessees to recognize a lease liability and a right-of-use asset for all leases, including operating leases, with an expected term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This transition method option is in addition to the existing transition method of using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company will use the cumulative-effect transition method. The Company anticipates taking advantage of the practical expedient options which allows an entity to not reassess whether any existing or expired contracts contain leases, not reassess lease classifications for existing or expired leases, and an entity does not need to reassess initial direct costs for any existing leases. The Company’s operating lease obligations as of September 25, 2018 were approximately $256.3

10


 

million. The discounted minimum remaining operating lease obligations will be the starting point for determining the right-of-use asset and lease liability. The Company expects that adoption of the new guidance will have a material impact on its consolidated balance sheets due to recognition of the right-of-use asset and lease liability related to current operating leases and the derecognition of the buildings that the Company has determined that it is the accounting owner of under build-to-suit lease guidance contained in ASC 840. The Company is using their current lease software, which has been enhanced to account for ASC 842, and is continuing the process of validating occupancy information in preparation for the new reporting, disclosure and audit for this standard update on its consolidated financial statements.

Recently Adopted Accounting Pronouncements— In March 2016, the FASB issued ASU No. 2016–04, “Liabilities – Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored–Value Products,” which is intended to eliminate current and future diversity in practice related to derecognition of prepaid stored–value product liability in a way that aligns with the new revenue recognition guidance. The update is effective for fiscal years beginning after December 15, 2017; with early adoption permitted. The Company adopted this ASU in the first quarter of fiscal 2018 and there was no impact on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 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. This update is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this ASU in the first quarter of fiscal 2018 using the full retrospective approach and accordingly, has adjusted all prior periods reported for the effect of this new guidance. The new revenue guidance does not have an impact on the recognition of revenue from company-operated restaurants or royalty revenue and development fees from franchisees and licensees. Additionally, the new revenue guidance does not impact the revenue recognized from gift cards. The new guidance does impact the revenue recognition of initial franchise and license fees. Previously, the Company recognized the initial franchise or license fee as revenue when the restaurant opened. Under the new guidance, the Company has identified separate performance obligations over the term of the contract and will recognize revenue as those performance obligations are satisfied. These performance obligations include rights to use trademarks and intellectual property, initial training and other operational support visits. The Company recognized a reduction of $0.4 million to retained earnings as the cumulative effect of adoption of this accounting change as of December 26, 2017 with a corresponding increase of deferred franchise income on the condensed consolidated balance sheet. The Company also recognized a decrease in revenue of $29,000 and $70,000, as previously reported, for the 13 and 39 weeks ended September 26, 2017, respectively, as a result of the adoption of this new standard. The Company also recognized a decrease of $0.01 in basic and diluted earnings per share for the 39 weeks ended September 26, 2017 as a result of the revenue adjustments made related to the adoption of this new standard.

Note 3—Non-controlling Interests

Pursuant to the LLC Agreement, the Continuing LLC Owners 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 Company (such determination to be made by the disinterested members of our board of directors), (i) 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 or (ii) cash consideration. At any time that an effective registration statement is on file with the SEC with respect to the shares of Class A Common Stock to be issued upon an exchange, The Habit Restaurants, Inc. may not provide cash consideration upon an exchange to a Continuing LLC Owner without the Continuing LLC Owner’s prior consent. The Company amended its LLC Agreement in May 2016, pursuant to which the Company processes exchange requests every other week, rather than weekly, effective in June 2016. The Company further amended its LLC Agreement in March 2017, pursuant to which the Company processes exchange requests monthly, effective in May 2017.

The non-controlling interests represents the portion of earnings or loss attributable to the economic interest held by the non-controlling Continuing LLC Owners. The non-controlling interests upon the completion of the IPO was 65.5%. Upon completion of the follow-on offering in April 2015, the non-controlling interests portion was 47.1%. The non-controlling interests portion changes as Continuing LLC Owners exchange their LLC Units, together with a corresponding number of shares of Class B common stock, for Class A common stock. The non-controlling interests on the condensed consolidated balance sheet were adjusted to reflect the non-controlling interests portion as of September 25, 2018, which was 20.7%. The amounts of these changes are reflected in the condensed consolidated statements of stockholders’ equity. The amount recorded in equity for the 39 weeks ended September 25, 2018 was $1.5 million. Net income attributable to non-controlling interests is calculated based on the non-controlling interests ownership percentage in effect at that time.  The following table represents the weighted average non-controlling interests for the periods presented (dollar amounts in thousands):

 

11


 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

September 25,

 

 

September 26,

 

 

September 25,

 

 

September 26,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Income (loss) before income taxes of The Habit Restaurants, LLC and its subsidiaries

 

$

(1,184

)

 

$

226

 

 

$

2,622

 

 

$

6,949

 

Weighted average non-controlling interests

   ownership percentage

 

 

20.6

%

 

 

24.8

%

 

 

21.5

%

 

 

22.5

%

Net income (loss) attributable to non-controlling

   interests

 

$

(244

)

 

$

56

 

 

$

563

 

 

$

1,561

 

    

 

Note 4—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 was approximately $15.3 million and $21.1 million at September 25, 2018 and December 26, 2017, respectively, and the Company classified such investments as Level 1. These investments consist entirely of U.S. Treasury instruments with a maturity of three months or less at the date of purchase and the interest income received from these instruments is included in interest expense, net in the condensed consolidated statements of operations. These amounts are included in cash and cash equivalents in the accompanying condensed consolidated balance sheets.

Note 5—Property and Equipment, net

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

 

 

 

September 25,

 

 

December 26,

 

 

 

2018

 

 

2017

 

Leasehold improvements

 

$

115,289

 

 

$

96,318

 

Equipment

 

 

64,589

 

 

 

53,563

 

Furniture and fixtures

 

 

27,849

 

 

 

24,702

 

Buildings under deemed landlord financing

 

 

17,688

 

 

 

13,966

 

Smallwares

 

 

2,212

 

 

 

1,899

 

Vehicles

 

 

2,378

 

 

 

2,209

 

Construction in progress

 

 

10,060

 

 

 

13,700

 

 

 

 

240,065

 

 

 

206,357

 

Less: Accumulated depreciation and amortization

 

 

(83,456

)

 

 

(66,401

)

 

 

$

156,609

 

 

$

139,956

 

 

Depreciation expense was $6.3 million and $4.8 million and $18.0 million and $13.5 million for the 13 and 39 weeks ended September 25, 2018 and September 26, 2017, respectively.

Based on the Company’s review of its long-lived assets for impairment, the Company recorded a non-cash impairment charge of $3.1 million for the 13 and 39 weeks ended September 25, 2018. No impairment was recorded in the prior year comparable periods.

As a result of the application of build-to-suit lease guidance contained in ASC 840-40-55 Costs Incurred by a Lessee Prior to Entering into a Lease Agreement, the Company has determined that it was the accounting owner of a total of 29 buildings under deemed landlord financing as of September 25, 2018 and the accounting owner of a total of 25 buildings under deemed landlord financing as of December 26, 2017, and they are included in the Company’s property and equipment, respectively. Included in the buildings under deemed landlord financing is the estimated construction costs of the landlord for the shell building.

12


 

Note 6—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 operations for the 39 weeks ended September 25, 2018 and September 26, 2017 is based on an estimate of the Company’s annualized effective income tax rate. 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 fiscal year 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 (121.26)% and 22.38% for the 39 weeks ended September 25, 2018 and September 26, 2017, 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 change in tax rate for the 39 weeks ended September 25, 2018 and September 26, 2017 is a result of the changes in annual taxable income and related state income taxes (and forecasts thereof which are used to calculate the tax provision during interim periods). The income tax provision would reflect an effective tax rate of 29.97% and 42.00% for the 39 week periods ended September 25, 2018 and September 26, 2017, respectively, if all of the income was taxed at Habit Restaurants, Inc. and the impact of discrete items and the non-controlling interests was disregarded.

Effects of the Tax Cuts and Jobs Act

Tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the Act), was enacted on December 22, 2017. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions was for tax years beginning after December 31, 2017. Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed. SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Act. 

As of September 25, 2018, the Company’s accounting for the Act is complete. As noted at the fiscal year ended December 26, 2017, the Company was able to reasonably estimate certain effects related to the reduction in the U.S. corporate income tax rate to 21%, including the impact of the Company’s assessment of 100% bonus depreciation for qualified assets placed in service after September 27, 2017 and the inclusion of performance based compensation in determining the excessive compensation limitation. Therefore, the Company recorded provisional adjustments associated with these items during the fiscal year ended December 26, 2017. During the first quarter of fiscal 2018, the Company updated its provision adjustments as related to the bonus depreciation for qualified assets and the impact related to the TRA payments, resulting in a reduction in the current portion of the Tax Receivable Agreement liability of $0.7 million that did not impact the Company’s effective tax rate. The Company did not adjust its provisional adjustments during the second and third quarters of fiscal 2018. As of September 25, 2018, the Company has made a reasonable estimate with respect to the limitation on future entertainment and certain employee fringe benefits in accordance with the enactment of the Act that could potentially change the timing of future TRA payments. The Company has applied the limitation to costs applicable under the new limitation. The Company has analyzed the impacts of the legislative change for expected changes to the Company’s policies and do not expect any further changes to its previous estimates. 

13


 

Tax Receivable Agreement

In connection with the IPO that occurred in fiscal year 2014, the Company entered into a 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 realizes 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 in the accompanying condensed consolidated balance sheets. 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 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) 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 or (ii) 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). At any time that an effective registration statement is on file with the SEC with respect to the shares of Class A common stock to be issued upon an exchange, The Habit Restaurants, Inc. may not provide cash consideration upon an exchange to a Continuing LLC Owner without the Continuing LLC Owner’s prior consent. 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 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 breaches 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 IPO are calculated based on the IPO 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.

14


 

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.

As of September 25, 2018, the Company recorded a liability of $84.0 million, representing the payments due to the Continuing LLC Owners under the TRA. As of September 25, 2018, $1.2 million of the TRA liability is classified as a current liability. The increase of $2.2 million in the TRA liability during the 39 weeks ended September 25, 2018 is primarily a result of updates in estimated future tax savings and also as a result of the exchanges of LLC Units for shares of Class A common stock by the Continuing LLC Owners during the period.

As part of the TRA, there are adjustments associated with revisions to the expected TRA liability as a result of updated estimated future tax savings at the federal, state and local level. The amounts of these adjustments were $1.5 million for the 39 week period ended September 25, 2018, and $0.7 million for the 39 week period ended September 26, 2017 and are reflected in the condensed consolidated statements of operations.

In addition, from time to time we may have adjustments to deferred tax assets as a result of changes in the tax basis associated with the TRA.  The amounts of these changes are reflected in the consolidated statements of stockholders’ equity. The amount recorded in equity for the 39 weeks ended September 25, 2018 due to changes of the deferred tax assets associated with the tax basis increase was $92,000.

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 a payment due after the filing of the Company’s federal income tax return, which is due on or about October 15th of any given year (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 7—Long-Term Debt

On August 2, 2017, The Habit Restaurants, LLC executed a $20 million credit facility with Bank of the West (the “Credit Facility”) that matures on August 2, 2019. In October 2018, the Company extended the maturity date on the Credit Facility to August 1, 2020. All borrowings under the Credit Facility will bear interest at a variable rate based upon LIBOR plus the applicable margin for LIBOR loans (as defined in the Credit Facility). The Credit Facility has no unused commitment fees. The Company incurred $0.3 million in deferred financing fees related to the Credit Facility that will be amortized over the length of the agreement. That amortization expense is included in interest expense, net on the accompanying condensed consolidated statements of operations. As of September 25, 2018, The Habit Restaurants, LLC had no borrowings outstanding against the Credit Facility. Interest related to the Credit Facility and principal payments, if applicable, are due monthly.

The Credit Facility is secured by all the assets of The Habit Restaurants, LLC, and the Company is required to comply with certain financial covenants therein. The Credit Facility contains customary representations, warranties, negative and affirmative covenants, including a maximum lease adjusted leverage ratio of 4.00 to 1.00 and a minimum EBITDA of $21.4 million for the twelve month period then ended at the end of each fiscal quarter. As of September 25, 2018, the Company and The Habit Restaurants, LLC were in compliance with all covenants.

On January 4, 2018 the Company executed an irrevocable standby letter of credit for $1.5 million related to the Company’s self-insured workers’ compensation coverage. This letter of credit is a reduction of the borrowing capacity of our Credit Facility. In conjunction with the renewal of the Company’s self-insured workers’ compensation coverage in October 2018, the Company increased its irrevocable standby letter of credit to $3.25 million. The increased standby letter of credit expires on January 5, 2019.

15


 

Note 8—Commitments and Contingencies

Future commitments—The Company’s growth strategy includes new restaurant openings during fiscal year 2018 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 September 25, 2018, the Company had approximately $8.1 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 9—Management Incentive Plans

Stock-based compensation is included in general and administrative expenses on the accompanying condensed consolidated statements of operations. The stock-based compensation expense related to the 2014 Omnibus Incentive Plan and to units issued under The Habit Restaurants, LLC Management Incentive Plan is summarized in the table below for the periods indicated: (in thousands)

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

September 25,

 

 

September 26,

 

 

September 25,

 

 

September 26,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Stock-based compensation expense

 

$

687

 

 

$

675

 

 

$

2,025

 

 

$

1,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 have been granted under the 2014 Omnibus Incentive Plan. The 2014 Omnibus Incentive Plan also permits 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.

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 is administered by our board of directors or a committee of our board of directors (the “Administrator”). The Administrator has 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 are conclusive and binding. The Administrator will determine the time or times at which an award will vest or become exercisable. The maximum term of an award will not exceed ten years from the date of grant.

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 39 weeks ended September 25, 2018:

 

 

 

Options

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

(Years)

 

 

Aggregate

Intrinsic

Value

 

Outstanding and expected to vest at December 26, 2017