424B4 1 d776094d424b4.htm FINAL PROSPECTUS Final Prospectus
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Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-199394

5,000,000 Shares

The Habit Restaurants, Inc.

 

Class A Common Stock

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$18.00 per share

 

 

 

 

The Habit Restaurants, Inc. is offering 5,000,000 shares of its Class A common stock.

 

 

The initial public offering price is $18.00 per share of Class A common stock.

 

This is our initial public offering and no public market previously existed for shares of our Class A common stock.

 

 

Our Class A common stock has been approved for listing on the NASDAQ Global Market under the trading symbol: HABT.

 

The Habit Restaurants, Inc. has two classes of authorized common stock: the Class A common stock offered hereby and Class B common stock, each of which has one vote per share. Immediately following the completion of this offering, affiliates of certain members of our board of directors will hold substantially all of our issued and outstanding Class B common stock and will control a majority of the combined voting power of our common stock. As a result of their ownership, they will be able to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and by-laws and the approval of any merger or sale of substantially all of our assets. We will be a “controlled company” within the meaning of the corporate governance rules of NASDAQ. See the section entitled “The Recapitalization—Organizational Structure Following This Offering.”

 

 

Investing in our Class A common stock involves risks. See the section entitled “Risk Factors,” beginning on page 21.

We are an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 and will be subject to reduced public company reporting requirements.

 

 

 

     Per share      Total  

Public offering price

   $ 18.00       $ 90,000,000   

Underwriting discount

   $ 1.26       $ 6,300,000   

Proceeds, before expenses, to The Habit Restaurants, Inc.(1)

   $ 16.74       $ 83,700,000   

 

 

 

 

(1) 

See the section entitled “Underwriting” for additional information regarding underwriting compensation.

We have granted the underwriters the option to purchase up to an additional 750,000 shares of Class A common stock to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of our Class A common stock to purchasers on or about November 25, 2014.

 

Piper Jaffray   Baird    Wells Fargo Securities

Raymond James

 

Stephens Inc.   Stifel

The date of this prospectus is November 19, 2014.

 

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TABLE OF CONTENTS

 

 

Prospectus Summary

     1   

Risk Factors

     21   

Cautionary Note Regarding Forward-Looking Statements

     48   

The Recapitalization

     50   

Use of Proceeds

     56   

Dividend Policy

     57   

Capitalization

     58   

Dilution

     59   

Unaudited Pro Forma Condensed Consolidated Financial Information

     61   

Selected Consolidated Financial and Other Data

     69   

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

     74   

Business

     100   

Management

     117   

Executive Compensation

     123   

Certain Relationships and Related Party Transactions

     130   

Security Ownership of Beneficial Owners and Management

     136   

Description of Capital Stock

     139   

Shares Eligible for Future Sale

     144   

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Shares of Class A Common Stock

     147   

Underwriting

     151   

Legal Matters

     159   

Experts

     159   

Where You Can Find More Information

     159   

Index to Consolidated Financial Statements

     F-1   

Through and including December 15, 2014 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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You should rely only on the information contained in this prospectus or in any related free-writing prospectus we may authorize to be delivered to you. Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any related free-writing prospectuses we have prepared. Neither we nor the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of shares of our Class A common stock.

For investors outside of the United States: we have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ordinary shares and the distribution of this prospectus outside of the United States.

Market and Other Industry Data

Unless otherwise indicated, market data and certain industry forecasts used throughout this prospectus were obtained from various sources, including internal surveys, market research, consultant surveys, publicly available information and industry publications and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. In particular, we have obtained information regarding the restaurant industry, including market sizes and sales growth in the fast casual segment of the restaurant industry, from Technomic, Inc. (“Technomic”), a national consulting market research firm. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable based upon our management’s knowledge of the industry, have not been independently verified. The future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in these publications and reports.

 

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Basis of Presentation

Beginning with fiscal year 2011, we have operated on a 52- or 53-week fiscal year ending on the last Tuesday of each calendar year for financial reporting purposes. As a result of the transition to this 52- or 53-week fiscal calendar from a traditional year-end calendar, fiscal year 2010 began on January 1, 2010 but ended on December 28, 2010, such that fiscal year 2010 was three days fewer than a typical calendar year. Prior to fiscal year 2010, we used a traditional calendar year end for our fiscal year for financial reporting purposes. Fiscal years 2011, 2012 and 2013 ended on December 27, 2011, December 25, 2012 and December 31, 2013, respectively. We refer to our fiscal years presented in this prospectus as 2009, 2010, 2011, 2012 and 2013. Each of our fiscal quarters consists of 13 weeks, with the exception of a 53-week year in which the fourth quarter has 14 weeks. A 53-week year occurs every six or seven years. The 2013 fiscal year contained 53 weeks, while all other years presented in this prospectus contain 52 weeks. References to periods in this prospectus refer to a four or five week reporting period, except for the 12th period of a 53-week year, which contains six weeks. We operate on a four-four-five week calendar. References to comparable restaurant sales in this prospectus reflect the change in year-over-year sales in our comparable restaurant base. A restaurant enters our comparable restaurant base in the accounting period following its 18th full period of operations. References to average unit volumes (“AUVs”) in this prospectus refer to average unit volumes at our company-owned restaurants that have been open for at least 52 weeks. AUVs are calculated by dividing revenue for the trailing 52 week period for all company-owned restaurants that have operated for 12 full periods by the total number of restaurants open for such period. For purposes of the AUV calculation in 2013, we used the last 52 of the 53 weeks of the fiscal year. References to per customer spend in this prospectus refer to total restaurant revenue divided by the number of entrées sold.

Trademarks and Copyrights

We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, tag-lines, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. Solely for convenience, some of the copyrights, trade names and trademarks referred to in this prospectus are listed without their ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks.

 

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PROSPECTUS SUMMARY

The following summary highlights information appearing elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, and in particular, the sections entitled ‘‘Risk Factors’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and our consolidated financial statements and the notes relating to those statements included elsewhere in this prospectus. Some of the statements in this prospectus constitute forward-looking statements. See the section entitled ‘‘Cautionary Note Regarding Forward-Looking Statements.’’

In this prospectus, unless the context requires otherwise, references to ‘‘The Habit Burger Grill,’’ ‘‘The Habit,’’ the ‘‘company,’’ ‘‘we,’’ ‘‘our’’ or ‘‘us’’ refer collectively to (i) The Habit Restaurants, LLC and its consolidated subsidiaries immediately prior to the completion of this offering and (ii) The Habit Restaurants, Inc., the issuer of the Class A common stock offered hereby, and its consolidated subsidiaries immediately after the completion of this offering.

Our Company

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 $34.5 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.

We believe our restaurant concept delivers a highly differentiated customer experience by combining the quality and hospitality that customers commonly associate with our full service and fast casual restaurant competitors with the convenience and value customers generally expect from traditional fast food restaurants. Four pillars form the foundation of our brand:

 

   

Quality.    At the core of our differentiated model is a company-wide commitment to quality, beginning with our food. Our award-winning burger, paired with hot, crispy fries, and our made-to-order preparation serve as the cornerstone of our distinctive menu that also includes many appealing non-burger items, such as a fresh-grilled albacore sandwich made with sushi-grade tuna, a grilled chicken sandwich topped with crisp bacon and ripe avocado, a classic Cobb salad, offered with a variety of dressings, and our tempura green beans. We believe the breadth of our menu and our made-to-order preparation results in broad consumer appeal.

 

   

Environment.    We complement our distinctive menu with a comfortable, clean and appealing dining environment that makes The Habit an inviting destination at any time of day. Our prototype new restaurant model targets an average investment of approximately $750,000, net of tenant allowances, which we use to deliver a warm and welcoming atmosphere. Our restaurants are enhanced with abundant natural light, hardwood accents, polished stone countertops and a spacious dining area featuring soft vinyl booths, high-top tables and community table seating. Our open kitchen showcases our made-to-order preparation and exemplifies our commitment to freshness.

 

 

 

 

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Hospitality.    We seek to exceed our customers’ expectations for service and believe our ability to consistently deliver genuine hospitality begins with our employees. We hire and train individuals who deliver friendly, attentive service by engaging customers from the moment they enter our restaurants until we clear their table and thank them for visiting. Our Chief Quality Officer oversees our ongoing effort to elevate the customer experience and seeks to instill a culture of continuous improvement in our restaurants.

 

   

Value.    Our combination of high-quality food, welcoming environment and genuine hospitality, all delivered at a low price, strengthens the value proposition for our customers. We are a fast casual restaurant that offers high quality food and service typically associated with full service and other fast casual restaurants at a price point that is below the low end of the average range of the fast casual segment. For instance, the starting price for our original Charburger with cheese is $3.50, which is well below similar items on the menus of most competing fast casual restaurants. For the 52 weeks ended September 30, 2014, our average per customer spend was $7.56, which we believe is also among the lowest in the fast casual restaurant segment.

The first Habit Burger Grill 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, and since then we have grown our brand on a disciplined basis. Our highly experienced management team has created and refined our infrastructure to deliver replicable restaurant-level systems, processes and training procedures that can deliver a high-quality experience that is designed to consistently exceed our customers’ expectations.

Performance Overview

Our disciplined growth strategy has enabled strong growth across all of our key performance metrics, including number of new restaurant openings, comparable restaurant sales, AUVs, revenue, net income and Adjusted EBITDA.

 

   

The Habit has grown from 26 locations across three markets in California as of December 31, 2009 to 99 locations across 10 markets in four states as of October 20, 2014 and we had a compound annual growth rate (“CAGR”) of our units from 2009 to 2013 of 34.5%;

 

   

Our restaurants have generated 43 consecutive fiscal quarters of positive comparable restaurant sales growth, due primarily to increases in customer traffic;

 

   

We have grown our company-owned restaurant AUVs from approximately $1.2 million in fiscal year 2009 to approximately $1.7 million for the 52 weeks ended September 30, 2014, representing an increase of 39.4%; and

 

   

From fiscal year 2009 to fiscal year 2013, our revenue increased from $28.1 million to $120.4 million, net income increased from $0.1 million to $5.7 million and Adjusted EBITDA increased from $1.9 million to $14.7 million.

 

 

 

 

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(1) 

Net income excludes income taxes due to the tax status of The Habit Restaurants, LLC.

For the definition and reconciliation of Adjusted EBITDA, a non-GAAP term, to net income, see the section entitled ‘‘—Summary Consolidated Financial and Other Data.’’

Our Market Opportunity

We operate within the fast casual segment, which is a subset of the limited service segment of the restaurant industry and generally consists of establishments where customers pay at the counter for food items that generally cost between $3.00 and $12.00. According to Technomic, restaurants operating within the limited service segment generated $231.0 billion of total sales in 2013. The limited service segment is comprised of two subsets: traditional quick service and fast casual. Quick service restaurants include traditional fast food restaurants, generally with check averages between $3.00 and $8.00, whereas fast casual restaurants more commonly utilize a limited service format and are differentiated by food prepared to order, fresh ingredients, innovative menu choices and upscale or highly developed interior design, generally with check averages between $8.00 and $12.00, making our check average of $7.56 more appealing to our customers when they are choosing among fast casual restaurants.

 

 

 

 

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According to Technomic, the fast casual segment generated approximately $34.5 billion of sales in 2013, representing an 11.3% increase from 2012. Fast casual concepts, such as The Habit, attract customers from other restaurant segments, and accordingly, are taking market share from other segments and generating growth that exceeds the growth of the overall restaurant industry. Technomic projects the fast casual segment to outpace the growth of the broader limited service segment and exceed $50 billion in sales by 2018. We believe that the steady growth and expansion of the fast casual segment will continue to capture market share from many of the largest restaurant segments, including the approximately $196.5 billion quick service segment and the approximately $49.9 billion varied menu full service segment. We believe the fast casual segment delivers customers the winning combination of quality, convenience, experience and value that is not adequately provided by other segments. Accordingly, we believe that The Habit’s position in the fast casual segment allows us to attract customers across multiple segments within the restaurant industry and gives The Habit a significant and continuing opportunity for growth.

Our Competitive Strengths

We believe the following strengths differentiate us from our competitors and provide a strong foundation for growth:

“The Habit Difference”

Quality.    Quality is a key ingredient in everything we do and our commitment to quality starts with our food. The Habit offers a diverse menu featuring a distinctive char-grilled preparation technique to deliver an appealing variety of burgers, chicken, tuna and steak featured in our sandwiches and salads, which are made-to-order using fresh ingredients.

It is our mission to become everyone’s favorite Habit, one burger at a time. We “Respect the Burger” and believe that it should be prepared over an open flame, topped with your choice of lettuce, ripe tomatoes, caramelized onions and melted cheese, wrapped neatly in paper and served alongside hot, crispy fries. Our burgers range from our award-winning original Charburger, including mayonnaise, pickles, ripe tomato, crisp lettuce and caramelized onions served on a toasted bun, to our Santa Barbara-style Charburger including all the fixings of the original Charburger plus cheese and avocado served on grilled sourdough. Burgers accounted for approximately 60% of our entrée revenue for the 52 weeks ended September 30, 2014. Our sandwich selection offers a variety of choices, featuring sushi-grade tuna, fresh chicken and USDA choice steak and we also offer a variety of salad options, which are key to further diversifying our menu. Sandwiches and salads accounted for approximately 27% and 13%, respectively, of our entrée revenue for the 52 weeks ended September 30, 2014. We make it easy for customers to personalize their order through our made-to-order preparation, selection of freshly baked breads, including toasted French rolls and grilled sourdough, our pepper bar, including pepperoncini, chili peppers and jalapeños, and a selection of six flavorful sauces. We believe that our diverse menu generates broad customer appeal as evidenced by our well-balanced gender, age and income customer demographics, allowing us to drive traffic and sales during both the lunch and dinner day parts, and ultimately increase AUVs.

Environment.    We invest in our restaurant design to deliver a warm and inviting atmosphere enhanced with abundant natural light, polished stone and exposed hardwood accents. Our average restaurant size is between 2,000 and 2,800 square feet and features booth, high-top and community table seating, along with outdoor patios in most of our current restaurant locations. Our open kitchen showcases our made-to-order preparation and exemplifies our commitment to freshness. We seek to deliver an experience and atmosphere that our customers want to share with family and friends, while also offering speed and

 

 

 

 

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efficiency to meet the high demands of on-the-go customers. We believe the attractive design of our restaurants and our commitment to delivering superior service have contributed to a balanced day part mix of 52% lunch and 48% dinner for the 52 weeks ended September 30, 2014.

Hospitality.    We seek to exceed our customers’ expectations for service, and we believe our ability to consistently deliver genuine hospitality begins with our employees. We hire and train individuals who share our passion for food and deliver friendly, attentive service by engaging customers the moment they enter our restaurants and maintaining this level of service throughout their visit. We encourage our employees to regularly interact with customers and deliver “Top Shelf Service,” from personalized and courteous interactions with customers to stocking and maintaining our pepper bar. We believe our ability to deliver high-quality service is a function of our relationship with our employees, and we therefore focus on fostering an atmosphere of teamwork and support with a clear path toward promotion within the company. We have developed a proprietary matrix system for professional development of the entire restaurant-level team, and we believe that by offering our employees great opportunities for ongoing professional development, they in turn remain committed to providing our customers with an experience that exceeds expectations.

Value.    Delivering exceptional value to our customers is core to our brand. We have developed a formula for customer value by delivering high-quality food, a welcoming environment and genuine hospitality, all at a compelling price point. We believe that The Habit’s formula brings a highly differentiated experience to the fast casual restaurant segment by combining the quality, convenience and hospitality commonly associated with our casual dining and fast casual competitors at a price point that is below the low end of the average range of the fast casual segment. The price for our award-winning, char-grilled, made-to-order Charburger combination meal with fries and a regular drink starts at $6.50, which provides our customers with a meal that is priced well below comparable menu options at many competing fast casual restaurant alternatives.

“The Habit Difference” has generated positive comparable restaurant sales growth for the last 43 quarters. In addition, AUVs have grown from approximately $1.2 million in fiscal year 2009 to approximately $1.7 million for the 52 weeks ended September 30, 2014, representing an increase of 39.4%.

 

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Broad Customer Appeal

We believe that “The Habit Difference” generates broad customer appeal and a loyal following. Based on an external research report and a third-party customer satisfaction survey, our customer base is well-balanced, with 55% male customers and 45% female customers. We believe our female customers represent a highly desirable customer base with strong influence on a family’s mealtime decision-making process, making them strong brand advocates. Our customer base extends across age and socioeconomic groups, enabling us to successfully operate restaurants within a variety of communities of varying sizes, ethnic diversity and income ranges. Over 60% of our customer base is in the age range of 25 to 54. Families with children under the age of 18 represent a significant segment of this customer base. We believe our diversified customer base and menu variety contributed to our balanced day part mix of 52% lunch and 48% dinner for the 52 weeks ended September 30, 2014, which in turn contributed to our strong AUVs.

 

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(1) 

Based on an external research report and a third-party customer satisfaction survey.

(2) 

Based on revenue derived from entrées for the 52 weeks ended September 30, 2014.

(3) 

Based on revenue generated in the 52 weeks ended September 30, 2014 during lunch (restaurant opening through 4:00 PM) and dinner (4:00 PM through restaurant close).

Highly Productive Restaurants

For the 52 weeks ended September 30, 2014, our restaurants that had been open for 12 months or more had an AUV of approximately $1.7 million, restaurant-level profit margins greater than 21.0% and generated cash-on-cash returns in excess of 40%.

Our restaurant model is designed to generate high sales volumes, strong restaurant-level financial results and high cash-on-cash returns. We believe our ability to generate AUVs of approximately $1.7 million for the 52 weeks ended September 30, 2014 at our low average per customer spend is indicative of our ability to generate traffic and deliver superior restaurant-level execution. Our ability to generate traffic, with an average weekly customer count of 4,574 customers per restaurant location, serves as a benefit to adjacent retail businesses and therefore makes The Habit a desirable tenant for landlords and developers, who seek to find tenants that increase traffic in their retail developments.

Our menu variety and quality offerings contribute to the productivity of our restaurants and positions The Habit as an attractive destination for a range of occasions, including a convenient lunch option, an after-school hangout for students, a social venue for seniors or an affordable restaurant for families. We believe our ability to drive traffic across both the lunch and dinner day parts allowed us to deliver an attractive per annum sales per leasable square foot of $818 for the 52 weeks ended September 30, 2014.

 

 

 

 

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Built for Growth: Highly Experienced and Committed Management Team Driving Strong Performance

Our mission of becoming everyone’s favorite Habit, one burger at a time, is driven by our senior management, led by Russell W. Bendel, our Chief Executive Officer. Mr. Bendel joined The Habit in 2008 and has assembled an experienced management team, including Ira Fils, our Chief Financial Officer, Anthony Serritella, our Chief Operating Officer, Peter Whitwell, our Chief Quality Officer, Russell Friend, our Chief Development Officer, and Matthew Hood, our Chief Marketing Officer. Our management team has an average tenure of over 28 years in the restaurant industry and experience across a broad range of disciplines. Collectively, the management team leverages industry experience from The Habit, as well as other leading brands such as The Cheesecake Factory, Mimi’s Café, Panda Express, Outback Steakhouse, Rubio’s Fresh Mexican Grill, Pei Wei Asian Diner, and BJ’s Restaurant and Brewhouse.

Our Growth Strategies

Disciplined Growth Strategy to Capture Our Significant Market Opportunity—We Are Disrupting the Largest Restaurant Categories

We plan to execute the following strategies to continue to grow our restaurant base, revenue and profitability.

Grow Our Restaurant Base

We have expanded our restaurant base from 26 restaurants in three markets in California as of December 31, 2009 to 99 restaurants in 10 markets in four states as of October 20, 2014. We opened 22 restaurants in 2013. From January 1, 2014 through October 20, 2014, we opened 14 restaurants, and we expect to open a total of 23 to 25 restaurants in 2014, as well as 26 to 28 company-owned restaurants in 2015. We plan to balance our growth between existing and new markets, with the majority of new restaurants expected to open in existing markets in 2014 and 2015. In August 2014, we opened our first restaurant in the Eastern U.S. in New Jersey, and we expect to continue to expand our presence in Eastern and Western markets in 2015. We believe we are in the early stages of our growth story and estimate, based on our internal analysis, a total restaurant potential in the United States in excess of 2,000 locations. Our selection process uses proprietary methods to identify target markets and expansion opportunities within such markets. Based on this analysis, we believe there is opportunity for substantial development in both new and existing markets, and we expect to double our restaurant base over the next four years.

Our restaurant model is designed to generate high sales volumes, strong restaurant-level financial results and high cash-on-cash returns. Our prototype new restaurant model targets an average cash build-out cost of approximately $750,000, net of tenant allowances, AUVs of approximately $1.5 million and cash-on-cash returns in excess of 30% in the third full year of operation.

Although we expect the majority of our expansion to continue to come from our company-owned restaurants, we have developed a franchising and licensing strategy that will enable us to expand our presence into select markets. We have focused our franchisee and licensee development efforts on experienced, well-capitalized partners that have both operating resources and local market knowledge. These programs are low cost and high return models that allow us to expand our footprint and build brand awareness in markets that we otherwise do not plan to enter in the short- to medium-term. We expect to open our first franchised restaurants in 2015, and we currently have one licensed restaurant located on the campus of The University of Southern California.

 

 

 

 

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Increase Comparable Restaurant Sales

We have consistently demonstrated strong comparable restaurant sales growth with 43 consecutive quarters of positive comparable restaurant sales growth, and we intend to generate future comparable restaurant sales growth through the following strategies:

Deliver Superior Execution.    We believe that delivering consistent execution is integral to building customer satisfaction and driving comparable restaurant sales growth. We staff each of our restaurants with a minimum of three managers and follow our “daily disciplines,” which provide each of our teams with the framework to consistently improve execution. Our managers are incentivized to instill a culture of excellence and drive the personal and professional development of their employees. We have complemented our training and development programs with systems that provide our employees with real-time information and optimize operations. To lead our restaurant management teams, we maintain a tight span-of-control, utilizing our District Managers (each of whom is responsible for, on average, less than four restaurants), which improves execution through greater contact with restaurant managers and hourly employees.

Increase Existing Customer Frequency.    The customer-first mentality that has been our guiding principle for the past 45 years has enabled us to deliver a customer experience that exceeds our customers’ expectations. We strive to constantly improve our customers’ experiences through improvements in order throughput and order execution all while delivering our genuine hospitality. We selectively test and invest in technology, such as our use of in-store tablets for expedited order input and our deployment of an online ordering platform tailored for mobile or computer use, supported by a dedicated call center. We also evolve our menu to offer our customers new choices that are aligned with our brand and are consistent with our commitment for fresh, high-quality food. These initiatives contribute to increasing frequency as our customers are able to regularly recognize the improvement in overall experience.

Acquire New Customers through Increasing our Brand Awareness.    We believe a strong driver of new customer traffic is word-of-mouth advocacy from our existing customers. We have attracted a loyal base of customers that enjoy sharing their experiences with friends and families in their communities. Furthermore, we believe that our commitment to our employees encourages them to become enthusiastic brand ambassadors and help to further multiply our growing fanbase. In addition, we combine social media, community engagement and public relations to increase our brand awareness in the communities we serve. We complement these strategies with high visibility marketing tactics such as our special event catering trucks to build further awareness of our brand that often leads to trial by new customers.

Leverage Infrastructure to Improve Long-term Profitability

We have invested in building a strong corporate- and restaurant-level infrastructure that can support a restaurant base greater than our existing footprint. We have completed investments in above-store, restaurant-level and human resources and information systems that enable our restaurant base to grow while providing corporate and restaurant managers the tools necessary to monitor our operations and maintain our history of strong performance.

We believe we have enabled our growth into new markets by investing in resources, processes and systems that can be further leveraged to enhance margins as we build further density in new markets. Additionally, we believe we will be able to leverage corporate costs over time to enhance margins as general and administrative expenses grow at a slower rate than our restaurant base and revenue.

 

 

 

 

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Our Equity Sponsor

KarpReilly, LLC, (“KarpReilly” or our “Sponsor”) is a Greenwich, Connecticut-based private investment firm, founded by Allan W. Karp and Christopher K. Reilly, whose primary mission is to partner with premier growth companies and help them achieve their long-term vision. KarpReilly takes an active role in working with portfolio companies to strengthen management teams and invest in systems, people and processes to support growth. KarpReilly currently manages funds and affiliates with capital commitments in excess of $500 million. Immediately following the completion of this offering, affiliates of our Sponsor will beneficially own approximately 39.2% of our outstanding Class A common stock, or 35.9% if the underwriters’ option to purchase additional shares of our Class A common stock is exercised in full, 64.4% of our outstanding Class B common stock, which, combined with its holdings of our Class A common stock, aggregates to 56.2% of our voting power, or 54.6% of our voting power if the underwriters’ option to purchase additional shares of our Class A common stock is exercised in full, and 64.4% of the outstanding common units of The Habit Restaurants, LLC. Two of our directors, Messrs. Karp and Reilly, are partners of our Sponsor. See the section entitled “Certain Relationships and Related Party Transactions.”

Prior to the completion of this offering, we were a party to the Management and Monitoring Agreement with KarpReilly, pursuant to which we paid them an annual fee of $135,000, and reimbursed them for out-of-pocket expenses.

Summary Risk Factors

Investing in our Class A common stock involves significant risks. Any of the factors set forth in the section entitled “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, you should evaluate the specific factors set forth in the section entitled “Risk Factors” in deciding whether to invest in our Class A common stock. Below is a summary of some of the principal risks we face.

 

   

The restaurant industry is a highly competitive industry with many well-established competitors;

 

   

New restaurants may not be profitable, and we may not be able to maintain or improve levels of our comparable restaurant sales;

 

   

We rely heavily on certain vendors, suppliers and distributors;

 

   

We may not be able to successfully implement our growth strategy if we are unable to locate and secure appropriate sites for restaurant locations, obtain favorable lease terms, attract customers to our restaurants or hire and retain personnel;

 

   

We may face negative publicity or damage to our reputation, which could arise from concerns regarding food safety and foodborne illness or other matters;

 

   

Our principal stockholders and their affiliates own a substantial portion of our outstanding equity, and their interests may not always coincide with the interests of the other stockholders; and

 

   

We will face increased costs as a result of being a public company.

Summary of the Offering Structure

On the date of and prior to the completion of this offering, the limited liability company agreement of The Habit Restaurants, LLC will be amended and restated to, among other things, create a single new class of economic, non-voting interests in The Habit Restaurants, LLC that we refer to as “LLC Units.” Immediately after the completion of this offering, we will (i) be a holding company that will hold as our

 

 

 

 

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principal assets an equity interest in The Habit Restaurants, LLC and shares of subsidiaries, each of which in turn will hold as its principal asset an equity interest in The Habit Restaurants, LLC, (ii) operate and control the business affairs of The Habit Restaurants, LLC as its sole managing member, and conduct our business through The Habit Restaurants, LLC and its subsidiaries, and (iii) include The Habit Restaurants, LLC and its subsidiaries in our consolidated financial statements.

Investors in this offering will purchase shares of our Class A common stock. We intend to use all of the net proceeds from the sale of our Class A common stock in this offering to directly or indirectly purchase LLC Units from The Habit Restaurants, LLC at a purchase price per unit equal to the initial public offering price per share of Class A common stock in this offering net of underwriting discounts. The Habit Restaurants, LLC will bear the cost of or reimburse The Habit Restaurants, Inc. for all of the expenses of this offering. The number of LLC Units purchased will be equal to the number of shares of Class A common stock sold to the public in this offering. The existing owners of The Habit Restaurants, LLC will continue to hold LLC Units, and such existing owners (other than The Habit Restaurants, Inc. and its wholly-owned subsidiaries) will be issued a number of shares of our Class B common stock equal to the number of LLC Units held by them in connection with the completion of this offering. We refer herein to the amendment of the LLC Agreement, the issuance of shares of our Class B common stock and entry into the tax receivable agreement (the “TRA”), the registration rights agreement and the recapitalization agreement, collectively as the “Recapitalization Transactions.” The effect of the purchase of LLC Units by The Habit Restaurants, Inc. and its subsidiaries is to dilute the ownership interest of the other existing holders in The Habit Restaurants, LLC and proportionately increase our direct and indirect ownership interest in The Habit Restaurants, LLC.

The Class A and Class B common stock generally will vote together as a single class on all matters submitted to a vote of stockholders, except as otherwise required by applicable law. The Class B common stock will not be publicly traded and will not entitle its holders to receive dividends or distributions upon a liquidation, dissolution or winding up of The Habit Restaurants, Inc. See the section entitled “The Recapitalization.” As a result of these transactions and this offering, upon completion of this offering:

 

   

the investors in this offering will collectively own 5,000,000 shares of our Class A common stock (or 5,750,000 shares of Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

the Continuing LLC Owners will collectively hold 17,028,204 LLC Units, representing 67.4% of the economic interest in The Habit Restaurants, LLC (or 65.5% if the underwriters exercise in full their over-allotment option to purchase additional shares of Class A common stock);

 

   

the investors in this offering will collectively have 19.8% of the voting power in The Habit Restaurants, Inc. (or 22.1% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

the Continuing LLC Owners, through their holdings of our Class B common stock, will collectively have 67.4% of the voting power in The Habit Restaurants, Inc. (or 65.5% if the underwriters exercise in full their option to purchase additional shares of Class A common stock); and

 

   

The Habit Restaurants, Inc. will directly or indirectly hold 8,224,550 LLC Units (or 8,974,550 LLC Units if the underwriters exercise in full their over-allotment option to purchase additional shares of Class A common stock), representing 32.6% of the economic interest in The Habit Restaurants, LLC (or 34.5% if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and will exercise exclusive control over The Habit Restaurants, LLC, as its sole managing member.

 

 

 

 

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The Habit Restaurants, Inc. and its wholly-owned subsidiaries, The Habit Restaurants, LLC, and the Continuing LLC Owners will enter into the TRA in connection with this offering. 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 benefits that are created as a result of this offering 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. 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 sections entitled “Risk Factors—Risks Related to Our Business and Industry,” “The Recapitalization” and “Certain Relationships and Related Party Transactions.”

In addition, as a part of the Recapitalization Transactions, we will, among other things, enter into a new registration rights agreement with the Continuing LLC Owners. See the section entitled “Certain Relationships and Related Party Transactions.”

The diagram below depicts our organizational structure immediately following the Recapitalization Transactions and this offering assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

LOGO

 

 

 

 

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Corporate Background and Information

The Habit Restaurants, Inc. was formed July 24, 2014 and has not to date 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, as of September 30, 2014, a less than 20% interest in The Habit Restaurants, LLC) and (iii) the preparation of this registration statement. We have no other material assets and have not engaged in any business or other activities except as described above in connection with the Recapitalization Transactions described in the section entitled “The Recapitalization.” Our principal executive offices are located at 17320 Red Hill Avenue, Suite 140, Irvine, CA 92614, and our telephone number is (949) 851-8881. Our website is www.habitburger.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.

The Habit Burger Grill, the Habit Burger Grill design logo and other Habit trademarks and service marks included in this prospectus are the property of The Habit Restaurants, LLC. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (“the JOBS Act”). As such, we are 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 of 2002 (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. The JOBS Act further permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to opt out of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Following the completion of this offering, we will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (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 date of the first sale of Class A common stock under this registration statement.

 

 

 

 

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The Offering

 

Class A common stock offered by us


5,000,000 shares (or 5,750,000 shares if the underwriters exercise their option to purchase additional shares in full).

 

Class A common stock to be outstanding immediately after completion of this offering





8,224,550 shares (or 8,974,550 shares if the underwriters exercise their option to purchase additional shares in full).

 

Over-allotment option

We have granted to the underwriters the option, exercisable for 30 days of this prospectus, to purchase up to 750,000 additional shares of common stock.

 

Class B common stock to be outstanding immediately after completion of this offering(1)





17,028,204 shares, or one share for every outstanding LLC Unit other than those held by The Habit Restaurants, Inc. and its subsidiaries.

 

Total Class A and Class B common stock to be outstanding immediately after completion of this offering






25,252,754 shares (or 26,002,754 shares if the underwriters exercise their option to purchase additional shares in full).

 

Use of proceeds

We expect to receive net proceeds, after deducting estimated offering expenses and underwriting discounts and commissions, of approximately $79.9 million. We intend to use the net proceeds from this offering to purchase, directly and indirectly LLC Units from The Habit Restaurants, LLC. The Habit Restaurants, LLC will subsequently use such proceeds to repay all of the borrowings under our existing credit facility with California Bank & Trust (which was $11.1 million as of September 30, 2014), to repay approximately $30 million to extinguish the Bridge Loan with California Bank & Trust in connection with the distribution to the members of The Habit Restaurants, LLC made immediately prior to the completion of this offering and, with the remaining proceeds, to continue to support our growth, for working capital and general corporate purposes. See the section entitled “Use of Proceeds.”

 

Directed Share Program

At our request, the underwriters have reserved up to 375,000 shares of Class A common stock, or approximately 7.5% of the shares being offered by this prospectus, for sale, at the initial public offering price, to our directors, officers, employees and other parties associated with us or our Sponsor. Shares of Class A

 

 

 

 

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common stock purchased by any of such other parties subject to a lock-up agreement with the underwriters will be subject to the 180-day lockup restriction described in the “Underwriting” section of this prospectus. The number of shares of Class A common stock available for sale to the general public will be reduced to the extent these parties purchase any of such reserved shares. Any reserved shares of Class A common stock that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

 

Listing

Our Class A common stock has been approved for listing on the NASDAQ Global Market under the symbol “HABT.”

 

Dividend policy

We do not expect to pay dividends as a public company in the foreseeable future. Immediately after the completion of this offering, we will (i) be a holding company that will hold as our principal assets an equity interest in The Habit Restaurants, LLC and shares of subsidiaries, each of which in turn will hold as its principal asset an equity interest in The Habit Restaurants, LLC, and (ii) operate and control the business affairs of The Habit Restaurants, LLC as its sole managing member, and conduct our business through The Habit Restaurants, LLC and its subsidiaries. If The Habit Restaurants, Inc. decides to pay a dividend in the future, it would need to cause The Habit Restaurants, LLC to make distributions to The Habit Restaurants, Inc. in an amount sufficient to cover such dividend. If The Habit Restaurants, LLC makes such distributions to The Habit Restaurants, Inc., the other holders of LLC Units will be entitled to receive pro rata distributions. 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., including all of the expenses of this offering. In connection with the Recapitalization Transactions and immediately prior to the completion of this offering, The Habit Restaurants, LLC will distribute approximately $30 million to its members, including The Habit Restaurants, Inc.’s subsidiaries. The portion received by The Habit Restaurants, Inc.’s subsidiaries will immediately be distributed to The Habit Restaurants, Inc., which will distribute such amounts to its existing owners as of the completion of this offering, subject to retention of any reserves for expenses and taxes. For additional information, see the section entitled “Dividend Policy.”

 

 

 

 

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Risk factors

You should carefully read the section entitled “Risk Factors” beginning on page 21 of this prospectus, for a discussion of factors that you should consider before deciding to invest in our Class A common stock.

 

(1) 

Our Class A and Class B common stock will generally vote together as a single class on all matters submitted to a vote of stockholders, except as otherwise required by applicable law. However, the Class B common stock will not be publicly traded and will not entitle its holders to receive dividends or distributions upon a liquidation, dissolution or winding up of the company.

References in this section to number of shares of Class A common stock to be issued and outstanding immediately after this offering excludes:

 

   

2,525,275 shares of Class A common stock reserved for issuance under our 2014 Omnibus Incentive Plan.

Except as otherwise indicated, all information in this prospectus assumes no exercise of the underwriters’ option to purchase additional shares.

 

 

 

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Summary Consolidated Financial and Other Data

The following tables set forth summary consolidated financial information and other data on a historical and pro forma basis of The Habit Restaurants, Inc. The Habit Restaurants, Inc. has had no operations to date, other than (i) those incident to its formation, (ii) the merger transactions resulting in it holding interests, indirectly through its wholly-owned subsidiaries, the principal assets of which are equity interests in The Habit Restaurants, LLC (such interests collectively representing, as of September 30, 2014, a less than 20% interest in The Habit Restaurants, LLC) and (iii) the preparation of this registration statement. Therefore, the information below is presented for reporting purposes only for The Habit Restaurants, LLC, which, upon the completion of the Recapitalization Transactions and this offering, will be a consolidated subsidiary of The Habit Restaurants, Inc. You should read these tables along with the sections entitled “The Recapitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Unaudited Pro Forma Condensed Consolidated Financial Information” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

The summary statements of operations and cash flow data presented below for the years ended December 27, 2011, December 25, 2012 and December 31, 2013, respectively, have been derived from our audited consolidated financial statements that are included elsewhere in this prospectus. We have derived the summary statements of operations data for the 39 weeks ended September 24, 2013 and September 30, 2014, respectively, and the summary balance sheet data as of September 30, 2014 from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our unaudited interim condensed consolidated financial statements are based on assumptions and were prepared on the same basis as our audited consolidated financial statements and include, in our opinion, all adjustments, consisting of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those financial statements. The unaudited pro forma financial information is not necessarily indicative of the results that actually would have been achieved for this period or that may be achieved in the future. Our historical results for any prior period are not necessarily indicative of our results in any future period, and our results for any interim periods are not necessarily indicative of results for a full fiscal year.

 

 

 

 

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Beginning with fiscal year 2011, we have operated on a 52- or 53-week fiscal year ending on the last Tuesday of each calendar year for financial reporting purposes. As a result of the transition to this 52- or 53-week fiscal calendar from a traditional year-end calendar, fiscal year 2010 began on January 1, 2010 but ended on December 28, 2010, such that fiscal year 2010 was three days fewer than a typical calendar year. Prior to fiscal year 2010, we used a traditional calendar year end for our fiscal year for financial reporting purposes. Fiscal years 2011, 2012 and 2013 ended on December 27, 2011, December 25, 2012 and December 31, 2013, respectively. The 2013 fiscal year contained 53 weeks, while all other years presented contain 52 weeks.

 

     Fiscal Year Ended     39 Weeks Ended  
     December 27,
2011
    December 25,
2012
    December 31,
2013
    September 24,
2013
    September 30,
2014
 

(amounts in thousands, except per share data)

                     (unaudited)  
        

Statement of Operations Data:

          

Revenue:

          

Revenue

   $     59,236      $     84,158      $     120,373      $     84,889      $     126,210   

Franchise/license revenue

     —          —          —          —         56   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     59,236        84,158        120,373        84,889        126,266   

Operating Expenses:

          

Restaurant operating costs (excluding depreciation and amortization):

          

Food and paper costs

     19,538        26,396        38,789        27,521        41,928   

Labor and related expenses

     18,135        25,831        35,782        25,126        37,362   

Occupancy and other operating expenses

     8,563        12,687        18,906        13,233        19,485   

General and administrative expenses

     6,850        10,254        12,634        9,057        12,574   

Depreciation and amortization

     2,292        3,923        6,008        4,124        5,991   

Pre-opening costs

     1,122        1,458        1,754        977        1,147   

Loss on disposal of assets

     4        3        15        7        115   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     56,502        80,552        113,888        80,045        118,602   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     2,734        3,606        6,485        4,844        7,664   

Other Expenses:

          

Interest expense

     344        548        735        514        756   

Income before income taxes

     2,389        3,058        5,750        4,330        6,908   

Provision for income taxes(1)

     —          —          —          —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 2,389      $ 3,058      $ 5,750      $ 4,330      $ 6,908   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Net Income and Per Share Data(2):

          

Pro forma net income

       $ 1,222        $ 1,463   

Pro forma net income per share

          

Basic

       $ 0.15        $ 0.18   

Diluted

       $ 0.15        $ 0.18   

Weighted average shares used in computing pro forma net income per share:

          

Basic

         8,244          8,244   

Diluted

         8,244          8,244   

 

 

 

 

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     As of September 30, 2014(3)  
     Actual      Pro Forma As
Adjusted
 

(amounts in thousands)

   (unaudited)  

Balance Sheet Data—Consolidated (at period end):

     

Cash and cash equivalents

   $ 2,261      $ 41,044   

Property and equipment, net(4)

     60,593         60,593   

Total assets

     91,764         142,696   

Total debt(5)

     13,604         2,486   

Total stockholders’ equity

   $     51,859      $ 101,732   

 

     Fiscal Year Ended     39 Weeks Ended  
     December 27,
2011
    December 25,
2012
    December 31,
2013
    September 24,
2013
    September 30,
2014
 

(dollar amounts in thousands)

                     (unaudited)  

Other Operating Data:

          

Total restaurants at end of period(6)

     46        63        85        73        99   

Company-owned restaurants at end of period

     46        63        85        73        98   

Comparable restaurant sales growth(7)

     8.7     3.5     3.6     2.9     9.8

Average unit volumes

   $ 1,526      $ 1,565      $ 1,634      $ 1,592      $ 1,741   

Restaurant contribution(8)

   $ 13,000      $ 19,243      $ 26,896      $ 19,009      $ 27,435   

as a percentage of revenue

     21.9     22.9     22.3     22.4     21.7

EBITDA(9)

   $ 5,025      $ 7,529      $ 12,492      $ 8,968      $ 13,655   

Adjusted EBITDA(9)

   $ 6,558      $ 10,251      $ 14,656      $ 10,279      $ 15,780   

as a percentage of revenue

     11.1     12.2     12.2     12.1     12.5

Capital expenditures(10)

   $     11,274      $     14,968      $     20,234      $     11,629      $     14,935   

 

(1) 

The Habit Restaurants, LLC is a limited liability company that is treated by its members as a partnership under the provisions of the federal and applicable state income tax codes. Under these provisions, The Habit Restaurants, LLC generally pays no tax on its net income, and each of its members is required to report such member’s allocable share of The Habit Restaurants, LLC’s net income on such member’s income tax returns. As a result, no provision for income taxes is reflected in the above financial statements.

(2) 

The unaudited pro forma net income data give effect to the Recapitalization Transactions and the sale of 5,000,000 shares of our Class A common stock by us in this offering at the initial public offering price of $18.00 per share and the use of proceeds contemplated hereby. For a detailed presentation of the unaudited pro forma information, including a description of the transactions and assumptions underlying the pro forma adjustments giving rise to these results, see the section entitled “Unaudited Pro Forma Condensed Consolidated Financial Information” included elsewhere in this prospectus.

(3) 

Pro forma balance sheet data as of September 30, 2014 give effect to this offering, as if this offering had been consummated on September 30, 2014, at the initial public offering price of $18.00 per share, after deducting the underwriting discounts and estimated offering expenses payable by us.

(4) 

Property and equipment, net consists of property owned, net of accumulated depreciation and amortization.

(5) 

Total debt consists of borrowings under our credit facility (as described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility”) and deemed landlord financing.

(6) 

Does not include the five licensed locations in Santa Barbara County. See the section entitled “Certain Relationships and Related Party Transactions—License Agreement with Co-Founders.”

(7) 

Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base. A restaurant enters our comparable restaurant base in the accounting period following its 18th full period of operations.

(8) 

Restaurant contribution is neither required by, nor presented in accordance with, GAAP, and is defined as company-owned restaurant revenue less company-owned restaurant operating costs. Restaurant contribution is a supplemental measure of operating performance of our restaurants and our calculation thereof may not be comparable to that reported by other companies. Restaurant contribution has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Management believes that restaurant contribution is an important tool for investors because it is a widely-used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant contribution as a key metric to evaluate the profitability of incremental sales at our restaurants, to evaluate our restaurant performance across periods and to evaluate our restaurant financial performance compared with our competitors. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of restaurant contribution and other key performance indicators.

footnotes continued on following page

 

 

 

 

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A reconciliation of restaurant contribution to company-owned restaurant revenue is provided below:

 

     Fiscal Year Ended      39 Weeks Ended  
   December 27,
2011
     December 25,
2012
     December 31,
2013
     September 24,
2013
     September 30,
2014
 
(amounts in thousands)                         (unaudited)  

Revenue

   $     59,236       $     84,158       $     120,373       $     84,889       $     126,210   

Restaurant operating costs

     46,236         64,915         93,477         65,880         98,775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Restaurant contribution

   $ 13,000       $ 19,243       $ 26,896       $ 19,009       $ 27,435   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(9) 

EBITDA represents net income before interest expense, provision for income taxes, depreciation and amortization. Adjusted EBITDA represents net income before interest expense, 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 prospectus 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.

footnotes continued on following page

 

 

 

 

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

 

     Fiscal Year Ended     39 Weeks Ended  
     December 27,
2011
     December 25,
2012
    December 31,
2013
    September 24,
2013
    September 30,
2014
 

(amounts in thousands)

                      (unaudited)  

Net income

   $     2,389       $ 3,058      $ 5,750      $ 4,330      $ 6,908   

Non-GAAP adjustments:

           

Provision for income taxes

     —           —          —          —         —    

Interest expense

     344         548        735        514        756   

Depreciation and amortization

     2,292         3,923        6,008        4,124        5,991   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 5,025       $ 7,529      $ 12,492      $ 8,968      $ 13,655   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Share-based compensation expense(a)

     251         301        260        216        304   

Management fees(b)

     157         160        144        120        114   

Loss on disposal of assets(c)

     4         3        15        7        115   

Legal settlement(d)

     —           800        (9     (9     —    

Pre-opening costs(e)

     1,122         1,458        1,754        977        1,147   

Costs associated with becoming a public company

     —           —          —          —          445   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 6,558       $     10,251      $     14,656      $ 10,279      $ 15,780   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) 

Includes non-cash, share-based compensation.

  (b) 

Includes management fees and other out-of-pocket costs incurred by us and payable to our Sponsor.

  (c) 

Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.

  (d) 

One-time costs related to the settlement of a legal matter.

  (e) 

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.

 

(10)

Capital expenditures consist of cash paid related to new restaurant construction, the remodel and maintenance of existing restaurants and other corporate expenditures.

 

 

 

 

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RISK FACTORS

An investment in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our consolidated financial statements and accompanying notes, before investing in our Class A common stock. The risks described below are those which we believe are the material risks that we face. Additional risks not presently known to us or which we currently consider immaterial may also have an adverse effect on us. The trading price of our Class A common stock could decline due to any of these risks, and you may lose all or part of your investment in our Class A common stock. Some statements in this prospectus, including such statements in the following risk factors, constitute forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to Our Business and Industry

Our future growth depends primarily on our ability to open new restaurants and is subject to many unpredictable factors.

We expect that one of the key means of achieving our growth strategy for the foreseeable future will be through opening new restaurants and operating those restaurants on a profitable basis. We opened 22 restaurants in 2013. From January 1, 2014 through October 20, 2014, we opened 14 restaurants, and we expect to open a total of 23 to 25 restaurants in 2014, as well as 26 to 28 company-owned restaurants in 2015. We may not be able to open new restaurants as quickly as planned. In the past, we have experienced delays in opening some restaurants due to construction delays in new developments. Such delays could happen again in future restaurant openings. Delays or failures in opening new restaurants could have a material adverse effect on our growth strategy and our business, financial condition and results of operations. As we operate more restaurants, our rate of expansion relative to the size of our restaurant base will decline.

In addition, one of our biggest challenges is locating and securing an adequate supply of suitable new restaurant sites. Competition for those sites is intense, and other restaurant and retail concepts that compete for those sites may have economic models that permit them to bid more aggressively for those sites than we can. There is no guarantee that a sufficient number of suitable sites will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan. Our ability to open new restaurants also depends on other factors, including:

 

   

negotiating leases with acceptable terms;

 

   

identifying, hiring and training qualified employees in each local market;

 

   

identifying and securing an appropriate site;

 

   

timely delivery of leased premises to us from our landlords and punctual commencement of our build-out construction activities;

 

   

managing construction and development costs of new restaurants, particularly in competitive markets;

 

   

obtaining construction materials and labor at acceptable costs;

 

   

securing required governmental approvals, permits and licenses (including construction and other permits) in a timely manner and responding effectively to any changes in local, state or federal laws and regulations; and

 

   

avoiding the impact of inclement weather, natural disasters and other calamities.

Our progress in opening new restaurants from quarter to quarter may occur at an uneven rate. If we do not open new restaurants in the future according to our current plans, the delay could have a material adverse effect on our business, financial condition and results of operations.

 

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We operate in the highly competitive restaurant industry. If we are not able to compete effectively, it will have a material adverse effect on our business, financial condition and results of operations.

We face significant competition from restaurants in the fast casual dining and traditional fast food segments of the restaurant industry. These segments are highly competitive with respect to, among other things, taste, price, food quality and presentation, service, location and the ambience and condition of each restaurant. Our competition includes a variety of locally-owned restaurants and national and regional chains offering dine-in, carry-out, delivery and catering services. Many of our competitors have existed longer and have a more established market presence with substantially greater financial, marketing, personnel and other resources than we do. Among our competitors are a number of multi-unit, multi-market, fast casual restaurant concepts, some of which are expanding nationally. As we expand, we will face competition from these restaurant concepts as well as new competitors that strive to compete with our market segments. These competitors may have, among other things, lower operating costs, better locations, better facilities, better management, more effective marketing and more efficient operations. Additionally, we face the risk that new or existing competitors will copy our business model, menu options, presentation or ambience, among other things.

Any inability to successfully compete with the restaurants in our markets will place downward pressure on our customer traffic and may prevent us from increasing or sustaining our revenue and profitability. Consumer tastes, nutritional and dietary trends, traffic patterns and the type, number and location of competing restaurants often affect the restaurant business, and our competitors may react more efficiently and effectively to those conditions. Several of our competitors compete by offering menu items that are specifically identified as low in carbohydrates, gluten-free or healthier for consumers. In addition, many of our traditional fast food restaurant competitors offer lower-priced menu options or meal packages, or have loyalty programs. Our sales could decline due to changes in popular tastes, “fad” food regimens, such as low carbohydrate diets, and media attention on new restaurants. If we are unable to continue to compete effectively, our traffic, sales and restaurant contribution could decline which would have a material adverse effect on our business, financial condition and results of operations.

Our expansion into new markets may present increased risks.

We plan to open restaurants in markets where we have little or no operating experience. Restaurants we open in new markets may take longer to reach expected sales and profit levels on a consistent basis and may have higher construction, occupancy or operating costs than restaurants we open in existing markets, thereby affecting our overall profitability. New markets may have competitive conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than our existing markets. We may need to make greater investments than we originally planned in advertising and promotional activity in new markets to build brand awareness. We may find it more difficult in new markets to hire, motivate and keep qualified employees who share our vision, passion and culture. We may also incur higher costs from entering new markets if, for example, we assign regional managers to manage comparatively fewer restaurants than in more developed markets. As a result, these new restaurants may be less successful or may achieve AUVs at a slower rate. We may not be able to successfully develop critical market presence for our brand in new geographical markets, as we may be unable to find and secure attractive locations, build name recognition or attract new customers. Inability to fully implement or failure to successfully execute our plans to enter new markets could have a material adverse effect on our business, financial condition and results of operations.

New restaurants, once opened, may not be profitable, and the increases in average restaurant revenue and comparable restaurant sales that we have experienced in the past may not be indicative of future results.

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

 

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on a consistent basis. However, we cannot assure you that this will occur for future restaurant openings. 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. In addition, our average restaurant revenue and comparable restaurant sales may not increase at the rates achieved over the past several years. Our ability to operate new restaurants profitably and increase average restaurant revenue and comparable restaurant sales will depend on many factors, some of which are beyond our control, including:

 

   

consumer awareness and understanding of our brand;

 

   

general economic conditions, which can affect restaurant traffic, local labor costs and prices we pay for the food products and other supplies we use;

 

   

changes in consumer preferences and discretionary spending;

 

   

difficulties obtaining or maintaining adequate relationships with distributors or suppliers in new markets;

 

   

increases in prices for commodities, including beef and other proteins;

 

   

inefficiency in our labor costs as the staff gains experience;

 

   

competition, either from our competitors in the restaurant industry or our own restaurants;

 

   

temporary and permanent site characteristics of new restaurants;

 

   

changes in government regulation; and

 

   

other unanticipated increases in costs, any of which could give rise to delays or cost overruns.

If our new restaurants do not perform as planned, our business and future prospects could be harmed. In addition, an inability to achieve our expected average restaurant revenue would have a material adverse effect on our business, financial condition and results of operations.

Our sales growth and ability to achieve profitability could be adversely affected if comparable restaurant sales are less than we expect.

The level of comparable restaurant sales, which reflect the change in year-over-year sales for restaurants in the accounting period following their 18th full period of operations, will affect our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin on new restaurant sales. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement our initiatives to build sales. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial condition and results of operations. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures We Use to Evaluate Our Performance—Comparable Restaurant Sales Growth.”

Our long-term success is highly dependent on our ability to effectively identify and secure appropriate sites for new restaurants.

We intend to develop new restaurants in our existing markets, expand our footprint into adjacent markets and selectively enter into new markets. In order to build new restaurants, we must first identify markets where we can enter or expand our footprint, taking into account numerous factors, including the location of our current restaurants, local economic trends, population density, area demographics

 

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and geography. Then we must secure appropriate restaurant sites, which is one of our biggest challenges. There are numerous factors involved in identifying and securing an appropriate restaurant site, including:

 

   

evaluating size of the site, traffic patterns, local retail and business attractions and infrastructure that will drive high levels of customer traffic and sales;

 

   

competition in new markets, including competition for restaurant sites;

 

   

financial conditions affecting developers and potential landlords, such as the effects of macro-economic conditions and the credit market, which could lead to these parties delaying or canceling development projects (or renovations of existing projects), in turn reducing the number of appropriate restaurant sites available;

 

   

developers and potential landlords obtaining licenses or permits for development projects on a timely basis;

 

   

proximity of potential restaurant sites to existing restaurants;

 

   

anticipated commercial, residential and infrastructure development near the potential restaurant site; and

 

   

availability of acceptable lease terms and arrangements.

Given the numerous factors involved, we may not be able to successfully identify and secure attractive restaurant sites in existing, adjacent or new markets, which could have a material adverse effect on our business, financial condition and results of operations.

Changes in food and supply costs or failure to receive frequent deliveries of food ingredients and other supplies could have an adverse effect on our business, financial condition and results of operations.

Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs, and our ability to maintain our menu depends in part on our ability to acquire ingredients that meet our specifications from reliable suppliers. Shortages or interruptions in the availability of certain supplies caused by unanticipated demand, problems in production or distribution, food contamination, inclement weather or other conditions could adversely affect the availability, quality and cost of our ingredients, which could harm our operations. Any increase in the prices of the food products most critical to our menu, such as beef, chicken, fresh produce, soybean oil and other proteins, could have a material adverse effect on our results of operations. Particularly, the cost of ground beef, our largest commodity expenditure and the only commodity that accounts for more than 19% of our total food and paper costs, or 6% of our total costs in the 52 weeks ended September 30, 2014, has increased significantly over the past year as a result of a reduction in U.S. cattle supply, a trend which we expect to continue for several years, coupled with an increase in world demand for beef. We currently do not purchase beef with fixed pricing or use futures contracts or other financial risk management strategies to reduce our exposure to potential price fluctuations. The market for ground beef is particularly volatile and is subject to extreme price fluctuations due to seasonal shifts, climate conditions, the price of feed, industry demand, energy demand and other factors. Although we try to manage the impact that these fluctuations have on our operating results, we remain susceptible to increases in food costs as a result of factors beyond our control, such as general economic conditions, seasonal fluctuations, weather conditions, demand, food safety concerns, generalized infectious diseases, product recalls and government regulations. Therefore, material increases in the prices of the ingredients most critical to our menu, particularly ground beef, could adversely affect our operating results or cause us to consider changes to our product delivery strategy and adjustments to our menu pricing.

If any of our distributors or suppliers performs inadequately, or our distribution or supply relationships are disrupted for any reason, there could be a material adverse effect on our business, financial condition, results of operations or cash flows. Although we often enter into contracts for the purchase of food

 

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products and supplies, we do not have long-term contracts for the purchase of all of such food products and supplies. As a result, we may not be able to anticipate or react to changing food costs by adjusting our purchasing practices or menu prices, which could cause our operating results to deteriorate. If we cannot replace or engage distributors or suppliers who meet our specifications in a short period of time, that could increase our expenses and cause shortages of food and other items at our restaurants, which could cause a restaurant to remove items from its menu. If that were to happen, affected restaurants could experience significant reductions in sales during the shortage or thereafter, if customers change their dining habits as a result. In addition, because we provide moderately priced food, we may choose not to, or may be unable to, pass along commodity price increases to consumers, including price increases with respect to ground beef. These potential changes in food and supply costs could have a material adverse effect on our business, financial condition and results of operations.

Failure to manage our growth effectively could harm our business and operating results.

Our growth plan includes opening a significant number of new restaurants. Our existing restaurant management systems, financial and management controls and information systems may be inadequate to support our planned expansion. Managing our growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train and retain managers and team members. We may not respond quickly enough to the changing demands that our expansion will impose on our management, restaurant teams and existing infrastructure, which could harm our business, financial condition and results of operations.

Opening new restaurants in existing markets may negatively impact sales at our existing restaurants.

The consumer target area of our restaurants varies by location, depending on a number of factors, including population density, other local retail and business attractions, area demographics and geography. As a result, the opening of a new restaurant in or near markets in which we already have restaurants could adversely impact sales at these existing restaurants. Existing restaurants could also make it more difficult to build our consumer base for a new restaurant in the same market. Our core business strategy does not entail opening new restaurants that we believe will materially affect sales at our existing restaurants, but we may selectively open new restaurants in and around areas of existing restaurants that are operating at or near capacity to effectively serve our customers.

The planned rapid increase in the number of our restaurants may make our future results unpredictable.

We opened 22 restaurants in 2013. From January 1, 2014 through October 20, 2014, we opened 14 restaurants and we expect to open a total of 23 to 25 restaurants in 2014, as well as 26 to 28 company-owned restaurants in 2015. We intend to continue to increase the number of our restaurants in the next several years. This growth strategy and the substantial investment associated with the development of each new restaurant may cause our operating results to fluctuate unpredictably or have an adverse effect on our profits. In addition, we may find that our restaurant concept has limited appeal in new markets or we may experience a decline in the popularity of our restaurant concept in the markets in which we operate. Newly opened restaurants or our future markets and restaurants may not be successful or our system-wide average restaurant revenue may not increase at historical rates, which could have a material adverse effect on our business, financial condition and results of operations.

We will have limited control over our franchisees or licensees and our franchisees or licensees could take actions that could harm our business.

A part of our expected growth strategy is to partner with franchisees. We have limited control over our franchisees and licensees, and they could take actions that could harm our business. Franchisees and licensees are independent contractors and are not our employees, and we will not exercise control over their day-to-day operations. We plan to provide training and support to franchisees and licensees, but the

 

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quality of franchised or licensed restaurant operations may be diminished by any number of factors beyond our control. Consequently, franchisees and licensees may not successfully operate restaurants in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other restaurant personnel. If franchisees or licensees do not meet our standards and requirements, our image and reputation, and the image and reputation of other franchisees or licensees, may suffer materially and system-wide sales could decline significantly.

Franchisees and licensees, as independent business operators, may from time to time disagree with us and our strategies regarding the business or our interpretation of our, and their, rights and obligations under franchise and development agreements or license agreements, respectively. This may lead to disputes with our franchisees or licensees in the future. These disputes may divert the attention of our management and our franchisees or licensees from operating our restaurants and affect our image and reputation and our ability to attract franchisees or licensees in the future, which could have a material adverse effect on our business, financial condition and results of operations.

There are five Habit Burger Grill locations in Santa Barbara County, California, operated under a license agreement by our former chief executive officer, for which we receive no royalties or revenue.

Our former chief executive officer, Brent Reichard, and our co-founder, Bruce Reichard, operate five The Habit Burger Grill restaurants in Santa Barbara County, California through Reichard Bros. Enterprises, Inc., pursuant to license agreements entered into in 2004, as amended and restated in 2007 and as further amended in October 2014 (the “Reichard License”). We do not receive any royalties or other revenue from these locations, and pursuant to the terms of the Reichard License, we are prohibited from opening any company-owned locations in Santa Barbara County. Reichard Bros. Enterprises, Inc. is also entitled, pursuant to the terms of the Reichard License, to open additional locations in Santa Barbara County, California. The Reichard License contains quality control provisions, and provides that we may terminate the Reichard License if Reichard Bros. Enterprises, Inc. fails to comply with any material provisions thereof. Nevertheless, if Reichard Bros. Enterprises, Inc. does not successfully operate its licensed restaurants in a manner consistent with our standards and requirements it may have a material adverse effect on our business, financial condition and results of operations.

Negative publicity relating to one of our restaurants, including one of our franchised restaurants, could reduce sales at some or all of our other restaurants.

Our success is dependent in part upon our ability to maintain and enhance the value of our brand, consumers’ connection to our brand and positive relationships with our franchisees. We may, from time to time, be faced with negative publicity relating to food quality, public health concerns, restaurant facilities, customer complaints or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers’ food processing, employee relationships or other matters, regardless of whether the allegations are valid or whether we are held to be responsible. The negative impact of adverse publicity relating to one restaurant may extend far beyond the restaurant or franchise involved to affect some or all of our other restaurants. The risk of negative publicity is particularly great with respect to our franchised restaurants because we are limited in the manner in which we can regulate them, especially on a real-time basis. The considerable expansion in the use of social media over recent years can further amplify any negative publicity that could be generated by such incidents. A similar risk exists with respect to unrelated food service businesses, if consumers associate those businesses with our own operations.

Additionally, employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination may also create negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. A significant increase in the number of these claims or an increase in the number of successful claims would have a material adverse effect on our business,

 

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financial condition and results of operations. Consumer demand for our products and our brand’s value could diminish significantly if any such incidents or other matters create negative publicity or otherwise erode consumer confidence in us or our products, which would likely result in lower sales and could have a material adverse effect on our business, financial condition and results of operations.

Governmental regulation may adversely affect our ability to open new restaurants or otherwise adversely affect our business, financial condition and results of operations.

We are subject to various federal, state and local regulations, including those relating to building and zoning requirements and those relating to the preparation and sale of food. The development and operation of restaurants depends to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. Our restaurants are also subject to state and local licensing and regulation by health, sanitation, food and occupational safety and other agencies. We may experience material difficulties or failures in obtaining the necessary licenses, approvals or permits for our restaurants, which could delay planned restaurant openings or affect the operations at our existing restaurants. In addition, stringent and varied requirements of local regulators with respect to zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations.

We are subject to the U.S. Americans with Disabilities Act (the “ADA”) and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas, including our restaurants. We may in the future have to modify restaurants by adding access ramps or redesigning certain architectural fixtures, for example, to provide service to or make reasonable accommodations for disabled persons. The expenses associated with these modifications could be material.

Our operations are also subject to the U.S. Occupational Safety and Health Act, which governs worker health and safety, the U.S. Fair Labor Standards Act, which governs such matters as minimum wages and overtime, and a variety of similar federal, state and local laws that govern these and other employment law matters. We and our franchisees may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission or others alleging violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters, and we have been a party to such matters in the past. In addition, federal, state and local proposals related to paid sick leave or similar matters could, if implemented, have a material adverse effect on our business, financial condition and results of operations.

There is also a potential for increased regulation of certain food establishments in the United States, where compliance with a Hazard Analysis and Critical Control Points (“HACCP”) approach would be required. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product. Many states have required restaurants to develop and implement HACCP Systems, and the United States government continues to expand the sectors of the food industry that must adopt and implement HACCP programs. For example, the Food Safety Modernization Act (the “FSMA”), signed into law in January 2011, granted the U.S. Food and Drug Administration (the “FDA”) new authority regarding the safety of the entire food system, including through increased inspections and mandatory food recalls. Although restaurants are specifically exempted from or not directly implicated by some of these new requirements, we anticipate that the new requirements may impact our industry. Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise impact our business.

The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and

 

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regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and, therefore, have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws, including the ADA, could require us to expend significant funds to make modifications to our restaurants if we failed to comply with applicable standards. Compliance with the aforementioned laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings, which could have a material adverse effect on our business, financial condition and results of operation.

Food safety and foodborne illness concerns could have an adverse effect on our business.

We cannot guarantee that our internal controls and training will be fully effective in preventing all food safety issues at our restaurants, including any occurrences of foodborne illnesses such as salmonella, E. coli and hepatitis A. Our quality assurance, health and sanitation internal controls and conditions are inspected by a third-party on a quarterly basis. If the third-party inspector fails to report unsafe or unsanitary conditions or insufficient internal controls, we cannot guarantee that our internal controls will be fully effective in preventing all food safety issues. In addition, there is no guarantee that our franchise restaurants will maintain the high levels of internal controls and training we require at our company-owned restaurants. Furthermore, we and our franchisees rely on third-party vendors, making it difficult to monitor food safety compliance and increasing the risk that foodborne illness would affect multiple locations rather than a single restaurant. Some foodborne illness incidents could be caused by third-party vendors and transporters outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of foodborne illness in any of our restaurants or markets or related to food products we sell could negatively affect our restaurant revenue nationwide if highly publicized on national media outlets or through social media. This risk exists even if it were later determined that the illness was wrongly attributed to us or one of our restaurants. A number of other restaurant chains have experienced incidents related to foodborne illnesses that have had a material adverse effect on their operations. The occurrence of a similar incident at one or more of our restaurants, or negative publicity or public speculation about an incident, could have a material adverse effect on our business, financial condition and results of operations.

We could be party to litigation that could distract management, increase our expenses or subject us to material monetary damages or other remedies.

Our customers occasionally file complaints or lawsuits against us alleging we caused an illness or injury they suffered at or after a visit to our restaurants, or that we have problems with food quality or operations. We may also be subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims and claims alleging violations of federal and state law regarding workplace and employment matters, equal opportunity, harassment, discrimination and similar matters, and we could become subject to class action or other lawsuits related to these or different matters in the future. In recent years, a number of restaurant companies have been subject to such claims, and some of these lawsuits have resulted in the payment of substantial damages by the defendants. Regardless of whether any claims against us are valid, or whether we are ultimately held liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment in excess of our insurance coverage for any claims could materially and adversely affect our financial condition and results of operations. Any adverse publicity resulting from these allegations may also materially and adversely affect our reputation, which in turn could have a material adverse effect on our business, financial condition and results of operations.

In addition, the restaurant industry has been subject to a growing number of claims based on the nutritional content of food products sold and disclosure and advertising practices. We may also be

 

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subject to this type of proceeding in the future and, even if we are not, publicity about these matters (particularly directed at the fast casual or traditional fast food segments of the industry) may harm our reputation and could have a material adverse effect on our business, financial condition and results of operations.

Compliance with environmental laws may negatively affect our business.

We are subject to federal, state and local laws and regulations concerning waste disposal, pollution, protection of the environment, and the presence, discharge, storage, handling, release and disposal of, and exposure to, hazardous or toxic substances. These environmental laws provide for significant fines and penalties for noncompliance and liabilities for remediation, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such hazardous or toxic substances at, on or from our restaurants. Environmental conditions relating to releases of hazardous substances at a prior, existing or future restaurant could have a material adverse effect on our business, financial condition and results of operations. Further, environmental laws, and the administration, interpretation and enforcement thereof, are subject to change and may become more stringent in the future, each of which could have a material adverse effect on our business, financial condition and results of operations.

Changes in economic conditions and adverse weather and other unforeseen conditions, particularly in the markets in which we operate, could have a material adverse effect on our business, financial condition and results of operations.

The restaurant industry depends on consumer discretionary spending. The United States in general or the specific markets in which we operate may suffer from depressed economic activity, recessionary economic cycles, higher fuel or energy costs, low consumer confidence, high levels of unemployment, reduced home values, increases in home foreclosures, investment losses, personal bankruptcies, reduced access to credit or other economic factors that may affect consumer discretionary spending. Traffic in our restaurants could decline if consumers choose to dine out less frequently or reduce the amount they spend on meals while dining out. Negative economic conditions might cause consumers to make long-term changes to their discretionary spending behavior, including dining out less frequently on a permanent basis, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, changes in economic conditions, adverse weather conditions or other unforeseen conditions in states in which we operate, or in the future may operate, could have a disproportionate impact on our overall results of operations. In particular, our business is significantly concentrated in Southern California, and as a result, we could be disproportionately affected by conditions specific to this market.

Specifically, our restaurants in Southern California generated, in the aggregate, approximately 70.1% of our revenue in fiscal year 2012 and approximately 66.6% in fiscal year 2013. Therefore, adverse changes in demographic, unemployment, economic or regulatory conditions in Southern California or the State of California overall, may have a material adverse effect on our business, financial condition and results of operations. As of September 2014, unemployment in California was 7.3% compared to the U.S. unemployment rate of 5.9%. We believe increases in unemployment will have a negative impact on traffic in our restaurants. As a result of our concentration in Southern California, we may be disproportionately affected by these adverse economic conditions compared to other chain restaurants.

Furthermore, regional occurrences in the markets in which we operate, such as local strikes, terrorist attacks, increases in energy prices, adverse weather conditions, tornadoes, earthquakes, hurricanes,

 

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floods, droughts, fires or other natural or man-made disasters, could have a material adverse effect on our business, financial condition and results of operations. Adverse weather conditions may also impact customer traffic at our restaurants, and, in more severe cases, cause temporary restaurant closures, sometimes for prolonged periods. Most of our restaurants have outdoor seating, and the effects of adverse weather may impact the use of these areas and may negatively impact our revenue. If restaurant revenue decreases, our profitability could decline as we spread fixed costs across a lower level of sales. Reductions in staff levels, asset impairment charges and potential restaurant closures could result from prolonged negative restaurant revenue, which would have a material adverse effect on our business, financial condition and results of operations.

New information or attitudes regarding diet and health could result in changes in regulations and consumer consumption habits, which could have an adverse effect on our business, financial condition and results of operations.

Regulations and consumer eating habits may change as a result of new information or attitudes regarding diet and health. Such changes may include responses to scientific studies on the health effects of particular food items or federal, state and local regulations that impact the ingredients and nutritional content of the food and beverages we offer. The success of our restaurant operations is dependent, in part, upon our ability to effectively respond to changes in any consumer attitudes or health regulations and our ability to adapt our menu offerings to trends in food consumption, especially fast-moving trends. If consumer health regulations or consumer eating habits change significantly, we may choose or be required to modify or delete certain menu items, which may adversely affect the attractiveness of our restaurants to new or returning customers. While we generally find that changes in consumer eating habits occur slowly, providing us with sufficient time to adapt our restaurant concept accordingly, changes in consumer eating habits can occur rapidly, often in response to published research or study information, which puts additional pressure on us to adapt quickly. To the extent we are unwilling or unable to respond with appropriate changes to our menu offerings in an efficient manner, it could materially affect consumer demand and have an adverse impact on our business, financial condition and results of operations.

Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the adverse health effects of consuming certain menu offerings. These changes have resulted in, and may continue to result in, laws and regulations requiring us to disclose the nutritional content of our food offerings, and they have resulted, and may continue to result in, laws and regulations affecting permissible ingredients and menu offerings. A number of counties, cities and states, including California, have enacted menu labeling laws requiring multi-unit restaurant operators to disclose to consumers certain nutritional information, or have enacted legislation restricting the use of certain types of ingredients in restaurants, which laws may be different or inconsistent with requirements under the Patient Protection and Affordable Care Act of 2010 (the “PPACA”), which establishes a uniform, federal requirement for certain restaurants to post nutritional information on their menus. Specifically, the PPACA requires chain restaurants with 20 or more locations operating under the same name and offering substantially the same menus to publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake.

We may not be able to effectively respond to changes in consumer health perceptions, comply with further nutrient content disclosure requirements or adapt our menu offerings to trends in eating habits, which could have a material adverse effect on our business, financial condition and results of operations.

We rely heavily on certain vendors, suppliers and distributors, which could have a material adverse effect on our business, financial condition and results of operations.

Our ability to maintain consistent price and quality throughout our restaurants depends in part upon our ability to acquire specified food products and supplies in sufficient quantities from third-party vendors,

 

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suppliers and distributors at a reasonable cost. We use a limited number of suppliers and distributors in various geographical areas, particularly with respect to our fresh food products. We also rely on Performance Food Group as one of our primary distributors, which supplied us with approximately 93.1% of our food supplies in the 39 weeks ended September 30, 2014. We do not control the businesses of our vendors, suppliers and distributors, and our efforts to specify and monitor the standards under which they perform may not be successful. Furthermore, certain food items are perishable, and we have limited control over whether these items will be delivered to us in appropriate condition for use in our restaurants. If any of our vendors or other suppliers are unable to fulfill their obligations to our standards, or if we are unable to find replacement providers in the event of a supply or service disruption, we could encounter supply shortages and incur higher costs to secure adequate supplies, which would have a material adverse effect on our business, financial condition and results of operations. Furthermore, if our current vendors or other suppliers are unable to support our expansion into new markets, or if we are unable to find vendors to meet our supply specifications or service needs as we expand, we could likewise encounter supply shortages and incur higher costs to secure adequate supplies, which would have a material adverse effect on our business, financial condition and results of operations.

In addition, we use various third-party vendors to provide, support and maintain most of our management information systems. We also outsource certain accounting, payroll and human resource functions to business process service providers. The failure of such vendors to fulfill their obligations could disrupt our operations. Additionally, any changes we may make to the services we obtain from our vendors, or new vendors we employ, may disrupt our operations. These disruptions could have a material adverse effect on our business, financial condition and results of operations.

Failure to maintain our corporate culture and changes in consumer recognition of our brand as we grow could have a material adverse effect on our business, financial condition and results of operations.

We believe that a critical component to our success has been our corporate culture. We have invested substantial time and resources in building our team. As we continue to grow, we may find it difficult to maintain the innovation, teamwork, passion and focus on execution that we believe are important aspects of our corporate culture. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives. If we cannot maintain our corporate culture as we grow, it could have a material adverse effect on our business, financial condition and results of operations.

In addition, our future results depend on various factors, including local market acceptance of our restaurants and consumer recognition of the quality of our food and operations. Although we have received national and regional recognition for the high-quality of our food and operations, we cannot guarantee that we will continue to receive similar recognition in future periods. Failure to receive continued national and regional recognition may impact consumer recognition of our brand, which could have a material adverse effect on our business, financial condition and results of operations.

The effect of changes to healthcare laws in the United States may increase the number of employees who choose to participate in our healthcare plans, which may significantly increase our healthcare costs and negatively impact our financial results.

In 2010, the PPACA was signed into law in the United States to require health care coverage for many uninsured individuals and expand coverage to those already insured. We currently offer and subsidize a portion of comprehensive healthcare coverage, primarily for our salaried employees. The PPACA will require us to offer healthcare benefits to all full-time employees (including full-time hourly employees) that meet certain minimum requirements of coverage and affordability, or face penalties. We intend to offer such benefits in mid- to late-2015, and may incur substantial additional expense due to organizing and maintaining the plan which we anticipate will be more expensive on a per person basis and for an

 

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increased number of employees who we anticipate will elect to obtain coverage through a healthcare plan we subsidize in part. If we fail to offer such benefits, or the benefits we elect to offer do not meet the applicable requirements, we may incur penalties. Since the PPACA also requires individuals to obtain coverage or face individual penalties, employees who are currently eligible but elect not to participate in our healthcare plans may find it more advantageous to do so when such individual mandates take effect. It is also possible that by making changes or failing to make changes in the healthcare plans offered by us we will become less competitive in the market for our labor. Finally, implementing the requirements of the PPACA is likely to impose additional administrative costs. The costs and other effects of these new healthcare requirements cannot be determined with certainty, but they may significantly increase our healthcare coverage costs and could have a material adverse effect on our business, financial condition and results of operations.

We depend on our senior management team and other key employees, and the loss of one or more key personnel or an inability to attract, hire, integrate and retain highly skilled personnel could have an adverse effect on our business, financial condition and results of operations.

Our success depends largely upon the continued services of our key executives. We also rely on our leadership team in setting our strategic direction, operating our business, identifying, recruiting and training key personnel, identifying expansion opportunities, arranging necessary financing and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The loss of one or more of our executive officers or other key employees could have a serious adverse effect on our business. The replacement of one or more of our executive officers or other key employees would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

To continue to execute our growth strategy, we also must identify, hire and retain highly skilled personnel. We might not be successful in maintaining our unique culture and continuing to attract and retain qualified personnel. Failure to identify, hire and retain necessary key personnel could have a material adverse effect on our business, financial condition and results of operations.

Labor shortages, unionization activities, labor disputes or increased labor costs could negatively impact our growth and could have a material adverse effect on our business, financial condition and results of operations.

Labor is a primary component in the cost of operating our restaurants. If we face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, increases in the federal, state or local minimum wage or other employee benefits costs (including costs associated with health insurance coverage), our operating expenses could increase and our growth could be negatively impacted. In addition, our success depends in part upon our ability to attract, motivate and retain a sufficient number of well-qualified restaurant operators and management personnel, as well as a sufficient number of other qualified employees, including customer service and kitchen staff, to keep pace with our expansion schedule. In addition, restaurants have traditionally experienced relatively high employee turnover rates. Although we have not yet experienced significant problems in recruiting or retaining employees, our ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could have a material adverse effect on our business, financial condition and results of operations.

Although none of our employees are currently covered under collective bargaining agreements, if a significant number of our employees were to become unionized and collective bargaining agreement terms were significantly different from our current compensation arrangements, it could adversely affect our business, financial condition and results of operations. In addition, a labor dispute involving some or all of our employees may harm our reputation, disrupt our operations and reduce our revenue, and resolution of disputes may increase our costs.

 

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If we are unable to continue to recruit and retain sufficiently qualified individuals, our business and our growth could be adversely affected. Competition for these employees could require us to pay higher wages, which could result in higher labor costs. In addition increases in the minimum wage would increase our labor costs. Additionally, costs associated with workers’ compensation are rising, and these costs may continue to rise in the future. We may be unable to increase our menu prices in order to pass these increased labor costs on to consumers, in which case our margins would be negatively affected, which could have a material adverse effect on our business, financial condition and results of operations.

The minimum wage, particularly in California, continues to increase and is subject to factors outside of our control.

We have a substantial number of hourly employees who are paid wage rates based on the applicable federal or state minimum wage, although our pay scale starts in excess of the minimum wage, and increases in the minimum wage may increase our labor costs. Since July 1, 2014, the State of California (where most of our restaurants are located) has had a minimum wage of $9.00 per hour, and it is scheduled to rise to $10.00 per hour on January 1, 2016. Moreover, municipalities may set minimum wages above the applicable state standards. The federal minimum wage has been $7.25 per hour since July 24, 2009. Either federally-mandated or state-mandated minimum wages may be raised in the future. We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected, which could have a material adverse effect on our business, financial condition and results of operations. And if menu prices are increased by us to cover increased labor costs, the higher prices could adversely affect sales and thereby reduce our margins.

Changes in employment laws may adversely affect our business.

Various federal and state labor laws govern the relationship with our employees and impact operating costs. These laws include employee classification as exempt or non-exempt for overtime and other purposes, minimum wage requirements, unemployment tax rates, workers’ compensation rates, immigration status and other wage and benefit requirements. Significant additional government-imposed increases in the following areas could have a material adverse effect on our business, financial condition and results of operations:

 

   

minimum wages;

 

   

mandatory health benefits;

 

   

vacation accruals;

 

   

paid leaves of absence, including paid sick leave; and

 

   

tax reporting.

In addition, various states in which we operate are considering or have already adopted new immigration laws or enforcement programs, and the U.S. Congress and Department of Homeland Security from time to time consider and may implement changes to federal immigration laws, regulations or enforcement programs as well. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. We currently participate in the “E-Verify” program, an Internet-based, free program run by the United States government to verify employment eligibility, in states in which participation is required. However, use of the “E-Verify” program does not guarantee that we will properly identify all applicants who are ineligible for employment. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized we could experience adverse publicity that negatively impacts our brand and may make it more difficult to hire and keep qualified employees. Termination of a significant number of

 

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employees who were unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws. These factors could have a material adverse effect on our business, financial condition and results of operations.

We might require additional capital to support business growth, and this capital might not be available.

We intend to continue to make investments to support our business growth and might require additional funds to respond to business challenges or opportunities, including the need to open additional restaurants, develop new products and menu items or enhance our products and menu items, and enhance our operating infrastructure. Accordingly, we might need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Moreover, if we issue new debt securities, the debt holders would have rights senior to Class A common stockholders to make claims on our assets. In addition, we might not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

We are subject to all of the risks associated with leasing space subject to long-term non-cancelable leases.

We do not own any real property. Payments under our operating leases account for a significant portion of our operating expenses and we expect the new restaurants we open in the future will also be leased. We are obligated under non-cancelable leases for our restaurants and our corporate headquarters. Our restaurant leases generally have a term of 10 years with two five-year renewal options. Our restaurant leases generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance charges and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds, although we generally do not expect to pay significant contingent rent on these properties based on the thresholds in those leases. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. If an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as each of our leases expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to pay increased occupancy costs or to close restaurants in desirable locations. These potential increased occupancy costs and closed restaurants could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to adequately protect our intellectual property, which could harm the value of our brand and have a material adverse effect on our business, financial condition and results of operations.

Our intellectual property is material to the conduct of our business. Our ability to implement our business plan successfully depends in part on our ability to further build brand recognition using our trademarks, service marks, trade dress and other proprietary intellectual property, including our name and logos and the unique ambience of our restaurants. While it is our policy to protect and defend vigorously our rights to our intellectual property, we cannot predict whether steps taken by us to protect our intellectual property rights will be adequate to prevent misappropriation of these rights or the use by others of restaurant features based upon, or otherwise similar to, our restaurant concept. It may be difficult for us to prevent others from copying elements of our concept and any litigation to enforce our

 

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rights will likely be costly and may not be successful. Although we believe that we have sufficient rights to all of our trademarks and service marks, we may face claims of infringement that could interfere with our ability to market our restaurants and promote our brand. Any such litigation may be costly and could divert resources from our business. Moreover, if we are unable to successfully defend against such claims, we may be prevented from using our trademarks or service marks in the future and may be liable for damages, which in turn could have a material adverse effect on our business, financial condition and results of operations.

In addition, we license certain of our proprietary intellectual property, including our name and logos, to third parties. For example, we grant our franchisees and licensees a right to use certain of our trademarks in connection with their operation of the applicable restaurant. If a franchisee or other licensee fails to maintain the quality of the restaurant operations associated with the licensed trademarks, our rights to, and the value of, our trademarks could potentially be harmed. Negative publicity relating to the franchisee or licensee could also be incorrectly associated with us, which could harm our business. Failure to maintain, control and protect our trademarks and other proprietary intellectual property would likely have a material adverse effect on our business, financial condition and results of operations and on our ability to enter into new franchise agreements.

We may incur costs resulting from breaches of security of confidential consumer information related to our electronic processing of credit and debit card transactions.

The majority of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information has been stolen. We may in the future become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings relating to these types of incidents. In addition, most states have enacted legislation requiring notification of security breaches involving personal information, including credit and debit card information. Any such claim or proceeding could cause us to incur significant unplanned expenses, which could have a material adverse effect on our business, financial condition and results of operations. Further, adverse publicity resulting from these allegations may have a material adverse effect on our business and results of operations.

We rely heavily on information technology, and any material failure, weakness, interruption or breach of security could prevent us from effectively operating our business.

We rely heavily on information systems, including point-of-sale processing in our restaurants, for management of our supply chain, payment of obligations, collection of cash, credit and debit card transactions and other processes and procedures. Our ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. Our operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses and other disruptive problems. The failure of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a breach in security of these systems could result in delays in customer service and reduce efficiency in our operations. Remediation of such problems could result in significant, unplanned capital investments.

Our current insurance may not provide adequate levels of coverage against claims.

Our current insurance policies may not be adequate to protect us from liabilities that we incur in our business. Additionally, in the future, our insurance premiums may increase, and we may not be able to obtain similar levels of insurance on reasonable terms, or at all. Any substantial inadequacy of, or inability to obtain insurance coverage could have a material adverse effect on our business, financial condition and results of operations.

 

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There are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business, financial condition and results of operations. As a public company, we intend to enhance our existing directors’ and officers’ insurance. While we expect to obtain such coverage, we may not be able to obtain such coverage at all or at a reasonable cost now or in the future. Failure to obtain and maintain adequate directors’ and officers’ insurance would likely adversely affect our ability to attract and retain qualified officers and directors.

Failure to obtain and maintain required licenses and permits or to comply with food control regulations could lead to the loss of our food service licenses and, thereby, harm our business.

The restaurant industry is subject to various federal, state and local government regulations, including those relating to the sale of food. Such regulations are subject to change from time to time. The failure to obtain and maintain these licenses, permits and approvals could have a material adverse effect on our results of operations. Typically, licenses must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses and approvals could adversely affect our existing restaurants and delay or result in our decision to cancel the opening of new restaurants, which would have a material adverse effect on our business.

Changes to accounting rules or regulations may adversely affect the reporting of our results of operations.

Changes to existing accounting rules or regulations may impact the reporting of our future results of operations or cause the perception that we are more highly leveraged. Other new accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. For instance, accounting regulatory authorities have indicated that they may begin to require lessees to capitalize operating leases in their financial statements in the next few years. If adopted, such change would require us to record significant lease obligations on our balance sheet and make other changes to our financial statements. This and other future changes to accounting rules or regulations could have a material adverse effect on the reporting of our business, financial condition and results of operations.

Changes to estimates related to our property, fixtures and equipment or operating results that are lower than our current estimates at certain restaurant locations may cause us to incur impairment charges on certain long-lived assets, which may adversely affect our results of operations.

In accordance with accounting guidance as it relates to the impairment of long-lived assets, we make certain estimates and projections with regard to individual restaurant operations, as well as our overall performance, in connection with our impairment analyses for long-lived assets. When impairment triggers are deemed to exist for any location, the estimated undiscounted future cash flows are compared to its carrying value. If the carrying value exceeds the undiscounted cash flows, an impairment charge equal to the difference between the carrying value and the fair value is recorded. The projections of future cash flows used in these analyses require the use of judgment and a number of estimates and projections of future operating results. If actual results differ from our estimates, additional charges for asset impairments may be required in the future. If future impairment charges are significant, this could have a material adverse effect on our results of operations.

Risks Related to Our Class A Common Stock and this Offering

We are a “controlled company” within the meaning of the NASDAQ rules and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After the completion of this offering, our Sponsor and its affiliates will continue to control a majority of our voting power. As a result, we are a “controlled company” within the meaning of the corporate

 

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governance standards of NASDAQ. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements including:

 

   

the requirement that a majority of the board of directors consist of independent directors;

 

   

the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees.

Following the completion of this offering we intend to utilize certain of these exemptions. As a result, our board committees will not be subject to annual performance evaluations. In addition, we will not have a nominating/corporate governance committee. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of NASDAQ.

Our Sponsor and its affiliates, however, are not subject to any contractual obligation to retain their controlling interest, except that it has agreed, subject to certain exceptions, not to sell or otherwise dispose of any shares of our common stock or other capital stock or other securities exercisable or convertible therefor for a period of at least 180 days after the date of this prospectus without the prior written consent of Piper Jaffray and Baird. Except for this period, there can be no assurance as to the period of time during which affiliates of our Sponsor will maintain its ownership of our common stock following the completion of this offering.

Our Sponsor and its affiliates will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of key transactions, including a change of control.

We are currently controlled, and after this offering is completed will continue to be controlled, by our Sponsor and its affiliates. Immediately following the completion of this offering, investment funds affiliated with our Sponsor will beneficially own 39.2% of our outstanding Class A common stock (35.9% if the underwriters exercise in full their option to purchase additional shares) and 64.4% of our outstanding Class B common stock, which, combined with its holdings of our Class A common stock, aggregates to 56.2% of our voting power, or 54.6% of our voting power if the underwriters’ option to purchase additional shares of our Class A common stock is exercised in full, assuming no purchases by such parties in our directed share program. For as long as investment funds affiliated with our Sponsor continue to beneficially own shares of common stock representing more than 50% of the voting power of our common stock, it will be able to direct the election of all of the members of our board of directors and could exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock and the payment of dividends. Similarly, our Sponsor will have the power to determine matters submitted to a vote of our stockholders without the consent of our other stockholders, will have the power to prevent a change in our control and could take other actions that might be favorable to it. Even if its ownership falls below 50%, our Sponsor will continue to be able to strongly influence or effectively control our decisions.

 

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Additionally, our Sponsor is in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsor may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Our ability to pay taxes and expenses, including payments under the TRA, may be limited by our structure.

Immediately after the completion of this offering, we will be a holding company with no direct operations that will hold as our principal assets an equity interest in The Habit Restaurants, LLC and shares of subsidiaries each of which hold as its principal asset an equity interest in The Habit Restaurants, LLC and will rely on The Habit Restaurants, LLC to provide us with funds necessary to meet any financial obligations. As such, we will have no independent means of generating revenue. 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 taxes as a withholding agent). Instead, taxable income will be allocated to holders of its LLC Units, including us and our subsidiaries. Accordingly, we will incur income taxes on our allocable share of any net taxable income of The Habit Restaurants, LLC and will also incur expenses related to our operations. Pursuant to the LLC Agreement, The Habit Restaurants, LLC will be obligated to make tax distributions to holders of LLC Units, including us and our subsidiaries, subject to the conditions described below. In addition to tax expenses, we also will incur expenses related to our operations, including payments under the TRA, which we expect will be significant. We intend to cause The Habit Restaurants, LLC to make distributions or, in the case of certain expenses, payments in an amount sufficient to allow us to pay our taxes and operating expenses, including distributions to fund any ordinary course payments due under the TRA. However, The Habit Restaurants, LLC’s ability to make such distributions and payments may be subject to various limitations and restrictions, including the operating results of our subsidiaries, our 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. If we do not have sufficient funds to pay tax or other liabilities or to fund our operations (e.g., as a result of The Habit Restaurants, LLC’s inability to make distributions due to various limitations and restrictions or as a result of the acceleration of our obligations under the TRA), we may have to borrow funds, and thus our liquidity and financial condition could be materially and adversely affected. To the extent that we are unable to 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 this prospectus).

We will be required to pay certain of the Continuing LLC Owners for certain tax benefits we may claim, and we expect that the payments we will be required to make will be substantial.

Our acquisitions of interests in The Habit Restaurants, LLC (including in connection with this offering and including transactions treated as “sales or exchanges” for U.S. federal income tax purposes) from the Continuing LLC Owners for shares of our Class A common stock or cash are expected to provide favorable tax attributes for us. As a result of our acquisitions of interests in The Habit Restaurants, LLC from the Continuing LLC Owners, we anticipate that the resulting tax basis adjustments and other related tax attributes may reduce the amount of tax we would otherwise be required to pay in the future.

In connection with this offering, we will enter 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 or our subsidiaries actually realize directly or indirectly (or are deemed

 

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to realize in certain circumstances) as a result of (i) certain tax benefits that are created as a result of this offering 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 payment obligations under the TRA are obligations of The Habit Restaurants, Inc., not The Habit Restaurants, LLC, and we expect that the payments we will be required to make under the TRA will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the TRA, we expect that the tax savings associated with sales or exchanges of interests in The Habit Restaurants, LLC as described above would aggregate to approximately $14.2 million over 22 years from the date of this offering, assuming all future exchanges not occurring in connection with the offering would occur one year after this offering and that the price per share of our Class A common stock does not change. Under such scenario we would be required to pay the other parties to the TRA approximately 85% of such amount, or $12.1 million, over the 15-year period from one year following the date of this offering. The actual amounts may materially differ from these hypothetical amounts. For example, potential future reductions in tax payments for us and TRA payments by us will be calculated using the market value of our Class A common stock at the time of the exchange (or the 15 trading days immediately prior to the delivery date of a notice of exchange, where we elect in the future to pay cash consideration for units of The Habit Restaurants, LLC) and the prevailing applicable tax rates applicable to us over the life of the TRA and will generally be dependent on our generating sufficient future taxable income to realize the benefit. Our 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 us in connection with this offering are expected to be calculated based on the initial public offering price of our Class A common stock, net of underwriting discounts. See the section entitled “Certain Relationships and Related Party Transactions—Recapitalization Transactions in Connection with this Offering—Tax Receivable Agreement.” Payments under the TRA are not conditioned on our existing owners’ continued ownership of us after this offering.

The increase in tax basis, as well as the amount and timing of any payments under these agreements, will vary depending upon a number of factors, including the timing of exchanges by the holders of LLC Units, the price of our Class A common stock at the time of the exchange (or the 15 trading days immediately prior to the delivery date of a notice of exchange, where we elect in the future to pay cash consideration for units of The Habit Restaurants, LLC), whether such exchanges are taxable, the amount and timing of the taxable income we generate in the future, the prevailing applicable tax rates and the portion of our payments under the TRA constituting imputed interest. Payments under the TRA are expected to give rise to certain additional tax benefits attributable to either further increases in basis or in the form of deductions for imputed interest, depending on the circumstances. Any such benefits are covered by the TRA and will increase the amounts due thereunder. In addition, the TRA will provide 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 this prospectus).

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.

 

 

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In certain cases, payments under the TRA to the Continuing LLC Owners may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the TRA.

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 or our subsidiaries 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 years in advance of the actual realization of such future benefits, if any 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. If we were to elect to terminate the TRA immediately after this offering, based on the initial public offering price of $18.00 per share of our Class A common stock, and a discount rate equal to 8%, we estimate that we would be required to pay $63.5 million in the aggregate under the TRA. See the section entitled “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

In certain circumstances, The Habit Restaurants, LLC will be required to make distributions to us and the Continuing LLC Owners, and the distributions that The Habit Restaurants, LLC will be required to make may be substantial.

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 taxes as a withholding agent. Instead, taxable income will be allocated to holders of its LLC Units, including us. Pursuant to the LLC Agreement, The Habit Restaurants, LLC will be obligated to make tax distributions to holders of LLC Units, including us and our subsidiaries, 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 The Habit Restaurants, LLC, our 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. We will be a holding company with no direct operations and will rely on The Habit Restaurants, LLC to provide us with funds necessary to meet any financial obligations.

Funds used by The Habit Restaurants, LLC to satisfy its tax distribution obligations will not be available for reinvestment in our business. Moreover, the tax distributions that The Habit Restaurants, LLC will be required to make may be substantial, and will likely exceed (as a percentage of The Habit Restaurants, LLC’s income) the overall effective tax rate applicable to a similarly situated corporate taxpayer.

As a result of potential differences in the amount of net taxable income allocable to us and to the Continuing LLC Owners, as well as the use of an assumed tax rate in calculating The Habit Restaurants,

 

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LLC’s distribution obligations, we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the TRA. To the extent, as currently expected, we do not distribute such cash balances as dividends on our Class A common stock and instead, for example, hold such cash balances or lend them to The Habit Restaurants, LLC, the Continuing LLC Owners would benefit from any value attributable to such accumulated cash balances as a result of their ownership of Class A common stock following an exchange of their LLC Units. See the section entitled “The Recapitalization—The Recapitalization Transactions—Amendment of the Limited Liability Company Agreement of The Habit Restaurants, LLC.”

We will not be reimbursed for any payments made to the Continuing LLC Owners under the TRA in the event that any tax benefits are disallowed.

If the IRS or a state or local taxing authority challenges the tax basis adjustments and/or deductions that give rise to payments under the TRA and the tax basis adjustments and/or deductions 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 and/or deductions 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.

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial condition and results of operations.

We will be subject to income taxes in the United States, and our domestic tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expected timing and amount of the release of any tax valuation allowances;

 

   

tax effects of stock-based compensation;

 

   

costs related to intercompany restructurings;

 

   

changes in tax laws, regulations or interpretations thereof; or

 

   

lower than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future earnings in jurisdictions where we have higher statutory tax rates.

In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal and state authorities. Outcomes from these audits could have an adverse effect on our financial condition and results of operations.

Our stock price could be extremely volatile, and, as a result, you may not be able to resell your shares at or above the price you paid for them.

In recent years the stock market in general has been highly volatile. As a result, the market price and trading volume of our Class A common stock is likely to be similarly volatile, and investors in our Class A common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our results of operations or prospects, and could lose part or all of their investment. The price of our Class A common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this prospectus and others such as:

 

   

variations in our operating performance and the performance of our competitors or restaurant companies in general;

 

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actual or anticipated fluctuations in our quarterly or annual operating results;

 

   

publication of research reports by securities analysts about us or our competitors or our industry;

 

   

the public’s reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission (the “SEC”);

 

   

our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market;

 

   

additions and departures of key personnel;

 

   

strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

 

   

the passage of legislation or other regulatory developments affecting us or our industry;

 

   

speculation in the press or investment community;

 

   

changes in accounting principles;

 

   

terrorist acts, acts of war or periods of widespread civil unrest;

 

   

natural disasters and other calamities; and

 

   

changes in general market and economic conditions.

In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

There is no existing market for our Class A common stock and we do not know if one will develop. Even if a market does develop, the stock prices in the market may not exceed the offering price.

Prior to this offering, there has not been a public market for our Class A common stock or any of our equity interests. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market on the NASDAQ stock market or how liquid that market may become. An active public market for our Class A common stock may not develop or be sustained after this offering. If an active trading market does not develop or is not sustained, you may have difficulty selling any shares that you buy.

The initial public offering price for the Class A common stock was determined by negotiations among us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following the completion of this offering. Consequently, you may not be able to sell shares of our Class A common stock at prices equal to or greater than the price you pay in this offering.

Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.

Our quarterly operating results may fluctuate significantly because of several factors, including:

 

   

the timing of new restaurant openings and related expense;

 

   

restaurant operating costs for our newly-opened restaurants;

 

   

labor availability and costs for hourly and management personnel;

 

   

profitability of our restaurants, especially in new markets;

 

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changes in interest rates;

 

   

increases and decreases in AUVs and comparable restaurant sales growth;

 

   

impairment of long-lived assets and any loss on restaurant closures;

 

   

macroeconomic conditions, both nationally and locally;

 

   

negative publicity relating to the consumption of seafood or other products we serve;

 

   

changes in consumer preferences and competitive conditions;

 

   

expansion to new markets;

 

   

increases in infrastructure costs; and

 

   

fluctuations in commodity prices.

Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically slightly lower in the fourth quarter due to holiday closures. Adverse weather conditions may also affect customer traffic. In addition, we have outdoor seating at most of our restaurants, and the effects of adverse weather may impact the use of these areas and may negatively impact our revenue.

Regulatory compliance may divert our management’s attention from day-to-day management of our business, which could have a material adverse effect on our business.

Our management team may not successfully or efficiently manage our continued transition to a public company that will be subject to significant regulatory oversight and reporting obligations under the federal securities laws and the regulations imposed by NASDAQ. In particular, these new obligations will require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business, which could materially and adversely impact our business operations.

We have broad discretion in the use of the net proceeds from this offering and might not use them effectively.

Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the section entitled “Use of Proceeds.” Accordingly, you will have to rely on the judgment of our management with respect to the use of the proceeds, with only limited information concerning management’s specific intentions. Our management might spend a portion or all of the net proceeds from this offering in ways that our stockholders do not desire or that might not yield a favorable return. The failure by our management to apply these funds effectively could harm our business. Pending their use, we might invest the net proceeds from this offering in a manner that does not produce income or that loses value.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Following the completion of this offering, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of Class A common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of Class A common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

If you purchase shares in this offering, you will suffer immediate and substantial dilution.

If you purchase shares of our Class A common stock in this offering, you will incur immediate and substantial dilution in the pro forma book value of your stock, which would have been $9.86 per share

 

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as of September 30, 2014, because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. You will experience additional dilution upon the exercise of options and warrants to purchase our Class A common stock, including those options currently outstanding and those granted in the future, and the issuance of stock or other equity awards under our equity incentive plans. To the extent we raise additional capital by issuing equity securities, our stockholders will experience substantial additional dilution. See the section entitled “Dilution.”

There may be sales of a substantial amount of our Class A common stock after this offering by our current stockholders, and these sales could cause the price of our Class A common stock to fall.

After this offering, there will be 8,224,550 shares of Class A common stock outstanding. Of our issued and outstanding shares, all the Class A common stock sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Following completion of this offering, approximately 39.2% of our outstanding Class A common stock (35.9% if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock) and 75.9% of our outstanding Class B common stock will be held by investment funds affiliated with our Sponsor, executive officers and directors, assuming no purchases by parties in our directed share program.

Each of our directors, executive officers and significant equity holders (including affiliates of our Sponsor) has entered into a lock-up agreement with Piper Jaffray and Baird, on behalf of the underwriters, which regulates their sales of our common stock (or sales of interests in The Habit Restaurants, LLC by the Continuing LLC Owners) for a period of 180 days after the date of this prospectus, subject to certain exceptions and automatic extensions in certain circumstances. See the section entitled “Shares Eligible for Future Sale—Lock-Up Agreements.” At any time, the underwriters, in their sole discretion, may release all or some of the securities subject to the lock-up agreements, including securities purchased in the directed shares program, as described in the section entitled “Underwriting.”

Sales of substantial amounts of our Class A common stock in the public market after this offering, or the perception that such sales will occur, could adversely affect the market price of our Class A common stock and make it difficult for us to raise funds through securities offerings in the future. Of the shares to be outstanding after this offering, the shares offered by this prospectus will be eligible for immediate sale in the public market without restriction by persons other than our affiliates.

After this offering, we intend to register 2,525,275 shares of Class A common stock that have been issued or are reserved for issuance under our 2014 Omnibus Incentive Plan. For more information, see the section entitled “Shares Eligible for Future Sale—Registration Statements on Form S-8.”

Provisions in our charter documents and Delaware law may deter takeover efforts that could be beneficial to stockholder value.

Our amended and restated certificate of incorporation and by-laws and Delaware law contain provisions that could make it harder for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include a classified board of directors and limitations on actions by our stockholders. In addition, our board of directors has the right to issue preferred stock without stockholder approval that could be used to dilute a potential hostile acquirer. Our amended and restated certificate of incorporation also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding Class A common stock other than affiliates of our Sponsor. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures, and efforts by stockholders to change the direction or management of the company may be unsuccessful. See the section entitled “Description of Capital Stock.”

 

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If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research or reports about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us and our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our Class A common stock or change their opinion of our Class A common stock, our stock price would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

We will incur significant increased expenses and administrative burdens as a public company, which could have a material adverse effect on our business, financial condition and results of operations.

We will face increased legal, accounting, administrative and other costs and expenses as a public company that we do not incur as a private company. The Sarbanes-Oxley Act, including the requirements of Section 404, as well as rules and regulations subsequently implemented by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated and to be promulgated thereunder, the Public Company Accounting Oversight Board and NASDAQ, impose additional reporting and other obligations on public companies. We expect that compliance with public company requirements will increase our costs and make some activities more time-consuming. A number of those requirements will require us to carry out activities we have not done previously. For example, we will create new board committees and adopt new internal controls and disclosure controls and procedures. In addition, we will incur additional expenses associated with our SEC reporting requirements. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our auditors identify a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation or investor perceptions of us. We also expect that it will be more expensive to obtain director and officer liability insurance. Risks associated with our status as a public company may make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We expect that the additional reporting and other obligations imposed on us by these rules and regulations will increase our legal and financial compliance costs and the costs of our related legal, accounting and administrative activities by approximately $2 million per year. These increased costs will require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives. Advocacy efforts by stockholders and third parties may also prompt additional changes in governance and reporting requirements, which could further increase our costs.

Because we have no current plans to pay cash dividends on our Class A common stock for the foreseeable future, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.

We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends as a public company in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our credit facility. As a result, you may not receive any return on an investment in our Class A common stock unless you sell our Class A common stock for a price greater than that which you paid for it. See the section entitled “Dividend Policy.”

 

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The JOBS Act permits “emerging growth companies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies.

We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. As such, we are 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 for as long as we continue to be an emerging growth company, 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 will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (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 date of the first sale of Class A common stock under this registration statement.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore 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 exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and therefore are not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a publicly traded company, we will be required to comply with the SEC’s rules implementing Section 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. Pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company, which may be up to five full fiscal years following this offering.

To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. In addition, we may identify material weaknesses in our internal control over financial reporting that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404.

 

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If we identify weaknesses in our internal control over financial reporting, are unable to comply with the requirements of Section 404 in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by NASDAQ (the exchange on which our securities are listed), the SEC or other regulatory authorities, which could require additional financial and management resources.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” These forward-looking statements can generally be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “potentially,” “can,” “should,” “seeks,” “projects,” “approximately,” “intends,” “plans,” “estimates” or “anticipates,” or, in each case, their negatives or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industries in which we and our partners operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). We believe that these risks and uncertainties include, but are not limited to, those described in the section entitled “Risk Factors,” which include but are not limited to the following:

 

   

difficulties executing our growth strategy and opening new restaurants that are profitable;

 

   

ineffectively competing in our industry;

 

   

difficulties maintaining increases in average restaurant revenue and comparable restaurant sales;

 

   

increases in food and supply costs or failure to receive frequent deliveries of food ingredients and other supplies;

 

   

limited control over franchisees and licensees, including Reichard Bros. Enterprises, Inc.;

 

   

negative publicity relating to one of our restaurants, including one of our franchised restaurants;

 

   

the impact of governmental laws and regulation;

 

   

food safety and foodborne illness concerns;

 

   

changes in economic conditions and adverse weather and other unforeseen conditions, especially in Southern California;

 

   

new information or attitudes regarding diet and health;

 

   

difficulties with certain vendors, suppliers and distributors we rely on or will rely on;

 

   

failure to maintain our corporate culture as we grow and changes in consumer recognition of our brand;

 

   

changes in senior management, loss of one or more key personnel or an inability to attract, hire, integrate and retain highly skilled personnel;

 

   

labor shortages, unionization activities, labor disputes or increased labor costs, including increased labor costs resulting from minimum wage increases; and

 

   

inadequately protecting our intellectual property or breaches of security of confidential consumer information.

These factors should not be construed as exhaustive and should be read with the other cautionary statements in this prospectus.

 

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Although we base the forward-looking statements contained in this prospectus on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this prospectus, those results or developments may not be indicative of results or developments in subsequent periods.

You are cautioned not to place undue reliance on the forward-looking statements contained in this prospectus as predictions of future events, and we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements contained in this prospectus will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.

Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. We qualify all forward-looking statements by these cautionary statements.

 

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THE RECAPITALIZATION

Incorporation of The Habit Restaurants, Inc.

The Habit Restaurants, Inc. was formed July 24, 2014 and has not to date 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, as of September 30, 2014, a less than 20% interest in The Habit Restaurants, LLC) and (iii) the preparation of this registration statement. The Habit Restaurants, Inc.’s amended and restated certificate of incorporation will authorize two classes of common stock, Class A common stock and Class B common stock, each having the terms described in the section entitled “Description of Capital Stock.”

Immediately following the completion of this offering, each Continuing LLC Owner will hold a number of shares of our Class B common stock equal to the number of LLC Units held by such Continuing LLC Owner. As of September 30, 2014, approximately 65 Continuing LLC Owners would hold shares of our Class B common stock after giving effect to the Recapitalization Transactions and this offering. Each such 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, as described in the section entitled “Description of Capital Stock—Common Stock.” 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.

A majority of the board of directors of The Habit Restaurants, Inc. will be affiliates of The Habit Restaurants, LLC. We expect that, prior to the completion of this offering, we will appoint additional members to the board of directors, who are considered independent under the corporate governance standards under the rules of NASDAQ and the Exchange Act. For more information, see the section entitled “Management—Board Structure and Committee Composition.”

The Recapitalization Transactions

The amendment of the LLC Agreement, issuance of shares of our Class B common stock and entry into the TRA, the registration rights agreement and the recapitalization agreement are collectively referred to as the “Recapitalization Transactions.”

Amendment of the Limited Liability Company Agreement of The Habit Restaurants, LLC

On the date of and prior to the completion of this offering, the limited liability company agreement of The Habit Restaurants, LLC will be amended and restated to, among other things, create a single new class of non-voting LLC Units. As of September 30, 2014, there were approximately 11 holders of Class A units, 15 holders of Class B units, 42 holders of Class C units and 15 holders of Class D units of The Habit Restaurants, LLC. The number of LLC units each equity holder of The Habit Restaurants, LLC, including our subsidiaries, will hold will be determined based on a hypothetical cash distribution by The Habit Restaurants, LLC of our pre-initial public offering value based on the limited liability company agreement of The Habit Restaurants, LLC as in effect prior to the aforementioned amendment and restatement. Immediately following the completion of this offering, The Habit Restaurants, Inc. will be the sole managing member of The Habit Restaurants, LLC.

As the sole managing member of The Habit Restaurants, LLC, The Habit Restaurants, Inc. will have 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

 

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non-pro rata payments 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., including all of the expenses of this offering.

In connection with the Recapitalization Transactions and immediately prior to the completion of this offering, The Habit Restaurants, LLC will incur $30 million of indebtedness under a bridge loan facility provided by California Bank & Trust (the “Bridge Loan”). The Bridge Loan matures two business days from the date that it is funded. We are required to make interest payments equal to 30 day LIBOR plus 2.25%. The Habit Restaurants, LLC will immediately distribute such funds to its members. The portion that is received by The Habit Restaurants, Inc.’s subsidiaries will immediately be distributed to the existing owners of The Habit Restaurants, Inc. prior to the completion of this offering, subject to retention of any reserves for expenses and taxes. Upon the completion of this offering, The Habit Restaurants, Inc. will, directly or indirectly through its wholly-owned subsidiaries, contribute all of the net proceeds of this offering to The Habit Restaurants, LLC in exchange for LLC Units from The Habit Restaurants, LLC at a purchase price per unit equal to the initial public offering price per share of Class A common stock in this offering net of underwriting discounts. The Habit Restaurants, LLC will use a portion of the proceeds to repay and extinguish the Bridge Loan and as further described in the section entitled “Use of Proceeds.”

Immediately after the completion of this offering, The Habit Restaurants, Inc. will be a holding company with no direct operations that will hold as its principal assets an equity interest in The Habit Restaurants, LLC and shares of subsidiaries, each of which in turn will hold as its principal asset an equity interest in The Habit Restaurants, LLC and will rely on The Habit Restaurants, LLC to provide us with funds necessary to meet any financial obligations. As such, The Habit Restaurants, Inc. will have no independent means of generating revenue. 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 will be allocated to holders of LLC Units, including The Habit Restaurants, Inc. Accordingly, The Habit Restaurants, Inc. will incur income taxes on its allocable share of any net taxable income of The Habit Restaurants, LLC and will also incur expenses related to its operations. Pursuant to the LLC Agreement, The Habit Restaurants, LLC will be 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 our subsidiaries, our 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. also will incur expenses related to its operations, plus payments under the TRA, which The Habit Restaurants, Inc. expects will be significant. The Habit Restaurants, Inc. 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 LLC Agreement will also provide that a Continuing LLC Owner will not have the right to transfer LLC Units if, among other things, The Habit Restaurants, Inc. determines that such transfer would be prohibited by law or regulation or would violate other agreements with The Habit Restaurants, Inc. to which the Continuing LLC Owner may be subject.

 

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Organizational Structure Following this Offering

The diagram below depicts our organizational structure immediately following the completion of this offering assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock. As used in this prospectus, “existing owners” refers to the owners of The Habit Restaurants, LLC, collectively, prior to the Recapitalization Transactions (defined below).

 

LOGO

Immediately after the completion of this offering, we will (i) be a holding company that will hold as our principal assets an equity interest in The Habit Restaurants, LLC and shares of subsidiaries, each of which in turn will hold as its principal asset an equity interest in The Habit Restaurants, LLC, (ii) operate and control the business affairs of The Habit Restaurants, LLC as its sole managing member, and conduct our business through The Habit Restaurants, LLC and its subsidiaries, and (iii) include The Habit Restaurants, LLC and its subsidiaries in our consolidated financial statements.

Our post-offering organizational structure will allow the Continuing LLC Owners to retain their equity ownership in The Habit Restaurants, LLC, an entity that its members treat as a partnership for U.S. federal income tax purposes, in the form of LLC Units. By contrast, investors, and existing owners who are not Continuing LLC Owners, participating in this offering will hold equity in The Habit Restaurants, Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of our Class A common stock. As described below, each of the Continuing LLC Owners will also hold a number of shares of Class B common stock of The Habit Restaurants, Inc. equal to the number of LLC Units that they own. In connection with this offering, The Habit Restaurants, Inc. will issue to each Continuing LLC Owner a number of shares of Class B common stock equal to the number of LLC Units such Continuing LLC Owner will hold immediately after the completion of this offering. Each such share of Class B common stock provides its holder with no economic rights but entitles the holder to one vote

 

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on matters presented to The Habit Restaurants, Inc.’s stockholders, as described in the section entitled “Description of Capital Stock—Common Stock—Voting Rights.” Under our amended and restated certificate of incorporation, each share of Class A common stock and each share of Class B common stock shall be entitled to one vote. Holders of our 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.

Exchange Procedures

Pursuant to and subject to the terms of 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 such shares 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. As any Continuing LLC Owner exchanges its LLC Units, The Habit Restaurants, Inc.’s interest in The Habit Restaurants, LLC will increase. The LLC Agreement will provide that a Continuing LLC Owner will not have the right to exchange LLC Units if, among other things, we determine that such exchange would be prohibited by law or regulation or would violate other agreements with us to which the Continuing LLC Owner may be subject of The Habit Restaurants, LLC. 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. We may impose additional restrictions on exchanges that we determine to be necessary or advisable to prevent The Habit Restaurants, LLC from being treated as a “publicly traded partnership” for U.S. federal income tax purposes. When a holder exchanges LLC Units and an equal number of shares of Class B common stock for shares of Class A common stock, because The Habit Restaurants, Inc. acquires additional LLC Units in connection with such exchange, the number of LLC Units held by The Habit Restaurants, Inc. will correspondingly increase, and such shares of Class B common stock will be cancelled. See the section entitled “Certain Relationships and Related Party Transactions—Recapitalization Transactions in Connection with this Offering—Exchange Procedures.”

As noted above, each of the Continuing LLC Owners will also hold a number of shares of our Class B common stock equal to the number of LLC Units held by such person. Although shares of Class B common stock have no economic rights, they give holders voting power at The Habit Restaurants, Inc., the managing member of The Habit Restaurants, LLC, at a level that is consistent with their overall equity ownership of our business. Under our amended and restated certificate of incorporation, each share of Class B common stock will be entitled to one vote. Accordingly, the voting power afforded to the Continuing LLC Owners by their shares of Class B common stock is automatically and correspondingly reduced as they exchange LLC Units and Class B common stock for shares of our Class A common stock pursuant to the LLC Agreement. Additionally, the voting power afforded to such Continuing LLC Owners will correspondingly increase as a result of the issuance of Class A common stock. Therefore, as a result of these transactions (and without taking into account any subsequent sale of shares of Class A common stock issued pursuant to the LLC Agreement), the voting power will effectively remain unchanged, provided that the LLC Units (and a corresponding number of shares of Class B common stock) are exchanged for shares of Class A common stock.

 

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Offering Transactions

In connection with the completion of this offering, The Habit Restaurants, Inc. intends to purchase, directly or indirectly, LLC Units from The Habit Restaurants, LLC at a purchase price per unit equal to the initial public offering price per share of Class A common stock in this offering net of underwriting discounts. The Habit Restaurants, Inc. will purchase, directly and indirectly, from The Habit Restaurants, LLC 5,000,000 LLC Units for an aggregate of $79.9 million (or 5,750,000 LLC Units for an aggregate of $92.4 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock). The Habit Restaurants, LLC will bear the cost of or reimburse The Habit Restaurants, Inc. for all of the expenses of this offering. Accordingly, following the completion of this offering, The Habit Restaurants, Inc. will hold a number of LLC Units that is equal to the number of shares of Class A common stock that it has issued, a relationship that we believe fosters transparency because it results in a single share of Class A common stock representing (albeit indirectly) the same percentage ownership in The Habit Restaurants, LLC as does a single LLC Unit.

In connection with this offering, we will enter 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 that are created as a result of this offering 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. See the section entitled “Certain Relationships and Related Party Transactions—Recapitalization Transactions in Connection with this Offering—Tax Receivable Agreement.”

The Habit Restaurants, Inc. may accumulate cash balances in future years resulting from distributions from The Habit Restaurants, LLC 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 to The Habit Restaurants, LLC for use in its operations, 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. See the section entitled “Certain Relationships and Related Party Transactions—Recapitalization Transactions in Connection with this Offering—Exchange Procedures.”

We refer to the foregoing transactions as the “Offering Transactions.” As a result of the Recapitalization Transactions and the Offering Transactions, upon completion of this offering:

 

   

the investors in this offering collectively will own 5,000,000 shares of our Class A common stock (or 5,750,000 shares of Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

The Habit Restaurants, Inc. will directly or indirectly hold 8,224,550 LLC Units (or 8,974,550 LLC Units if the underwriters exercise in full their over-allotment option to purchase additional shares of Class A common stock), representing 32.6% of the economic interest in The Habit Restaurants, LLC (or 34.5% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

the Continuing LLC Owners collectively will hold 17,028,204 LLC Units, representing 67.4% of the economic interest in The Habit Restaurants, LLC (or 65.5% if the underwriters exercise in full their over-allotment option to purchase additional shares of Class A common stock);

 

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the investors in this offering collectively will have 19.8% of the combined voting power in The Habit Restaurants, Inc. (or 22.1% if the underwriters exercise in full their option to purchase additional shares of Class A common stock); and

 

   

the Continuing LLC Owners, through their holdings of our Class B common stock, collectively will have 67.4% of the combined voting power in The Habit Restaurants, Inc. (or 65.5% if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of our Class A common stock in this offering will be approximately $79.9 million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares is exercised in full, we estimate that we will receive net proceeds of approximately $92.4 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering to directly and indirectly purchase LLC Units from The Habit Restaurants, LLC, as described below. The Habit Restaurants, LLC will subsequently use such proceeds to repay all of the borrowings under our existing credit facility with California Bank & Trust (which was $11.1 million as of September 30, 2014), and to repay approximately $30 million to extinguish the Bridge Loan with California Bank & Trust in connection with the distribution to the members of The Habit Restaurants, LLC made immediately prior to the completion of this offering. The Habit Restaurants, LLC will use the remaining proceeds of approximately $38.8 million to continue to support our growth and for working capital and general corporate purposes.

As of September 30, 2014, we had $11.1 million outstanding under the credit facility at an interest rate of 2.48%. We entered into our credit facility, which expires on July 23, 2017, with California Bank & Trust on July 23, 2014. The credit facility provides for up to $35.0 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. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility.”

In connection with the completion of this offering, The Habit Restaurants, Inc. intends to purchase, directly or indirectly, LLC Units from The Habit Restaurants, LLC at a purchase price per unit equal to the initial public offering price per share of Class A common stock in this offering net of underwriting discounts. The effect of the purchase of LLC Units by the Habit Restaurants, Inc. and its subsidiaries is to dilute the ownership interest of the other existing holders in The Habit Restaurants, LLC and proportionately increase our direct and indirect ownership interest in The Habit Restaurants, LLC. The Habit Restaurants, Inc. will purchase, directly and indirectly, from The Habit Restaurants, LLC 5,000,000 LLC Units for an aggregate of $79.9 million (or 5,750,000 LLC Units for an aggregate of $92.4 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock). The Habit Restaurants, LLC will bear the cost of or reimburse The Habit Restaurants, Inc. for all of the expenses of this offering.

 

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DIVIDEND POLICY

Except as described in the paragraph below, we have never declared or paid any cash dividends. Specifically, we have never declared or paid cash dividends on our Class A common stock, and our board of directors does not currently intend to pay regular dividends on our Class A common stock. Instead, we anticipate that all of our earnings in the foreseeable future, if any, will be used for the operation and growth of our business. However, we expect to reevaluate our dividend policy on a regular basis following the completion of this offering and may, subject to compliance with the covenants contained in our credit facility, in the future determine to pay dividends. Any future determination to pay dividends as a public company will be at the discretion of our board of directors and will be dependent upon then-existing conditions, including our earnings, capital requirements, results of operations, financial condition, business prospects and other factors that our board of directors considers relevant.

In connection with the Recapitalization Transactions and immediately prior to the completion of this offering, The Habit Restaurants, LLC will distribute $30 million to its members. The amount that is received by The Habit Restaurants, Inc.’s subsidiaries will immediately be distributed to the existing owners of The Habit Restaurants, Inc. prior to the completion of this offering, subject to retention of any reserves for expenses and taxes.

 

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CAPITALIZATION

The following table sets forth as of September 30, 2014:

 

   

the cash and cash equivalents and capitalization on a historical consolidated basis of The Habit Restaurants, LLC, our accounting predecessor, and

 

   

our pro forma cash and cash equivalents and capitalization on a consolidated basis, as adjusted to reflect (a) the Recapitalization Transactions, (b) our issuance and sale of shares of Class A common stock in this offering, the receipt of the estimated proceeds from this offering net of estimated underwriting discounts and commissions and the use of such estimated proceeds as described under the section entitled “Use of Proceeds” and (c) the payment of fees and expenses in connection with this offering.

This table should be read in conjunction with the sections entitled “The Recapitalization,” “Use of Proceeds,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     As of September 30, 2014  
     Actual      Pro Forma as
Adjusted
 
     (Unaudited)  
(in thousands, except share data)       

Cash and cash equivalents

   $ 2,261      $ 41,044   
  

 

 

    

 

 

 

Total debt(1):

     13,604         2,486   

Borrowings under our credit facility

     11,118           

Deemed landlord financing

     2,486         2,486   

Total members’/stockholders’ equity:

     

Members’ equity

     51,859           

Stockholders’ equity

     

Class A common stock, par value $0.01 per share, 70,000,000 shares authorized and 8,224,550 shares issued and outstanding on a pro forma as adjusted basis

             82   

Class B common stock, par value $0.01 per share, 70,000,000 shares authorized and 17,028,204 shares issued and outstanding on a pro forma as adjusted basis

               

Additional paid-in capital

             33,065   

Accumulated earnings

               
  

 

 

    

 

 

 

Total equity

     51,859         33,147   
  

 

 

    

 

 

 

Non-controlling interest

             68,585   

Total members’/stockholders’ equity attributable to the Company

             101,732   
  

 

 

    

 

 

 

Total capitalization

   $ 65,463       $ 104,218   
  

 

 

    

 

 

 

 

(1) 

Total debt consists of borrowings under our credit facility (as described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility”) and deemed landlord financing.

 

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DILUTION

If you invest in shares of our Class A common stock, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma net tangible book value per share of our Class A common stock after this offering. Dilution results from the fact that the initial public offering price per share of the common stock is substantially in excess of the book value per share of Class A common stock attributable to the existing stockholders for the presently outstanding shares of Class A common stock. We calculate net tangible book value per share of our Class A common stock by dividing the net tangible book value by the number of outstanding shares of our Class A common stock.

Our pro forma net tangible book value at September 30, 2014 was approximately $(1.9) million, or approximately $(0.23) per share of our Class A common stock (based on the number of shares of Class A common stock outstanding on a pro forma basis). Pro forma net tangible book value per share before this offering represents net tangible book value (total consolidated tangible assets less total consolidated liabilities) divided by the number of shares of Class A common stock outstanding at September 30, 2014, assuming that the Recapitalization Transactions had taken place on September 30, 2014. Dilution in net tangible book value per share represents the difference between the amount per share that you pay in this offering and the net tangible book value per share immediately after this offering.

After giving effect to the receipt of the estimated net proceeds from our sale of shares in this offering, at the initial public offering price of $18.00 per share, and the application of the estimated net proceeds therefrom as described in the section entitled “Use of Proceeds,” our pro forma as adjusted net tangible book value at September 30, 2014 would have been approximately $67.1 million, or $8.14 per share of Class A common stock. This represents an immediate increase in pro forma net tangible book value per share of $8.37 to existing stockholders and an immediate dilution in pro forma net tangible book value per share of $9.86 to you. The following table illustrates this dilution per share.

 

Initial public offering price per share

    $ 18.00   

Pro forma net tangible book value per share at September 30, 2014

  $ (0.23  

Increase in pro forma net tangible book value per share attributable to new investors

    8.37     
 

 

 

   

Pro forma net tangible book value per share after offering

      8.14   
   

 

 

 

Dilution per share to new investors

    $ 9.86   
   

 

 

 

If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share of our Class A common stock after giving effect to this offering, the immediate dilution in net tangible book value per share to investors in this offering would be $9.14 per share.

 

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The following table sets forth, on the same pro forma basis, as of September 30, 2014, the number of shares of Class A common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing shares of Class A common stock in this offering, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price Per
Share
 
                       
    

Number

     Percent     Amount      Percent    

Existing stockholders

     —           —     $ —           —     $ —     

New investors

     5,000,000         100   $ 90,000,000         100   $ 18.00   

Total

     5,000,000         100   $ 90,000,000         100   $ 18.00   

If the underwriters were to fully exercise their option to purchase additional shares of our Class A common stock, the percentage of shares of our Class A common stock held by existing stockholders would be 35.9%, and the percentage of shares of our Class A common stock held by new investors would be 64.1%.

To the extent any outstanding options granted under our 2014 Omnibus Incentive Plan are exercised or become vested or any additional options are granted and exercised or other equity awards are granted and become vested or other issuances of shares of our Class A common stock are made, there may be further economic dilution to new investors. The number of shares of our Class A common stock set forth in the table above is based on shares of our Class A common stock outstanding and does not reflect:

 

   

2,525,275 shares of Class A common stock issued or reserved for issuance under our 2014 Omnibus Incentive Plan.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following tables summarize the condensed consolidated financial information of The Habit Restaurants, LLC, as well as pro forma information that reflects the impact of the Recapitalization Transactions. The Habit Restaurants, Inc. was formed July 24, 2014 and has not to date 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, the principal assets of which are equity interests in The Habit Restaurants, LLC (such interests collectively representing, as of September 30, 2014, a less than 20% interest in The Habit Restaurants, LLC) and (iii) the preparation of this registration statement.

We derived the unaudited pro forma condensed consolidated financial information set forth below by the application of pro forma adjustments to the audited and unaudited consolidated financial statements included elsewhere in this prospectus.

The unaudited condensed consolidated pro forma statements of income for the 39 weeks ended September 30, 2014 and for the year ended December 31, 2013 and the unaudited pro forma condensed consolidated balance sheet as of September 30, 2014 present our consolidated results of operations and financial position to give pro forma effect to the Recapitalization Transactions described in the section entitled “The Recapitalization” and the sale of shares in this offering (excluding shares issuable upon exercise of the underwriters’ option to purchase additional shares), and the application of the net proceeds from this offering, as if all such transactions had been completed as of January 1, 2013 with respect to the unaudited condensed consolidated pro forma statements of income and as of September 30, 2014 with respect to the unaudited pro forma condensed consolidated balance sheet. The unaudited pro forma condensed consolidated financial statements reflect pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable, but are subject to change. We have made, in our opinion, all adjustments that are necessary to present fairly the pro forma financial data.

The pro forma adjustments principally give effect to the following items:

 

   

the Recapitalization Transactions described in the section entitled “The Recapitalization”;

 

   

this offering and the use of a portion of the proceeds as described in the section entitled “Use of Proceeds”;

 

   

the tax receivable agreement we will enter into with the existing owners as described in the section entitled “The Recapitalization—Tax Receivable Agreement”; and

 

   

In the case of the unaudited pro forma condensed consolidated statements of income, a provision for corporate income taxes on the income of The Habit Restaurants, Inc. at an effective rate of 39.64% which includes a provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state and local jurisdiction.

The unaudited pro forma condensed consolidated financial information is presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the Recapitalization Transactions and this offering been consummated on the dates indicated, and do not purport to be indicative of the financial condition or results of operations as of any future date or for any future period. You should read our unaudited pro forma condensed consolidated financial information and the accompanying notes in conjunction with the consolidated historical financial statements and related notes included elsewhere in this prospectus and the financial and other information appearing elsewhere in this prospectus, including information contained in the sections entitled “Risk Factors,” “Selected Historical Consolidated Financial and Operating Data,” “Use of Proceeds,” “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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The Habit Restaurants, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Income

Year Ended December 31, 2013

 

     The Habit
Restaurants, LLC
Actual
    Recapitalization
Adjustments
    As Adjusted
Before Offering
    Offering     The Habit
Restaurants, Inc.
Pro Forma
 
(amounts in thousands)       

Revenue

          

Revenue

   $   120,373      $ —        $ 120,373      $ —        $ 120,373   

Franchise/license revenue

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     120,373        —          120,373        —          120,373   

Operating Expenses

          

Restaurant operating costs (excluding depreciation and amortization):

          

Food and paper costs

     38,789        —          38,789        —          38,789   

Labor and related expenses

     35,782        —          35,782        —          35,782   

Occupancy and other operating expenses

     18,906        —          18,906        —          18,906   

General and administrative expenses

     12,634        —          12,634        —          12,634   

Depreciation and amortization expense

     6,008        —          6,008        —          6,008   

Pre-opening costs

     1,754        —          1,754        —          1,754   

Loss on disposal of assets

     15        —          15        —          15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     113,888        —          113,888        —          113,888   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     6,485        —          6,485        —          6,485   

Other Expenses

          

Interest expense, net

     735        (455 )(a)      280        —          280   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     5,750        455        6,205        —          6,205   

Provision for income taxes

     —   (b)      383 (c)      383        418 (c)      801   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,750      $ 72      $ 5,822      $ (418   $ 5,404   

Less: net income attributable to noncontrolling interest

     —          5,237 (d)      5,237        (1,055 )(e)      4,182   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Habit Restaurants, Inc.

   $ 5,750      $ (5,165   $ 585      $ 637      $ 1,222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Habit Restaurants, Inc. per share Class A common stock(f):

          

Basic

           $ 0.15   

Diluted

           $ 0.15   

Weighted average shares of Class A common stock outstanding:

          

Basic

             8,244   

Diluted

             8,244   

Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income For The Year Ended December 31, 2013

(a) Adjustment for interest expense that will not be incurred after the use of the offering proceeds to repay all outstanding amounts owed under the Bridge Loan and revolving credit facility.

(b) The Habit Restaurants, LLC is a limited liability company that is treated by the members as a partnership under the provisions of the federal and applicable state income tax codes. Under these provisions, The Habit Restaurants, LLC generally pays no tax on its net income, and each of its members is required to report such member’s allocable share of The Habit Restaurants, LLC’s net income on such member’s income tax returns. As a result, no provision for income taxes is reflected in the above financial statements.

(c) We will be 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, which will result in higher income taxes. As a result, the pro forma statements of income reflect an adjustment to our provision for corporate income taxes to reflect an effective rate of 39.64%, which includes provisions for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state and local jurisdiction.

 

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(d) The common units of The Habit Restaurants, LLC owned by the former holders and certain former and current members of management and our board will be considered noncontrolling interest for financial accounting purposes. The adjustment reflects the allocation of The Habit Restaurants, LLC income before income taxes to the noncontrolling interests, as The Habit Restaurants, LLC is treated by its members as a partnership under the provisions of the federal and applicable state income tax codes and generally pays no tax on its net income. Prior to the consummation of this offering, The Habit Restaurants, LLC income before income taxes was attributable to the noncontrolling interest based on its 84% ownership interest.

(e) The common units of The Habit Restaurants, LLC owned by the former holders and certain former and current members of management and our board will be considered noncontrolling interest for financial accounting purposes. The adjustment reflects the allocation of The Habit Restaurants, LLC income before income taxes to the noncontrolling interests, as The Habit Restaurants, LLC is treated by its members as a partnership under the provisions of the federal and applicable state income tax codes and generally pays no tax on its net income. Upon consummation of this offering, the noncontrolling interests’ ownership of The Habit Restaurants, LLC will be diluted to 67.4% and therefore income before income taxes will be attributable to the noncontrolling interest based on its 67.4% ownership interest, and The Habit Restaurants, Inc., which indirectly owns the remaining 32.6% of the common units of the Habit Restaurants, LLC, is therefore allocated the remaining 32.6% of the income before income taxes of The Habit Restaurants, LLC.

(f) The pro forma earnings per share is calculated using the treasury stock method, using only the Class A shares. The Class B shares have no economic rights and therefore are excluded from this calculation.

 

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The Habit Restaurants, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Income

39 Weeks Ended September 30, 2014

 

     The Habit
Restaurants, LLC
Actual
    Recapitalization
Adjustments
    As Adjusted
Before Offering
    Offering     The Habit
Restaurants, Inc.
Pro Forma
 
(amounts in thousands)       

Revenue

          

Revenue

   $     126,210      $ —       $ 126,210      $ —       $ 126,210   

Franchise/license revenue

     56        —         56        —         56   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     126,266        —         126,266        —         126,266   

Operating Expenses

          

Restaurant operating costs (excluding depreciation and amortization):

          

Food and paper costs

     41,928        —         41,928        —         41,928   

Labor and related expenses

     37,362        —         37,362        —         37,362   

Occupancy and other operating expenses

     19,485        —         19,485        —         19,485   

General and administrative expenses

     12,574        —         12,574        —         12,574   

Depreciation and amortization expense

     5,991        —         5,991        —         5,991   

Pre-opening costs

     1,147        —         1,147        —         1,147   

Loss on disposal of assets

     115        —         115        —         115   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     118,602        —         118,602        —         118,602   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     7,664        —         7,664        —         7,664   

Other Expenses

          

Interest expense, net

     756        (527 )(a)      229        —         229   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     6,908        527        7,435        —         7,435   

Provision for income
taxes

     —   (b)      460 (c)      460        501 (c)      961   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,908      $ 67      $ 6,975      $ (501   $ 6,474   

Less: net income attributable to noncontrolling interest

     —         6,275 (d)      6,275        (1,264 )(e)      5,011   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Habit Restaurants, Inc.

   $ 6,908      $ 6,208      $ 700      $ 763      $ 1,463   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Habit Restaurants, Inc. per share Class A common stock(f):

          

Basic

           $ 0.18   

Diluted

           $ 0.18   

Weighted average shares of Class A common stock outstanding:

          

Basic

             8,244   

Diluted

             8,244   

Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income for the 39 Weeks Ended September 30, 2014

(a) Adjustment for interest expense that will not be incurred after the use of the offering proceeds to repay all outstanding amounts owed under the Bridge Loan and revolving credit facility.

(b) The Habit Restaurants, LLC is a limited liability company that is treated by the members as a partnership under the provisions of the federal and applicable state income tax codes. Under these provisions, The Habit Restaurants, LLC generally pays no tax on its net income, and each of its members is required to report such member’s allocable share of The Habit Restaurants, LLC’s net income on such member’s income tax returns. As a result, no provision for income taxes is reflected in the above financial statements.

(c) We will be 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, which will result in higher income taxes. As a result, the pro forma statements of income reflect an adjustment to our provision for corporate income taxes to reflect an effective rate of 39.64%, which includes provisions for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state and local jurisdiction.

 

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(d) The common units of The Habit Restaurants, LLC owned by the former holders and certain former and current members of management and our board will be considered noncontrolling interest for financial accounting purposes. The adjustment reflects the allocation of The Habit Restaurants, LLC income before income taxes to the noncontrolling interests, as The Habit Restaurants, LLC is treated by its members as a partnership under the provisions of the federal and applicable state income tax codes and generally pays no tax on its net income. Prior to the consummation of this offering, The Habit Restaurants, LLC income before income taxes was attributable to the noncontrolling interest based on its 84% ownership interest.

(e) The common units of The Habit Restaurants, LLC owned by the former holders and certain former and current members of management and our board will be considered noncontrolling interest for financial accounting purposes. The adjustment reflects the allocation of The Habit Restaurants, LLC income before income taxes to the noncontrolling interests, as The Habit Restaurants, LLC is treated by its members as a partnership under the provisions of the federal and applicable state income tax codes and generally pays no tax on its net income. Upon consummation of this offering, the noncontrolling interests’ ownership of The Habit Restaurants, LLC will be diluted to 67.4% and therefore income before income taxes will be attributable to the noncontrolling interest based on its 67.4% ownership interest, and The Habit Restaurants, Inc., which indirectly owns the remaining 32.6% of the common units of the Habit Restaurants, LLC, is therefore allocated the remaining 32.6% of the income before income taxes of The Habit Restaurants, LLC.

(f) The pro forma earnings per share is calculated using the treasury stock method, using only the Class A shares. The Class B shares have no economic rights and therefore are excluded from this calculation.

 

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The Habit Restaurants, Inc.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

September 30, 2014

 

     The Habit
Restaurants, LLC
Actual
    Recapitalization
Adjustments
    As Adjusted
Before Offering
    Offering     The Habit
Restaurants, Inc.
Pro Forma
 

(amounts in thousands)

      

Assets

          

Current assets

          

Cash and cash equivalents

   $ 2,261      $ —   (a)    $ 2,261      $ 79,901 (e)    $ 41,044   
           (41,118 )(a)   

Accounts receivable

     1,967          1,967          1,967   

Inventory

     786          786          786   

Prepaid expenses

     1,926          1,926          1,926   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     6,940        —          6,940        38,785        45,723   

Property and equipment, net

     60,593          60,593          60,593   

Other assets

          

Trade-names

     12,500          12,500          12,500   

Goodwill

     9,967          9,967          9,967   

Deposits

     1,647          1,647          1,647   

Deferred tax assets

     —          —          —          12,149 (b)      12,149   

Other assets, net

     117          117          117   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 91,764      $ —        $ 91,764      $ 50,932      $ 142,696   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Members’ / Stockholders Equity

          

Current liabilities

          

Accounts payable

   $ 7,561      $        $ 7,561      $        $ 7,561   

Employee-related accruals

     4,819          4,819          4,819   

Accrued expenses

     4,672          4,672          4,672   

Sales tax payable

     1,545          1,545          1,545   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     18,597          18,597          18,597   

Other liabilities:

          

Deferred rent

     7,404          7,404          7,404   

Deemed landlord financing

     2,486          2,486          2,486   

Deferred franchise income

     300          300          300   

Deferred tax liability

     —          1,295        1,295        (1,295 )(b)      —     

Amounts payable under Tax Receivable Agreement

     —          —          —          12,177 (b)      12,177 (b) 

Long-term debt, net of current portion

     11,118        30,000        41,118        (41,118 )(a)      —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     39,905        31,295        71,200        (30,236     40,964   

Equity:

          

Members’ equity

     51,859        (21,859 )(c)      —          —          —     
       (30,000 )(a)       

Common stock

     —         32 (c)      32        50 (e)      82   

Additional paid-in capital

     —         (1,295 )(b)      2,083        79,851 (e)      33,065   
       3,378 (c)        1,267 (b)   
           (50,136 )(d)   

Retained earnings

          

The Habit Restaurants, Inc. equity

     51,859        (49,744     2,115        31,032        33,147   

Non-controlling interests

     —         18,449 (c)      18,449        50,136 (d)      68,585   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     51,859        (31,295     20,564        81,168        101,732   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $   91,764      $ —        $ 91,764      $ 50,932      $ 142,696   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2014

(a) In connection with the Recapitalization Transactions and immediately prior to the completion of this offering, The Habit Restaurants, LLC will incur $30 million of indebtedness under a bridge loan facility provided by California Bank & Trust (the “Bridge Loan”). The Habit Restaurants, LLC will immediately distribute such funds to its members. Additionally, The Habit Restaurants, LLC will use a portion of the offering proceeds to repay and extinguish the Bridge Loan and to repay all of the borrowings under our existing credit facility with California Bank & Trust.

(b) The Habit Restaurants, Inc. is subject to U.S. federal and state income taxes and will file consolidated income tax returns for U.S. federal and certain state jurisdictions. These adjustments reflect the recognition of deferred tax assets resulting from our status as a C Corporation. Temporary differences in the book and tax basis of our investment in The Habit Restaurants, LLC would have resulted in an unaudited pro forma deferred tax liability of $1.3 million as of September 30, 2014. Under the TRA associated with the exchange of The Habit Restaurants, LLC units for our common stock, we generally will be required to pay to the holders of units of The Habit Restaurants, LLC (other than units that we or our wholly-owned subsidiaries hold) 85% of the amount of cash savings, if any, in U.S. federal, state or local or foreign tax that we actually realize (or are deemed to realize in certain circumstances) as a result of (i) certain tax benefits that are created as a result of the sales or exchanges of their units for shares of our 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). See the section entitled “Certain Relationships and Related Party Transactions—Recapitalization Transactions in Connection with this Offering—Tax Receivable Agreement.”

The deferred tax asset of $12.1 million related to, and the $12.2 million in amounts payable under, the tax receivable agreement are assuming: (i) only exchanges associated with IPO; (ii) share price equal to $18.00 per share; (iii) constant corporate income tax rate of 39.64%; (iv) no material changes in tax law; (v) ability to utilize tax attributes; (vi) iterative TRA payments; and (vii) excluding actual interest.

We anticipate that we will account for the income tax effects and corresponding tax receivable agreement effects resulting from future taxable exchanges of units by unit holders of The Habit Restaurants, LLC for shares of our common stock by recognizing an increase in our deferred tax assets, based on enacted tax rates at the date of the exchange. Further, we will evaluate the likelihood that we will realize the benefit represented by the deferred tax asset and, to the extent that we estimate that it is more likely than not that we will not realize the benefit, we will reduce the carrying amount of the deferred tax asset with a valuation allowance.

The amounts to be recorded for both the deferred tax assets and the liability for our obligations under the tax receivable agreement have been estimated. All of the effects of changes in any of our estimates after the date of the purchase will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.

(c) As a C Corporation, we will no longer record members’ equity in the consolidated balance sheet. To reflect the C Corporation structure of our equity, we will separately present the value of our common stock, additional paid-in capital and retained earnings. The portion of the reclassification of members’ equity associated with additional paid-in capital was estimated as the remainder of capital contributions we have received less the $32,000 attributed to the par value of the common stock, the $30 million distribution and the $18.4 million allocated to the noncontrolling interest.

(d) The common units of The Habit Restaurants, LLC owned by the former holders and certain former and current members of management and our board will be considered noncontrolling interests for

 

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financial accounting purposes. The amount allocated to noncontrolling interests represents the proportional interest in the pro forma condensed consolidated total equity of The Habit Restaurants, LLC owned by those common unit holders.

(e) “Offering” represents the net proceeds from the sale of our common stock in this offering based on an initial public offering price of $18.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present selected consolidated financial information of The Habit Restaurants, LLC, our predecessor company, as well as pro forma information that reflects the impact of the Recapitalization Transactions and this offering. The Habit Restaurants, Inc. was formed July 24, 2014 and has not to date 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, as of September 30, 2014, a less than 20% interest in The Habit Restaurants, LLC) and (iii) the preparation of this registration statement.

The selected statements of operations and cash flow data presented for the years ended December 27, 2011, December 25, 2012 and December 31, 2013, respectively, and the selected consolidated balance sheet data as of December 25, 2012 and December 31, 2013, respectively, have been derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The selected statements of operations and cash flow data presented for the years ended December 31, 2009 and December 28, 2010, respectively, and the selected consolidated balance sheet data as of December 31, 2009, December 28, 2010 and December 27, 2011, respectively, have been derived from our audited consolidated financial statements that are not included in this prospectus. We have derived the selected statements of operations data for the 39 weeks ended September 24, 2013 and September 30, 2014, respectively, and the selected balance sheet data as of September 30, 2014 from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The selected balance sheet as of September 24, 2013 has been derived from our unaudited interim condensed consolidated financial statement for such period, which is not included in this prospectus. Our unaudited interim condensed consolidated financial statements were prepared on the same basis as our audited consolidated financial statements and include, in our opinion, all adjustments, consisting of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those financial statements. Our historical results for any prior period are not necessarily indicative of our results in any future period, and our results for any interim periods are not necessarily indicative of results for a full fiscal year.

This selected historical consolidated financial and other data should be read in conjunction with the disclosures set forth in the sections entitled “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

 

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Beginning with fiscal year 2011, we have operated on a 52- or 53-week fiscal year ending on the last Tuesday of each calendar year for financial reporting purposes. As a result of the transition to this 52- or 53-week fiscal calendar from a traditional year-end calendar, fiscal year 2010 began on January 1, 2010 but ended on December 28, 2010, such that fiscal year 2010 was three days fewer than a typical calendar year. Prior to fiscal year 2010, we used a traditional calendar year end for our fiscal year for financial reporting purposes. Fiscal years 2009, 2010, 2011, 2012 and 2013 ended on December 31, 2009, December 28, 2010, December 27, 2011, December 25, 2012 and December 31, 2013, respectively. The 2013 fiscal year contained 53 weeks, while all other years presented contain 52 weeks.

 

    Fiscal Year Ended     39 Weeks Ended  
    December 31,
2009
    December 28,
2010
    December 27,
2011
    December 25,
2012
    December 31,
2013
    September 24,
2013
    September 30,
2014
 
(dollar amounts in thousands, except per share data)    

(unaudited)

 

Statement of Operations Data:

             

Revenue

             

Revenue

  $   28,101      $   41,804      $   59,236      $   84,158      $   120,373      $   84,889      $   126,210   

Franchise/license revenue

    —          —          —          —          —          —         56   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    28,101        41,804        59,236        84,158        120,373        84,889        126,266   

Operating Expenses:

             

Restaurant operating costs (excluding depreciation and amortization):

             

Food and paper costs

    8,663        13,055        19,538        26,396        38,789        27,521        41,928   

Labor and related expenses

    8,973        13,002        18,135        25,831        35,782        25,126        37,362   

Occupancy and other operating expenses

    4,381        6,490        8,563        12,687        18,906        13,233        19,485   

General and administrative expenses

    4,527        5,320        6,850        10,254        12,634        9,057        12,574   

Depreciation and amortization

    922        1,597        2,292        3,923        6,008        4,124        5,991   

Pre-opening costs

    306        364        1,122        1,458        1,754        977        1,147   

Loss on disposal of assets

    —          2        4        3        15        7        115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    27,772        39,830        56,502        80,552        113,888        80,045        118,602   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    329        1,974        2,734        3,606        6,485        4,844        7,664   

Other Expenses:

             

Interest expense

    226        198        344        548        735        514        756   

Income before income tax

    103        1,776        2,389        3,058        5,750        4,330        6,908   

Provision for income taxes(1)

    —          —          —          —          —          —         —    

Net income

  $ 103      $ 1,776      $ 2,389      $ 3,058      $ 5,750      $ 4,330      $ 6,908   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Net Income and Per Share Data(2):

             

Pro forma net income

          $ 1,222        $ 1,463   

Pro forma net income per share

             

Basic

          $ 0.15        $ 0.18   

Diluted

          $ 0.15        $ 0.18   

Weighted average shares used in computing pro forma net income per share

             

Basic

            8,244          8,244   

Diluted

            8,244          8,244   

 

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    Fiscal Year Ended     39 Weeks Ended  
    December 31,
2009
    December 28,
2010
    December 27,
2011
    December 25,
2012
    December 31,
2013
    September 24,
2013
    September 30,
2014
 
(dollar amounts in thousands, except per share data)    

(unaudited)

 

Consolidated Statement of Cash Flows Data:

             

Net cash provided by operating activities

  $ 1,663      $ 4,147      $ 6,772      $   11,244      $   15,374      $   10,573      $   17,860   

Net cash used in investing activities

    (5,001     (4,677       (11,274       (14,968       (20,234     (11,629     (14,935

Net cash provided by/(used in) financing activities

    3,059        —          2,936        3,735        4,682        865        (786

Balance Sheet Data—Consolidated (at period end):

             

Cash and cash equivalents

  $ 2,384      $ 1,854      $ 288      $ 300      $ 122      $ 109      $ 2,261   

Property and equipment, net(3)

    9,553        12,650        22,642        34,775        50,076        42,253        60,593   

Total assets

      35,153          38,076        47,137        60,136        77,881        68,221        91,764   

Total debt(4)

    906        910        4,241        8,504        13,966        13,966        13,604   

Total stockholders’ equity

    31,241        33,225        35,874        39,130        45,067        43,553        51,859   

Other Operating Data (unaudited):

             

Total restaurants at end of period(5)

    26        33        46        63        85        73        99   

Company-owned restaurants at end of period

    26        33        46        63        85        73        98   

Comparable restaurant sales growth(6)

    1.9     5.4     8.7     3.5     3.6     2.9     9.8

Company-owned average unit volumes

  $ 1,249      $ 1,347      $ 1,526      $ 1,565      $ 1,634      $ 1,592      $ 1,741   

Restaurant contribution(7)

    6,084        9,257        13,000        19,243        26,896        19,009        27,435   

as a percentage of revenue

    21.6     22.1     21.9     22.9     22.3     22.4     21.7

EBITDA(8)

  $ 1,251      $ 3,571      $ 5,025      $ 7,529      $ 12,492      $ 8,968      $ 13,655   

Adjusted EBITDA(8)

    1,908        4,300        6,558        10,251        14,656        10,279        15,780   

as a percentage of revenue

    6.8     10.3     11.1     12.2     12.2     12.1     12.5

Capital expenditures(9)

  $ 5,001      $ 4,677      $ 11,274      $ 14,968      $ 20,234      $ 11,629      $ 14,935   

 

(1) 

The Habit Restaurants, LLC is a limited liability company that is treated by its members as a partnership under the provisions of the federal and applicable state income tax codes. Under these provisions, The Habit Restaurants, LLC generally pays no tax on its net income, and each of its members is required to report such member’s allocable share of The Habit Restaurants, LLC’s net income on such member’s income tax returns. As a result, no provision for income taxes is reflected in the above financial statements.

(2) 

The unaudited pro forma net income data give effect to the Recapitalization Transactions and the sale of 5,000,000 shares of our Class A common stock by us in this offering at the initial public offering price of $18.00 per share and the use of proceeds contemplated hereby. For a detailed presentation of the unaudited pro forma information, including a description of the transactions and assumptions underlying the pro forma adjustments giving rise to these results, see the section entitled “Unaudited Pro Forma Condensed Consolidated Financial Information” included elsewhere in this prospectus.

(3) 

Property and equipment, net consists of property owned, net of accumulated depreciation and amortization.

(4) 

Total debt consists of borrowings under our credit facility (as defined under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility” below) and deemed landlord financing.

(5) 

Does not include the five licensed locations in Santa Barbara County. See the section entitled “Certain Relationships and Related Party Transactions—License Agreement with Co-Founders.”

(6) 

Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base. A restaurant enters our comparable restaurant base in the accounting period following its 18th full period of operations.

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(7) 

Restaurant contribution is neither required by, nor presented in accordance with, GAAP, and is defined as company-owned restaurant revenue less company-owned restaurant operating costs. Restaurant contribution is a supplemental measure of operating performance of our restaurants and our calculation thereof may not be comparable to that reported by other companies. Restaurant contribution has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Management believes that restaurant contribution is an important tool for investors because it is a widely-used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant contribution as a key metric to evaluate the profitability of incremental sales at our restaurants, to evaluate our restaurant performance across periods and to evaluate our restaurant financial performance compared with our competitors. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of restaurant contribution and other key performance indicators.

 

   A reconciliation of restaurant contribution to company-owned restaurant revenue is provided below:

 

     Fiscal Year Ended     39 Weeks Ended  
     December 31,
2009
    December 28,
2010
    December 27,
2011
    December 25,
2012
    December 31,
2013
    September 24,
2013
    September 30,
2014
 
(amounts in thousands)                                 

(unaudited)

 

Revenue

   $   28,101      $   41,804      $   59,236      $   84,158      $   120,373      $   84,889      $   126,210   

Restaurant operating costs

     22,018        32,547        46,236        64,915        93,477        65,880        98,775   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant contribution

   $ 6,084      $ 9,257      $ 13,000      $ 19,243      $ 26,896      $   19,009      $   27,435   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(8) 

EBITDA represents net income before interest expense, provision for income taxes, depreciation and amortization. Adjusted EBITDA represents net income before interest expense, 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 prospectus 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 presents a reconciliation of Adjusted EBITDA and restaurant-level EBITDA to net income:

 

     Fiscal Year Ended     39 Weeks Ended  
     December 31,
2009
    December 28,
2010
    December 27,
2011
    December 25,
2012
    December 31,
2013
    September 24,
2013
    September 30,
2014
 
(amounts in thousands)                                 

(unaudited)

 

Net income

   $ 103      $   1,776      $   2,389      $ 3,058      $ 5,750      $   4,330      $   6,908   

Non-GAAP adjustments:

              

Provision for income taxes

     —          —          —          —          —          —          —     

Interest expense, net

     226        198        344        548        735        514        756   

Depreciation and amortization

     922        1,597        2,292        3,923        6,008        4,124        5,991   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 1,251      $ 3,571      $ 5,025      $ 7,529      $ 12,492      $ 8,968      $ 13,655   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share-based compensation expense(a)

   $ 194      $ 207      $ 251      $ 301      $ 260      $ 216      $ 304   

Management fees(b)

     158        156        157        160        144        120        114   

Loss on disposal of assets(c)

     —          2        4        3        15        7        115   

Legal settlement(d)

     —          —          —          800        (9     (9     —     

Pre-opening costs(e)

     306        364        1,122        1,458        1,754        977        1,147   

Costs associated with becoming a public company

     —          —          —          —          —          —          445   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $   1,908      $ 4,300      $ 6,558      $   10,251      $   14,656      $   10,279      $   15,780   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) 

Includes non-cash, share-based compensation.

  (b) 

Includes management fees and other out-of-pocket costs incurred by us and payable to our Sponsor.

  (c) 

Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.

  (d) 

One time costs related to the settlement of a legal matter.

  (e) 

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.

 

(9) 

Capital expenditures consist of cash paid related to new restaurant construction, the remodel and maintenance of existing restaurants and other corporate expenditures.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The Habit Restaurants, Inc. was formed July 24, 2014 and has not to date 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, as of September 30, 2014, a less than 20% interest in the Habit Restaurants, LLC) and (iii) the preparation of this registration statement. Upon the completion of the Recapitalization Transactions, we will conduct our business through The Habit Restaurants, LLC and its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this prospectus.

Fiscal Year

Beginning with fiscal year 2011, we have operated on a 52- or 53-week fiscal year ending on the last Tuesday of each calendar year for financial reporting purposes. As a result of the transition to this 52- or 53-week fiscal calendar from a traditional year-end calendar, fiscal year 2010 began on January 1, 2010 but ended on December 28, 2010, such that fiscal year 2010 was three days fewer than a typical calendar year. Prior to fiscal year 2010, we used a traditional calendar year end for our fiscal year for financial reporting purposes. Fiscal years 2011, 2012 and 2013 ended on December 27, 2011, December 25, 2012 and December 31, 2013, respectively.

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 $34.5 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.

We believe our restaurant concept delivers a highly differentiated customer experience by combining the quality and hospitality that customers commonly associate with our full service and fast casual restaurant competitors with the convenience and value customers generally expect from traditional fast food restaurants. The foundation of our brand is based on our four pillars of Quality, Environment, Hospitality and Value.

Our disciplined growth strategy has enabled strong growth across all of our key performance metrics. The Habit has grown from 26 locations across three markets in California as of December 31, 2009 to 99 locations across 10 markets in four states in the 39 weeks ended September 30, 2014 and we had a compound annual growth rate (“CAGR”) of our units from 2009 to 2013 of 34.5%. Our restaurants have generated 43 consecutive fiscal quarters of positive comparable restaurant sales growth, due primarily to increases in customer traffic. We have grown our company-owned restaurant AUVs from approximately $1.2 million in fiscal year 2009 to approximately $1.7 million for the 52 weeks ended

 

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September 30, 2014, representing an increase of 39.4%. From fiscal year 2009 to fiscal year 2013, our revenue increased from $28.1 million to $120.4 million, our net income increased from $0.1 million to $5.7 million (such amounts exclude income taxes due to the tax status of the Company during such time period) and Adjusted EBITDA increased from $1.9 million to $14.7 million. For more information, see the section entitled “Business.” For a reconciliation of Adjusted EBITDA, a non-GAAP term, to net income, see “—EBITDA and Adjusted EBITDA.”

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 our Sponsor, KarpReilly, LLC, 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 October 20, 2014, we had 99 locations. Our highly experienced management team has created and refined the infrastructure to create replicable restaurant-level systems, processes an