S-1/A 1 d806502ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
Table of Contents

As Filed with the Securities and Exchange Commission on June 15, 2015

Registration No. 333-203527

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

 

AMENDMENT NO. 3

TO

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

FOGO DE CHAO, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 5812 45-5353489
(State or other jurisdiction of
incorporation or organization)
  (Primary standard industrial
classification code number)
  (I.R.S. employer
identification number)

 

 

Albert G. McGrath General Counsel 14881 Quorum Drive Suite 750 Dallas, TX 75254 (972) 960-9533

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

Copies to:

 

Richard D. Truesdell, Jr., Esq.
John B. Meade, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
  Marc D. Jaffe, Esq.
Ian D. Schuman, Esq.
Latham & Watkins LLP
885 Third Avenue
New York, New York 10022-4834
(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b2 of the Exchange Act.

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Amount
to be
Registered(1)
  Proposed
Maximum
Offering Price
Per Share
 

Proposed

Maximum

Aggregate

Offering Price(1)

  Amount of
Registration Fee(2)

Common Stock, par value $0.01 per share

  5,073,528   $18.00   $91,323,504   $10,612

 

 

(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended. Includes the 661,764 shares of common stock that the underwriters have the option to purchase pursuant to their option to purchase additional shares.
(2) Previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


Table of Contents

LOGO

 

Subject to Completion, Dated June 15, 2015

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS

4,411,764 Shares

Fogo de Chão, Inc.

Common Stock

We are offering 4,411,764 shares of our common stock. This is our initial public offering and no public market currently exists for our common stock. We expect our initial public offering price to be between $16.00 and $18.00 per share. We have applied to list our common stock on the NASDAQ Global Select Market under the symbol “FOGO.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, will be subject to reduced public company reporting requirements.

Investing in our common stock involves a high degree of risk. Please read “Risk Factors”

beginning on page 16 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

PER SHARE TOTAL Public offering price $ $

Underwriting discounts and commissions* $ $

Proceeds, before expenses, to us $ $

* We refer you to “Underwriting (Conflicts of Interest)” beginning on page 130 of this prospectus for additional information regarding underwriting compensation.

Delivery of the shares of common stock is expected to be made on or about , 2015. We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase from us an additional 661,764 shares of our common stock. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $ , and the total proceeds to us, before expenses, will be $ .

Jefferies J.P. Morgan

Credit Suisse Deutsche Bank Securities Piper Jaffray Wells Fargo Securities Macquarie Capital

Prospectus dated , 2015


Table of Contents

LOGO


Table of Contents

LOGO

Dallas, TX Kansas City, MO Denver, CO Portland, OR Las Vegas, NV Scottsdale, AZ San Diego, CA Beverly Hills, CA Los Angeles, CA San Jose, CA Minneapolis, MN Rosemont, IL Chicago, IL Indianapolis, IN Philadelphia, PA Boston, MA New York City, NY Baltimore, MD Washington, DC Atlanta, GA Orlando, FL Miami, FL Austin, TX San Antonio, TX Houston, TX San Juan Rio de Janeiro – Bota Fogo – Barra da Tijuca São Paulo – Vila Olimpia – Moema – Santo Amaro – Center Norte – Jardins Belo Horizonte Brasilia Salvador SALVADOR, BRAZIL DALLAS, TEXAS RIO DE JANEIRO, BRAZIL UNITED STATES BRAZIL PUERTO RICO MEXICO Mexico City


Table of Contents

LOGO


Table of Contents

We are responsible for the information contained in this prospectus and in any related free-writing prospectus we may prepare or authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to give you any other information, and we and the underwriters take no responsibility for any other information that others may give you. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

TABLE OF CONTENTS

 

 

     Page  

Market and Industry Data

     ii   

Basis of Presentation

     ii   

Trademarks and Copyrights

     iv   

Prospectus Summary

     1   

Risk Factors

     16   

Special Note Regarding Forward-Looking Statements

     42   

Use of Proceeds

     44   

Dividend Policy

     45   

Capitalization

     46   

Dilution

     48   

Selected Historical Consolidated Financial Information

     50   

Unaudited Pro Forma Consolidated Financial Statements

     53   

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

     61   

Business

     90   

Management

     105   

Executive Compensation

     111   

Certain Relationships and Related Party Transactions

     122   

Principal Stockholders

     124   

Description of Capital Stock

     126   

Shares Eligible For Future Sale

     129   

US Federal Tax Considerations For Non-US Holders

     131   

Underwriting (Conflicts of Interest)

     133   

Legal Matters

     140   

Experts

     140   

Where You Can Find More Information

     140   

Fogo de Chão, Inc. Index to Consolidated Financial Statements

     F-1   


Table of Contents

MARKET AND INDUSTRY DATA

This prospectus includes industry and market data that we obtained from periodic industry publications such as those by the National Restaurant Association, third-party studies and surveys and internal company surveys. These sources include government and industry sources. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Although we believe the industry and market data to be reliable as of the date of this prospectus, this information could prove to be inaccurate. Industry and market data could be wrong because of the method by which sources obtained their data and because information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. In addition, we do not know all of the assumptions regarding general economic conditions or growth that were used in preparing the forecasts from the sources relied upon or cited herein.

BASIS OF PRESENTATION

Unless the context otherwise requires, references in this prospectus to “Fogo de Chão, Inc.,” “we,” “us,” “our,” and “our company” are, collectively, to Fogo de Chão, Inc., a Delaware corporation, incorporated in 2012, the issuer of the common stock offered hereby, and its consolidated subsidiaries.

Fogo de Chão, Inc. (the “Successor”) was incorporated under the name Brasa (Parent) Inc. on May 24, 2012 in connection with the acquisition (the “Acquisition”) on July 21, 2012 of Fogo de Chão Churrascaria (Holdings) LLC, a Delaware limited liability company, and its parent company, FC Holdings Inc., a Cayman Islands exempt company, by a collaborative group consisting of funds affiliated with Thomas H. Lee Partners, L.P. (“THL” and along with such funds and their affiliates, the “THL Funds”) and other minority investors. The Successor owns 100% of Brasa (Purchaser) Inc. (“Brasa Purchaser”), which owns 100% of Brasa (Holdings) Inc. (“Brasa Holdings”). Brasa Holdings owns 100% of Fogo de Chão (Holdings) Inc. (“Fogo Holdings”), which owns the Successor’s domestic and foreign operating subsidiaries. Immediately prior to the Acquisition, (i) FC Holdings Inc. contributed all of its ownership interests in Fogo de Chão Churrascaria (Holdings) LLC to Fogo Holdings, (ii) Fogo de Chão Churrascaria (Holdings) LLC was merged with Fogo Holdings, which was the surviving corporation, and (iii) FC Holdings Inc. was domesticated into Brasa Holdings. Promptly thereafter, Brasa Parent acquired Brasa Holdings through a reverse subsidiary merger of its subsidiary, Brasa Merger Sub Inc., with Brasa Holdings, which was the surviving corporation. The Acquisition was financed by loans to Brasa Holdings and equity contributions by the THL Funds and certain members of management.

As a result of the Acquisition, the financial information for all periods after May 24, 2012 represents the financial information of the Successor. Prior to, and including, July 20, 2012, the consolidated financial statements include the accounts of the “Predecessor” company. Financial information in the Predecessor period relates to Fogo de Chão Churrascaria (Holdings) LLC and its subsidiaries. Due to the change in the basis of accounting resulting from the Acquisition, the Predecessor’s consolidated financial statements and the Successor’s consolidated financial statements are not necessarily comparable. From May 24, 2012 to July 20, 2012, Successor had no activities other than the incurrence of transaction costs related to the Acquisition.

We operate on a 52- or 53-week fiscal year that ends on the Sunday that is closest to December 31 of each year. Each fiscal year generally is comprised of four 13-week fiscal quarters, although in the years with 53 weeks the fourth quarter represents a 14-week period. Fiscal 2012, Fiscal 2013 and Fiscal 2014 ended on December 30, 2012, December 29, 2013 and December 28, 2014, respectively, and each were comprised of 52 weeks. Approximately every six or seven years a 53-week fiscal year occurs. Fiscal 2015 is a 53-week fiscal year.

Comparable restaurant sales growth reflects the change in year-over-year sales for comparable restaurants. We consider a restaurant to be comparable during the first full fiscal quarter following the eighteenth full month of operations. We adjust the sales included in the comparable restaurant calculation for restaurant closures, primarily as a result of remodels, so that the periods will be comparable. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable restaurant sales reflect changes in guest count trends as well as changes in average check and highlight the performance of existing restaurants as the impact of new restaurant openings is excluded.

 

 

ii


Table of Contents

We measure average unit volumes (“AUVs”) on an annual (52-week) basis. AUVs consist of the average sales of all restaurants that have been open for a trailing 52-week period or longer. We adjust the sales included in AUV calculations for restaurant closures. This measurement allows us to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.

Restaurant contribution is defined as revenue less restaurant operating costs (which include food and beverage costs, compensation and benefits costs and occupancy and certain other operating costs but exclude depreciation and amortization expense). Restaurant contribution margin is defined as restaurant contribution as a percentage of revenue. Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants and our calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, United States generally accepted accounting principles (“GAAP”). Restaurant contribution and restaurant contribution margin 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.

We believe that restaurant contribution and restaurant contribution margin are important tools for securities analysts, investors and other interested parties because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. We use restaurant contribution and restaurant contribution margin as key metrics 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.

Cash-on-cash return for an individual restaurant is calculated by dividing restaurant contribution by our initial investment (net of pre-opening costs and tenant allowances). We believe that cash-on-cash return is an important tool for securities analysts, investors and other interested parties because it is a widely-used metric within the restaurant industry to evaluate new restaurant performance and return on capital we reinvest into our business. Cash-on-cash return is a supplemental measure of operating performance of our restaurants and our calculations thereof may not be comparable to those reported by other companies. Cash-on-cash return is neither required by, nor presented in accordance with, GAAP. Cash-on-cash return 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.

Adjusted EBITDA is defined as net income before interest, taxes and depreciation and amortization plus the sum of certain operating and non-operating expenses, including pre-opening costs, losses on modifications and extinguishment of debt, acquisition costs, equity-based compensation costs, management and consulting fees, retention agreement costs, IPO related costs, and other non-cash or similar adjustments. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of revenue. By monitoring and controlling our Adjusted EBITDA and Adjusted EBITDA margin, we can gauge the overall profitability of our company. Adjusted EBITDA as presented in this prospectus is a supplemental measure of our performance that is neither required by, nor presented in accordance with, GAAP. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income (loss), operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

We believe Adjusted EBITDA facilitates 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 Adjusted EBITDA because (i) we believe this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe investors will find this measure useful in assessing our ability to service or incur indebtedness, and (iii) we use Adjusted EBITDA internally as a benchmark to compare our performance to that of our competitors.

 

iii


Table of Contents

Adjusted EBITDA 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. Some of these limitations are (i) it does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments, (ii) it does not reflect changes in, or cash requirements for, our working capital needs, (iii) it does not reflect the significant 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 Adjusted EBITDA does not reflect any cash requirements for such replacements, (v) it does not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) it does 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 this measure differently than we do, limiting its usefulness as a comparative measure.

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

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Percentage amounts included in this prospectus have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements. Certain other amounts that appear in this prospectus may not sum due to rounding.

Unless we specifically state otherwise, all dollar amounts listed in this prospectus are in US dollars.

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, logos and website names. This prospectus contains references to certain trademarks and brands. These include our original trademarks Fogo®, Fogo de Chão® and Bar Fogo®. We believe that we have full ownership rights to these brands. Solely for the convenience of the reader, we refer to these brands in this prospectus without the ™ or ® symbol, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names, trademarks and brands. Other trademarks, service marks or trade names referred to in this prospectus are the property of their respective owners.

 

iv


Table of Contents

PROSPECTUS SUMMARY

This summary highlights some of the information contained elsewhere in this prospectus. This summary is not complete and does not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed in the “Risk Factors” section of this prospectus and our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus before making an investment decision to invest in our common stock.

Our Company

Fogo de Chão (fogo-dee-shoun) is a leading Brazilian steakhouse, or churrascaria, which has specialized for over 35 years in fire-roasting high-quality meats utilizing the centuries-old Southern Brazilian cooking technique of churrasco. We deliver a distinctive and authentic Brazilian dining experience through the combination of our high-quality Brazilian cuisine and our differentiated service model known as espeto corrido (Portuguese for “continuous service”) delivered by our gaucho chefs. We offer our guests a tasting menu of meats featuring up to 20 cuts, simply seasoned and carefully fire-roasted to expose their natural flavors.

Guests can begin their dining experience at the Market Table, which offers a wide variety of Brazilian-inspired side dishes, fresh-cut vegetables, seasonal salads, aged cheeses and cured meats, or they can receive immediate entrée service table-side from our gaucho chefs by turning a service medallion, found at each guest’s seat, green side up. Each gaucho chef rotates throughout the dining room, and is responsible for a specific cut of meat which they prepare, cook and serve to our guests continuously throughout their meal. Guests can pause the service at any time by turning the medallion to red and then back to green when they are ready to try additional selections and can communicate to our gauchos their preferred cut of meat, temperature and portion size. Our continuous service model allows customization and consumer engagement since our guests control the variety and quantity of their food and the pace of their dining experience. Through the combination of our authentic Brazilian cuisine, differentiated service model, prix fixe menu and engaging hospitality in an upscale restaurant atmosphere, we believe our brand delivers a differentiated dining experience relative to other specialty and fine-dining concepts and offers our guests a compelling value proposition.

Throughout our history, we have been recognized for our leading consumer appeal by both national and local media in the markets where we operate, including winning multiple “best of” restaurant awards from one of Brazil’s most prominent lifestyle publications, Veja Magazine, and numerous accolades in the United States, including awards from Nation’s Restaurant News, Zagat and Wine Spectator Magazine.

 

 

1


Table of Contents

We opened our first restaurant in 1979 in Porto Alegre, Brazil. In 1986, we expanded to São Paulo, Brazil, a city in which we now operate five restaurants. Encouraged by our success in Brazil, we opened our first restaurant in the United States in 1997 in Addison, Texas, a suburb of Dallas, and have since expanded our footprint nationwide. We currently operate 26 restaurants in the United States, 10 in Brazil and one in Mexico, our first joint venture restaurant. From the 2010 to 2014 fiscal years, we grew our restaurant count by a compound annual growth rate (“CAGR”) of 11.5%.

 

LOGO LOGO

We believe our dedication to serving high-quality Brazilian cuisine and our differentiated service model, combined with our disciplined focus on restaurant operations, have resulted in strong financial results illustrated by the following:

 

    In Fiscal 2014, we generated AUVs of approximately $8.0 million and a restaurant contribution margin of 32.5%, which we believe, based on an internal survey of our public competitors in the restaurant industry, are among the highest in the full-service dining category;

 

    In Fiscal 2014, we opened three restaurants, increasing our restaurant base 9.7% from 31 restaurants in 2013 to 34 restaurants in 2014, and in the year-to-date Fiscal 2015 we have opened restaurants in San Juan, Puerto Rico and Rio de Janeiro, Brazil and our first joint venture restaurant in Mexico City, Mexico; and

 

    From Fiscal 2013 to Fiscal 2014, revenue grew 19.6% to $262.3 million and our net income increased from a net loss of $0.9 million in Fiscal 2013 to net income of $17.6 million in Fiscal 2014. For the thirteen weeks ended March 29, 2015, revenue was $65.0 million and net income was $4.7 million, increases of 5.9% and 68.9%, respectively, as compared to the thirteen weeks ended March 30, 2014. In addition, from Fiscal 2013 to Fiscal 2014, restaurant contribution grew 23.9% to $85.1 million and Adjusted EBITDA grew 25.7% to $63.3 million, despite our investment of $4.2 million in additional fixed personnel costs during such period to develop key functional areas to support future growth. For the thirteen weeks ended March 29, 2015, restaurant contribution grew 13.6% to $20.5 million and Adjusted EBITDA grew 15.9% to $14.9 million as compared to the thirteen weeks ended March 30, 2014. For a reconciliation of Adjusted EBITDA and restaurant contribution, non-GAAP financial measures, to net income and revenue, respectively, see “Summary Consolidated Financial and Other Information.”

 

 

2


Table of Contents

Our Competitive Strengths

We believe the following strengths differentiate us from our competitors and serve as the foundation for our continued growth:

Authentic Cuisine – A Culinary Journey to Brazil

We provide our guests with an experience that is distinctly Brazilian, and our food is at the heart of that experience. Our traditional Brazilian cuisine has been passed down from generation to generation in Brazil and lives on in the way our gaucho chefs prepare, season and continuously fire-roast our meats utilizing the traditional cooking method of churrasco – fire-roasted on skewers over an open flame to expose the natural flavors. Our entrée selection features a variety of carefully cooked and seasoned meats including Brazilian style cuts of beef such as the fraldinha and the picanha, our signature cut of steak, as well as other premium beef cuts such as filet mignon and rib eye, and lamb, chicken, pork and seafood items. Each cut is carved table-side by our gaucho chefs in a manner designed to both enhance the tenderness of each slice and meet our guests’ desired portion size and temperature. At Fogo de Chão, every table is a chef’s table. To complement our meat selection, a variety of sharable side dishes, including warm cheese bread, fried bananas and crispy polenta, are brought to each table and replenished throughout the meal. For guests preferring lighter fare, we also offer Brazilian-inspired à la carte seafood options, a “Market Table” only option and a selection of small plates. Our Market Table, which features a variety of gourmet side dishes, seasonal salads, Brazilian hearts of palm, fresh-cut vegetables, aged cheeses, smoked salmon and cured meats is immediately available once our guests are seated. We believe it pays homage to the kitchen tables of Southern Brazil where families share fresh produce and seasonal salads grown locally. Our menu is enhanced by an award-winning wine list and a full bar complete with a selection of signature Brazilian drinks such as the caipirinha.

Interactive, Approachable Fine-Dining Experience Delivered By Our Gaucho Chefs

We believe that we offer our guests an upscale, approachable and friendly atmosphere in elegant dining rooms that is complemented by the personalized, interactive experience with our gaucho chefs and team members. Skilled artisans trained in the centuries-old Southern Brazilian cooking tradition of churrasco and the culture and heritage of Southern Brazil, the home of churrasco, our gaucho chefs are central to our ability to maintain consistency and authenticity throughout our restaurants in Brazil and the United States. Due to our significant operations in Brazil, we are able to place many of our native Brazilian gaucho chefs in restaurants in the United States, which we believe preserves the distinctly Brazilian attributes of our brand. Our team members focus on anticipating guests’ needs and helping guests navigate our unique dining experience for a memorable visit.

Our gaucho chefs butcher, prepare, cook and serve our premium meats to each guest, as well as engage and interact with them. We utilize a continuous style of service, where each of our gaucho chefs approaches guests at their table with various selections of meat, providing our guests with the cut, temperature and quantity they desire. During these interactions, our gaucho chefs learn each guest’s specific preferences and are able to tailor their dining experience accordingly. In addition to providing an entertaining and engaging experience, our continuous service allows our guests to control the entrée variety, portions and pace of their meal, which we believe maximizes the customization of their experience and the satisfaction they receive from dining at our restaurants.

Award-Winning Concept with a Compelling Value Proposition and Broad Appeal

We believe that the combination of our high-quality Brazilian cuisine, differentiated dining experience and the competitive price point of our prix fixe menu leads our restaurants to appeal to a wide range of demographic, including both men and women, and socioeconomic groups. We believe our restaurants provide a preferred venue for various dining occasions, including intimate gatherings, family get-togethers, business functions, convention banquets and other celebrations. A majority of our guests dine at our restaurants multiple times per year. In Fiscal 2014, our average per-person spend was $59, which we estimate is approximately three-quarters of that of the traditional high-end steakhouse category.

 

 

3


Table of Contents

Our restaurants have received numerous awards and accolades from critics and reviewers in the United States and Brazil. For example, we have been nationally recognized by Nation’s Restaurant News, Zagat and Wine Spectator Magazine, and we have received awards from local media in the markets we operate, including Atlanta Magazine, Chicago Tribune, Dallas Observer and Houston Business Journal. Additionally, our restaurants are consistently included among the top upscale dining options by reputable online reviewers such as Yelp and Urban Spoon. We believe that the authenticity of our brand is demonstrated by the fact that we have received multiple “best of” restaurant awards from Veja Magazine.

Unique Operating Model Drives Industry-Leading Restaurant-Level Profitability

Through the consistent execution of our unique business model, we are able to produce what we believe is industry-leading restaurant-level profitability by optimizing labor and food costs. For Fiscal 2014, the sum of our food and beverage costs and compensation and benefits costs (or “prime costs”) as a percentage of revenue were 50.7%, which we believe, based on an internal survey of our public competitors in the full-service dining category, is approximately 750 basis points lower than the average within the full-service restaurant industry in the United States. Our favorable performance on the largest components of a restaurant’s cost structure, which drives our restaurant contribution margins, is due to the following unique structural characteristics of our operational model:

 

    The dual role our gaucho chefs play as both chef and server significantly reduces back-of-the-house labor costs;

 

    Simple cooking technique and streamlined food offering, combined with table-side service and plating, allow for efficient kitchen and server operations, reducing labor costs;

 

    Our gaucho chefs work as a team with cross-functional roles and responsibilities, increasing productivity, speed of service and guest satisfaction, while reducing labor costs;

 

    Simple, space-efficient cooking technique and streamlined menu reduces our kitchen’s footprint and maximizes space devoted to front-of-the-house tables, which allows our restaurants to achieve higher sales per square foot and enables us to leverage our fixed costs such as occupancy;

 

    Our self-service Market Table requires minimal staffing and kitchen preparation, thereby reducing labor costs, and provides us flexibility in the range of items we offer, which helps us manage food costs through seasons and market cycles;

 

    In-house butchering by our highly skilled gaucho chefs maximizes the yield on our meat cuts, thereby reducing food costs; and

 

    Our wide variety of proteins offered provides us flexibility in sourcing our meat selection, which help us optimize food costs.

Industry-Leading Cash-on-Cash Returns Create New Restaurant Growth Opportunity

Our business model produces attractive unit volumes and restaurant contribution margins that drive what we believe are industry-leading cash-on-cash returns, based on an internal survey of our public competitors in the restaurant industry. For Fiscal 2014, we generated AUVs of approximately $8.0 million and a restaurant contribution margin of 32.5%. Since 2007, our new restaurants that have been open at least three years as of December 28, 2014, have generated an average year three cash-on-cash return of greater than 50%. We calculate our year three cash-on-cash return by dividing our restaurant contribution in the third year of operation by our initial investment costs (net of pre-opening costs and tenant allowances). Our restaurants perform well across a diverse range of geographic regions, population densities and real estate settings, which we believe demonstrates the portability of our concept to new markets. We believe the combination of our strong cash-on-cash returns, proven concept portability, and footprint of only 37 restaurants, including our first joint venture restaurant, supports further use of cash flow to grow our restaurant base and creates an attractive new restaurant growth opportunity.

 

 

4


Table of Contents

Highly Attractive Concept for Domestic and International Real Estate Developers Supports Growth

Due to the broad appeal of our brand, the diversity of our guest base and the relatively high number of weekly visits to our restaurants, our concept is a preferred tenant for real estate developers. Landlords and developers, both in the United States and internationally, seek out our restaurants to be anchors for their developments as they are highly complementary to national retailers. Our restaurants that opened prior to Fiscal 2014 have attracted, on average, approximately 137,000 guests per restaurant in Fiscal 2014, which we believe, based on an internal survey of our public fine-dining competitors, is approximately 60% more guests per restaurant than those competitors. Our ability to achieve AUVs that are comparable to those of other high-end steakhouses despite our lower average check demonstrates our capacity to attract more guests than many of our competitors. Our AUVs, brand recognition and relatively high guest traffic position us well to negotiate the prime location within a development and favorable lease terms, which enhance our return on invested capital.

We believe our concept has international appeal and makes us an attractive tenant for international real estate developers, and we believe we will be able to leverage our brand strength to negotiate attractive terms in desirable locations as we grow outside the United States and Brazil.

Experienced Leadership

Our senior management team has extensive operating experience with an average of over 26 years of experience in the restaurant industry. We are led by our CEO, Larry Johnson. Mr. Johnson first began working with Fogo de Chão in 1996 as Corporate Counsel. In 2007, Mr. Johnson joined us as CEO and has guided the growth of our company from 11 restaurants in 2007 to 37 restaurants as of the date of this prospectus. Under his leadership, our business has consistently achieved growth in revenue and Adjusted EBITDA year-over-year. Mr. Johnson leads a team of dedicated, experienced restaurant professionals including Barry McGowan, our President, Tony Laday, our CFO, and Selma Oliveira, our COO. Mrs. Oliveira, who was born in Brazil, joined us to help start our operations in the United States in 1996. Our senior management team is focused on executing our business plan and implementing our growth strategy, and we believe they are a key driver of our success and have positioned us well for long-term growth.

Our Growth Strategies

We plan to continue to expand our restaurant footprint and drive revenue growth, improve margins and enhance our competitive positioning by executing on the following strategies:

Grow Our Restaurant Base

We believe we are in the early stages of our growth with 37 current restaurants, 26 in the United States, 10 in Brazil and one in Mexico, our first joint venture restaurant. Based on internal analysis and a study prepared by Buxton, we believe there exists long-term potential for over 100 new domestic sites and additional new restaurants internationally, due to the broad appeal of our differentiated concept, industry leading cash-on-cash returns, flexible real estate strategy and successful history of opening new restaurants. We have a long track record of successful new restaurant development, evidenced by having grown our restaurant count by a multiple of 10 since 2000 and at a 11.5% CAGR since 2010. Since 2007, our new restaurants that have been open at least three years have generated an average year three cash-on-cash return of greater than 50%. We calculate our year three cash-on-cash return by dividing our restaurant contribution in the third year of operation by our initial investment costs (net of pre-opening costs and tenant allowances). We believe our concept has proven portability, with strong AUVs and cash-on-cash returns across a diverse range of geographic regions, population densities and real estate settings.

We will continue to pursue a disciplined new restaurant growth strategy primarily in the United States in both new and existing markets where we believe we are capable of achieving sales volumes and restaurant contribution margins that generate attractive cash-on-cash returns. We plan to open five to six restaurants during Fiscal 2015, which includes our first joint venture restaurant in Mexico City, which opened in May 2015. Over the next five years, we plan to increase our company-owned restaurant count by at least 10% annually, with North America being our primary market for new restaurant development. In addition, we plan to grow in other international markets.

 

 

5


Table of Contents
    Open New Restaurants in the United States.  We believe the United States can support a considerable number of additional Fogo de Chão restaurants and will continue to be our primary market for new restaurant development. Based on internal analysis and a study prepared by Buxton, we estimate that there exists long-term potential for over 100 new domestic sites across large- and mid-sized markets as well as urban and suburban locations that can support Fogo de Chão restaurants.

 

    Open New Restaurants in Brazil.  Based on analysis performed by our development team, we believe there is an opportunity to open additional restaurants in Brazil, the birthplace of Fogo de Chão. Over the next five years, we plan to open three to five new restaurants throughout the country as attractive real estate locations become available. In addition to providing strong returns on invested capital, our operations in Brazil allow us to maintain our authentic and distinctive churrasco heritage and support the global growth of our brand.

 

    Open New Restaurants in Other International Markets.  We will selectively consider other international markets, as we believe attractive opportunities for opening new restaurants exist in large cities and business centers in certain international markets including Asia, Australia, Canada, Europe, the Middle East and South America. We will pursue growth in these markets through a combination of company-owned restaurant development and joint ventures, which we believe allow us to expand our brand with limited capital investment by us. In May 2015, we opened our first joint venture restaurant in Mexico City.

Our current restaurant investment model targets an average cash investment of $4.5 million per restaurant, net of tenant allowances and pre-opening costs, assuming an average restaurant size of approximately 8,500 square feet, an AUV of $7.0 million and a cash-on-cash return in excess of 40% by the end of the third full year of operation. On average, our new company-owned restaurants opened since the beginning of 2007 have exceeded these AUV and cash-on-cash return targets within the third year of operation.

Grow Our Comparable Restaurant Sales

We believe the following strategies will allow us to grow our comparable restaurant sales:

 

    Food and Beverage Innovation.  We seek to introduce innovative items that we believe align with evolving consumer preferences and broaden our appeal, and we will continue to explore ways to increase the number of occasions for guests to visit our restaurants. In order to drive guest frequency and broaden the appeal of our menu, we recently added seafood items and on-trend seasonal food and beverage offerings. Additionally, we believe there are significant day-part opportunities with our recently launched Bar Fogo, a “small plates” menu served at the bar, which we launched in April 2014, happy hour and special occasion menus.

 

    Increase Our Per Person Average Spend.  We believe there are opportunities to drive comparable restaurant sales growth through incremental food and beverage sales. For example, in February 2014 we launched our Malagueta Shrimp Cocktail, which guests can order in addition to our traditional prix fixe menu. Through Bar Fogo, we plan to generate incremental food sales as well as increase our alcohol sales by improving our guest experience in our bar. In Fiscal 2014, our alcohol mix was 16.7% of sales, which we believe is below that of our fine-dining peers. In addition to our Bar Fogo initiative, we believe we can increase our alcohol sales through our recently improved wine-by-the-glass program and the introduction of new Brazilian-inspired cocktails to our beverage menu. Finally, we believe the continued rollout of happy hour and special occasion menus will also increase our per person average spend.

 

   

Further Grow Our Large Group Dining Sales.  We believe our differentiated dining experience, open restaurant layout, speed of service and compelling value proposition make us a preferred destination for group dining occasions of all types. For Fiscal 2014, large group sales represented 12.0% of US revenue, and we believe there is a significant opportunity to grow that aspect of our business. We have added group sales managers at most restaurants and introduced large group reception and meeting packages, which have generated significant momentum in group sales growth. In Fiscal 2014, we generated large group sales growth of 12.8% for our comparable restaurants over the prior year period,

 

 

6


Table of Contents
 

and we believe the investments we have made in our group sales business will continue to yield positive results.

 

    Continue to Improve Our Marketing to Drive Traffic.  We will continue to invest in marketing and advertising to drive guest trial and frequency. We continue to introduce new marketing initiatives through various channels, including social, online, print, digital advertising, TV and radio media, with the intent to promote brand awareness. We will continue to harness word of mouth and grow our social media and e-mail marketing fan base through thoughtful planning, unique promotions and rich content that reward loyalty and increase guest engagement with our brand. We intend to drive repeat traffic by becoming our guests’ preferred upscale restaurant destination and believe targeted marketing investments that heighten awareness, reinforce the premium image of our brand and highlight the authenticity of our dining experience will continue to generate guest loyalty and promote brand advocacy.

 

    Opportunistically Remodel Select Restaurants.  Beginning in 2015, we plan to launch an opportunistic remodel program with the target of remodeling three to four restaurants during the 2015 fiscal year. We believe our new design will enhance the guest experience, highlight our brand attributes and encourage guest trial and frequency. We also believe there are opportunities to optimize restaurant capacity and merchandising to maximize sales per square foot.

Improve Margins by Leveraging Our Infrastructure and Investments in Human Capital

To support our future growth and improve our operations and management team, over the last three years we have invested over $5 million in incremental annual personnel costs by adding 18 positions to our corporate team and adding 16 local sales manager positions and five assistant manager positions at the restaurant level. These hires have bolstered key functional areas and supported future growth initiatives including senior leadership, new restaurant site selection and analysis, new restaurant design, group dining, product innovation and in-restaurant employee training. In addition, we have implemented initiatives in our restaurants to improve labor productivity, which we believe will further enhance restaurant profitability and the guest experience. As evidenced by our improvement in both comparable restaurant sales growth and restaurant contribution in 2014, these investments and initiatives have yielded positive results and we believe we will continue to benefit from these investments as we grow our business in the long-term. Furthermore, we expect our general and administrative expenses to decrease as a percentage of total revenue over time as we are able to leverage these investments by growing revenue faster than our fixed cost base. In addition, we have made substantial investments in our IT systems, and we expect to utilize our IT infrastructure for continued improvements in operational efficiency and margins through the use of labor productivity and training tools.

Our Sponsor

Thomas H. Lee Partners, L.P. (“THL”) is one of the world’s oldest and most experienced private equity firms. Founded in 1974, THL has raised approximately $20 billion of equity capital and invested in more than 100 portfolio companies with an aggregate value of over $150 billion. THL invests in growth-oriented businesses, headquartered primarily in North America, across three sectors: Business & Financial Services, Consumer & Healthcare, and Media & Information Services. The firm partners with portfolio company management to identify and implement operational and strategic improvements for long-term growth.

As of the date of this prospectus, the THL Funds own approximately 96% of our common stock. Upon completion of this offering and assuming no exercise of the underwriters’ option to purchase additional shares, the THL Funds will continue to beneficially own approximately 82% of our outstanding common stock (or 80% if the underwriters’ option to purchase additional shares is exercised in full). As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the NASDAQ on which we have applied for our shares to be listed. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—We will be a “controlled company” within the meaning of the NASDAQ rules and, as a result, will be exempt from certain corporate governance requirements.”

 

 

 

7


Table of Contents

The THL Funds engage in a range of investing activities, including investments in restaurants and other consumer-related companies in particular that could directly or indirectly compete with us. In the ordinary course of its business activities, the THL Funds may engage in activities where its interests conflict with our interests or those of our stockholders. See “Following this offering, the THL Funds will continue to have a substantial ownership interest in our common stock. Conflicts of interest may arise because some of our directors are principals of the THL Funds.”

Our Corporate Information

Fogo de Chão, Inc. was incorporated as a Delaware corporation as Brasa (Parent) Inc. on May 24, 2012 in connection with the Acquisition. On December 17, 2014 we changed our corporate name from Brasa (Parent) Inc. to Fogo de Chão, Inc. Our principal executive offices are located at 14881 Quorum Drive, Suite 750, Dallas, Texas 75254. Our telephone number is (972) 960 9533. The address of our website is www.fogodechao.com. The information contained on, or accessible through, our website is not incorporated in, and shall not be part of, this prospectus.

Concurrent Refinancing Transaction

Concurrently with, and conditioned upon, the consummation of our initial public offering, we intend to refinance our existing Senior Credit Facilities and enter into a new $250.0 million revolving credit facility (the “New Credit Facility”). We expect that the loans under our New Credit Facility will bear interest at a base rate plus a margin ranging from 0.50% to 1.50% or at LIBOR plus a margin ranging from 1.50% to 2.50% and will mature in 2020. We expect that the New Credit Facility will contain customary affirmative, negative and financial covenants applicable to us and certain of our subsidiaries, including financial maintenance covenants requiring us to maintain a maximum Total Rent Adjusted Leverage Ratio and a minimum Interest Coverage Ratio (each as defined in the New Credit Facility). Borrowings under the New Credit Facility may vary significantly from time to time depending on our cash needs at any given time, and upon consummation of our initial public offering we expect that approximately $188.9 million will be drawn under our New Credit Facility. See “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.”

 

 

8


Table of Contents

The Offering

 

Issuer

Fogo de Chão, Inc.

Common stock offered by Fogo de Chão, Inc.

4,411,764 shares (or 5,073,528 shares if the underwriters exercise their option to purchase additional shares in full).

Option to purchase additional shares

We have granted the underwriters an option for a period of 30 days to purchase up to 661,764 additional shares of common stock from us.

Common stock outstanding immediately after this offering

27,253,018 shares (or 27,914,782 shares if the underwriters exercise their option to purchase additional shares in full).

Principal stockholders

Upon completion of this offering, the THL Funds will continue to beneficially own a controlling interest in us. As a result, we intend to avail ourselves of the controlled company exemption under the corporate governance rules of the NASDAQ. See “Management—Board Composition.”

Voting rights

Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders.

Dividend policy

We currently intend to retain all of our earnings for the foreseeable future to fund the operation and growth of our business and to repay indebtedness, and therefore, we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare and pay cash dividends will be at the discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, liquidity, contractual restrictions, general business conditions and such other factors as our board of directors deems relevant. In addition, our Senior Credit Facilities (as defined below) restrict, and our New Credit Facility will restrict, our ability to pay dividends. For additional information, see “Dividend Policy.”

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $66.9 million, or $77.4 million if the underwriters exercise their option to purchase additional shares in full, based upon an assumed initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

9


Table of Contents
We intend to use the net proceeds of this offering, together with borrowings under our New Credit Facility, to repay the outstanding indebtedness under our Senior Credit Facilities and to pay fees and expenses related to our initial public offering and the refinancing of our Senior Credit Facilities. See “Use of Proceeds.”

Conflicts of Interest

A portion of the proceeds from this offering will be used to repay the outstanding indebtedness under our Senior Credit Facilities. Because affiliates of Credit Suisse Securities (USA) LLC and Wells Fargo Securities, LLC are lenders under our First Lien Credit Facility and each will receive 5% or more of the net proceeds of this offering, Credit Suisse Securities (USA) LLC and Wells Fargo Securities, LLC are each deemed to have a “conflict of interest” under Rule 5121 of the Financial Industry Regulatory Authority, Inc., or FINRA. As a result, this offering will be conducted in accordance with FINRA Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the members primarily responsible for managing the public offering do not have a conflict of interest, are not affiliates of any member that has a conflict of interest and meet the requirements of paragraph (f)(12)(E) of FINRA Rule 5121. See “Use of Proceeds” and “Underwriting (Conflicts of Interest).”

Risk factors

Investment in our common stock involves substantial risks. Please read this prospectus carefully, including the section entitled “Risk Factors” and the consolidated financial statements and the related notes to those statements included elsewhere in this prospectus before deciding to invest in our common stock.

Directed share program

The underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares of our common stock being offered for sale to our directors, officers, certain employees and certain other persons associated with us. The number of shares of common stock available for sale to the general public in this offering will be reduced to the extent these persons purchased reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares. See “Underwriting (Conflicts of Interest).”

Expected NASDAQ Global Select Market symbol

“FOGO”

 

 

10


Table of Contents

The number of shares of our common stock to be issued and outstanding after the completion of this offering is based on 22,841,254 shares of our common stock issued and outstanding as of May 1, 2015. Unless otherwise indicated, information in this prospectus:

 

    assumes an initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus;

 

    assumes no exercise by the underwriters of their option to purchase up to an additional 661,764 shares of our common stock;

 

    except in our historical financial statements included in this prospectus, gives effect to the consummation of a stock split effected upon the closing of this offering pursuant to which each share held by the holder of common stock will be reclassified into 25.4588 shares;

 

    does not reflect (1) 783,590 shares of our common stock issuable upon exercise of stock options that will vest upon the consummation of this offering under our 2012 Plan (as defined herein) at a weighted average exercise price of $10.01, (2) 20,160 shares of our common stock issuable upon exercise of vested stock options outstanding as of May 1, 2015 under our 2012 Plan at a weighted average exercise price of $8.68, (3) 1,393,632 shares of our common stock underlying unvested stock options outstanding as of May 1, 2015 at a weighted average exercise price of $10.25 under our 2012 plan and (4) 317,799 shares of our common stock underlying other stock awards outstanding as of May 1, 2015 under our 2012 Plan; and

 

    does not reflect an additional 1,200,000 shares of our common stock reserved for future grant under our 2015 Plan (as defined herein) which we expect to adopt in connection with this offering, including 138,200 shares of our common stock issuable upon the exercise of stock options we expect to grant to employees upon the closing of this offering at an exercise price per share equal to the initial public offering price.

 

 

11


Table of Contents

Summary Consolidated Financial and Other Information

The following tables present summary consolidated financial information of the Company (Successor) as of March 29, 2015 and for the thirteen week periods ended March 29, 2015 and March 30, 2014, for the fiscal years ended December 28, 2014 and December 29, 2013 and for the period from May 24, 2012 to December 30, 2012 and summary historical consolidated financial information of Fogo de Chão Churrascaria (Holdings) LLC (Predecessor) and subsidiaries for the period from January 2, 2012 to July 20, 2012.

The summary historical consolidated statements of operations and cash flow data for the fiscal years ended December 28, 2014 and December 29, 2013 and for the periods May 24, 2012 (Inception) to December 30, 2012 (Successor) and January 2, 2012 to July 20, 2012 (Predecessor) have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated statements of operations and cash flow data for the thirteen week periods ended March 29, 2015 and March 30, 2014 and the summary historical consolidated balance sheet data as of March 29, 2015 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Historical results for any prior period are not necessarily indicative of results that may be expected in any future period, and results for any interim period are not necessarily indicative of results that may be expected for the entire year.

The following tables also set forth certain summary unaudited consolidated pro forma financial information as of and for the thirteen week period ended March 29, 2015 and for the fiscal year ended December 28, 2014, giving effect to (i) the consummation of a stock split effected upon the closing of this offering pursuant to which each share held by the holder of common stock will be reclassified into 25.4588 shares, (ii) the consummation of our initial public offering, assuming the issuance and sale by us of 4,411,764 shares of our common stock, assuming an initial public offering price of $17.00 per share, the midpoint of the price range on the cover of this prospectus, and after deducting estimated offering expenses and estimated underwriting discounts and commissions payable by us, (iii) the consummation of the refinancing of our existing Senior Credit Facilities and entry into, and effectiveness of, our New Credit Facility, (iv) the application of the net proceeds from our initial public offering and borrowings under our New Credit Facility as set forth under “Use of Proceeds” and (v) the termination of the advisory services agreement between us and an affiliate of THL and the one-time termination fee paid by us upon the consummation of this offering as set forth under the section “Unaudited Pro Forma Consolidated Financial Statements.” The summary consolidated pro forma financial information is presented for informational purposes only and does not purport to represent what our financial condition or results of operations actually would have been had the referenced events occurred on the dates indicated or to project our financial condition or results of operations as of any future date or for any future period. For additional information, see “Unaudited Pro Forma Consolidated Financial Statements.”

The Successor was incorporated under the name Brasa (Parent) Inc. on May 24, 2012 in connection with the Acquisition on July 21, 2012 of Fogo de Chão Churrascaria (Holdings) LLC, a Delaware limited liability company, and its parent company, FC Holdings Inc., a Cayman Islands exempt company, by a collaborative group consisting of the THL Funds. The Successor owns 100% of Brasa Purchaser, which owns 100% of Brasa Holdings. Brasa Holdings owns 100% of Fogo Holdings, which owns our domestic and foreign operating subsidiaries.

The Successor, Brasa Purchaser, Brasa Holdings, Brasa Merger Sub Inc. and Fogo de Chão (Holdings) Inc. were formed during 2012 for the purpose of effecting the Acquisition, which was consummated on July 21, 2012. As a result of the Acquisition, the financial information for all periods after May 24, 2012 represent the financial information of the “Successor” company. Prior to, and including, July 20, 2012, the consolidated financial statements include the accounts of the Predecessor. Financial information in the Predecessor period principally relates to Fogo de Chão Churrascaria (Holdings) LLC and its subsidiaries. From May 24, 2012 to July 20, 2012, Successor had no activities other than the incurrence of transaction costs related to the Acquisition.

For purposes of presenting a comparison of our Fiscal 2014 and Fiscal 2013 results to our Fiscal 2012 results, in addition to standalone results for the Successor for the period of May 24, 2012 (Inception) to December 30, 2012 and for the Predecessor for the period of January 2, 2012 to July 20, 2012, we have also

 

 

12


Table of Contents

presented summary historical consolidated financial information on a combined basis as the mathematical addition of the Predecessor and Successor periods. We believe that the presentation with mathematical addition provides meaningful information about our results of operations on a period to period basis. This approach is not consistent with GAAP, may yield results that are not strictly comparable on a period to period basis and may not reflect the actual results we would have achieved.

The data set forth in the following table should be read together with the sections of this prospectus entitled “Use of Proceeds,” “Capitalization,” “Selected Historical Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and in our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus.

 

                Combined     Successor          Predecessor  
                Period from
January 2 to
December 30,
2012
   

Period from
May 24

(Inception) to
December 30,
2012(2)

         Period from
January 2 to
July 20,
2012
 
    Thirteen Week Periods Ended     Fiscal Year Ended          

(dollars in thousands, except for

per share data)

  March 29,
2015
    March 30,
2014
    December 28,
2014
    December 29,
2013
            
                                                        

Statement of Operations Data

                 

Revenue

  $ 64,959      $ 61,317      $ 262,280      $ 219,239      $ 202,360      $ 93,844          $ 108,516   

Restaurant operating costs:

                 

Food and beverage costs

    19,164        18,547        78,330        67,002        63,893        29,381            34,512   

Compensation and benefit costs

    14,100        13,891        54,673        46,860        43,473        21,125            22,348   

Occupancy and other operating expenses (excluding depreciation and amortization)

    11,174        10,820        44,156        36,703        33,539        15,478            18,061   

Total restaurant operating costs

    44,438        43,258        177,159        150,565        140,905        65,984            74,921   

Marketing and advertising costs

    1,402        1,442        5,585        6,188        4,830        2,342            2,488   

General and administrative costs

    5,708        4,668        21,419        18,239        18,372        8,143            10,229   

Pre-opening costs

    1,003        788        1,951        4,764        2,478        1,119            1,359   

Acquisition costs

                                18,951        11,988            6,963   

Loss on modification/extinguishment of debt

                  3,090        6,875        7,762                   7,762   

Depreciation and amortization and other

    2,891        2,668        11,684        8,618        8,524        3,567            4,957   

Total costs and expenses

    55,442        52,824        220,888        195,249        201,822        93,143            108,679   

Income (loss) from operations

    9,517        8,493        41,392        23,990        538        701            (163

Other expense:

                 

Interest expense, net

    (3,757     (4,762     (17,121     (22,354     (18,267     (10,908         (7,359

Other expenses

    (2     (4     (7     (101     (88     (20         (68

Income (loss) before income taxes

    5,758        3,727        24,264        1,535        (17,817     (10,227         (7,590

Income tax expense (benefit)

    1,252        965        6,991        2,472        99        (1,195         1,294   

Net income (loss)

    4,506        2,762        17,273        (937     (17,916     (9,032         (8,884

Less: Loss attributable to noncontrolling interests

    (159            (282                                

Net income (loss) attributable to Fogo de Chão, Inc.

  $ 4,665      $ 2,762      $ 17,555      $ (937   $ (17,916   $ (9,032       $ (8,884

Historical Earnings (Loss) Per Share Data(1):

                 

Earnings (loss) per common share

                 

Basic

  $ 5.20      $ 3.10      $ 19.69      $ (1.06     *      $ (10.21         *   

Diluted

  $ 5.14      $ 3.06      $ 19.42      $ (1.06     *      $ (10.21         *   

Weighted average common shares outstanding:

                 

Basic

    896,679        890,439        891,523        885,940        *        884,850            *   

Diluted

    907,074        902,505        904,067        885,940        *        884,850            *   

Pro Forma Earnings Per Share Data(2):

                 

Pro Forma Net Income

  $ 6,274        $ 24,593               

Pro Forma earnings per common share:

                 

Basic

  $ 0.23        $ 0.91               

Diluted

  $ 0.23        $ 0.90               

Pro Forma weighted average common shares outstanding:

                 

Basic

    27,240,177          27,108,911               

Diluted

    27,813,089          27,476,524               

 

* Not applicable.

 

(1) Historical share and per share information does not give effect to the consummation of the stock split to be effected upon the closing of this offering.

 

(2) Pro forma amounts give effect to (i) the consummation of a stock split effected upon the closing of this offering pursuant to which each share held by the holder of common stock will be reclassified into 25.4588 shares, (ii) the issuance and sale by us of 4,411,764 shares of our common stock in this offering, assuming an initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, and after deducting estimated offering expenses and estimated underwriting discounts and commissions payable by us, (iii) the consummation of the refinancing of our existing Senior Credit Facilities and entry into, and effectiveness of, our New Credit Facility, (iv) the application of the net proceeds from our initial public offering and borrowings under our New Credit Facility as set forth under “Use of Proceeds” and (v) the termination of the advisory services agreement between us and an affiliate of THL and, with respect to the pro forma consolidated balance sheet, the one-time termination fee paid by us upon the consummation of this offering as set forth under “Use of Proceeds.” See “Unaudited Pro Forma Consolidated Financial Statements,” “Use of Proceeds” and “Capitalization.”

 

 

13


Table of Contents
     As of March 29, 2015  
(dollars in thousands)        Actual          Pro Forma(1)  

Consolidated Balance Sheet Data

     

Cash and cash equivalents

   $ 17,304       $ 17,304   

Total assets

     460,098         459,986   

Total debt

     242,758         188,884   

Total equity

         145,896         205,985   

 

                Combined  
        Thirteen Week Periods Ended         Fiscal Year Ended    

Period from
January 2 to
December 30,
2012

 
(dollars in thousands)   March 29,
2015
    March 30,
2014
    December 28,
2014
    December 29,
2013
   

Other Operating and Financial Data

         

Number of total restaurants at end of period

    35        32        34        31        27   

Number of comparable restaurants at end of period

    27        25        27        25        22   

Comparable restaurant sales growth:(3)

         

United States

    0.1     (0.4 )%      2.9     1.4     (1.1 %) 

Brazil

    2.3     0.8     11.4     1.1     (2.1 %) 

System-wide(4)

    0.5     (0.2 )%      4.9     1.3     (1.3 %) 

Average unit volumes

    *        *      $ 8,031      $ 7,931      $ 8,059   

Restaurant contribution(5)

  $ 20,521      $ 18,059      $ 85,121      $ 68,674      $ 61,455   

Restaurant contribution margin(5)

    31.6     29.5     32.5     31.3     30.4

Adjusted EBITDA(6)

  $ 14,938      $ 12,888      $ 63,319      $ 50,363      $ 49,244   

Adjusted EBITDA margin(6)

    23.0     21.0     24.1     23.0     24.3

 

* Not meaningful because management analyzes average unit volumes on a fiscal period basis.

 

(1) Pro forma amounts give effect to (i) the consummation of a stock split effected upon the closing of this offering pursuant to which each share held by the holder of common stock will be reclassified into 25.4588 shares, (ii) the issuance and sale by us of 4,411,764 shares of our common stock in this offering, assuming an initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, and after deducting estimated offering expenses and estimated underwriting discounts and commissions payable by us, (iii) the consummation of the refinancing of our existing Senior Credit Facilities and entry into, and effectiveness of, our New Credit Facility, (iv) the application of the net proceeds from our initial public offering and borrowings under our New Credit Facility as set forth under “Use of Proceeds” and (v) the termination of the advisory services agreement between us and an affiliate of THL and the one-time termination fee paid by us upon the consummation of this offering as set forth under “Use of Proceeds.” See “Unaudited Pro Forma Consolidated Financial Statements,” “Use of Proceeds” and “Capitalization.”

 

(2) From May 24, 2012 to July 20, 2012, Successor had no activities other than the incurrence of transaction costs related to the Acquisition.

 

(3) We consider a restaurant to be comparable during the first full fiscal quarter following the eighteenth full month of operations. Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base.

 

(4) Presented on a constant currency basis, which compares results between periods as if exchange rates had remained constant period-over-period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supplemental Selected Constant Currency Information.”

 

(5) Restaurant contribution is defined as revenue less restaurant operating costs. Restaurant contribution margin is defined as restaurant contribution as a percentage of revenue. 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. See “Basis of Presentation” for a discussion of restaurant contribution and a description of its limitations as an analytical tool.

 

 

14


Table of Contents

The following table sets forth the reconciliation of restaurant contribution to revenue:

 

                      Combined     Successor     Predecessor  
                     
    Thirteen Week
Periods Ended
    Fiscal Year Ended    

Period from
January 2 to
December 30,
2012

   

Period from
May 24
(Inception) to
December 30,
2012

   

Period
from
January 2
to July 20,
2012

 
(dollars in thousands)  

March 29,

2015

    March 30,
2014
    December 28,
2014
    December 29,
2013
       

Revenue

  $ 64,959      $ 61,317      $ 262,280      $ 219,239      $ 202,360      $ 93,844      $ 108,516   

Total restaurant operating costs (excluding depreciation and amortization)

    (44,438     (43,258     (177,159     (150,565     (140,905     (65,984     (74,921

Restaurant contribution

  $ 20,521      $ 18,059      $ 85,121      $ 68,674      $ 61,455      $ 27,860      $ 33,595   

 

(6) Adjusted EBITDA is defined as net income before interest, taxes and depreciation and amortization plus the sum of certain operating and non-operating expenses, including pre-opening costs, losses on modifications and extinguishment of debt, acquisition costs, equity-based compensation costs, management and consulting fees, retention agreement costs, IPO related costs, and other non-cash or similar adjustments. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of revenue. See “Basis of Presentation” for a discussion of Adjusted EBITDA and a description of its limitations as an analytical tool.

The following table sets forth the reconciliation of Adjusted EBITDA to our net income (loss):

 

                      Combined     Successor     Predecessor  
           
    Thirteen Week
Periods Ended
    Fiscal Year Ended    

Period from
January 2 to
December 30,
2012

   

Period from
May 24
(Inception) to
December 30,
2012

   

Period
from
January 2
to July 20,
2012

 
(dollars in thousands)  

March 29,

2015

   

March 30,

2014

    December 28,
2014
    December 29,
2013
       

Net income (loss) attributable to Fogo de Chão, Inc.

  $ 4,665      $ 2,762      $ 17,555      $ (937   $ (17,916   $ (9,032   $ (8,884

Depreciation and amortization expense

    3,004        2,737        11,638        8,989        8,850        3,736        5,114   

Interest expense, net

    3,757        4,762        17,121        22,354        18,267        10,908        7,359   

Income tax expense (benefit)

    1,252        965        6,991        2,472        99        (1,195     1,294   

EBITDA

    12,678        11,226      $ 53,305      $ 32,878      $ 9,300      $ 4,417      $ 4,883   

Pre-opening costs(a)

    849        788        1,717        4,764        2,478        1,119        1,359   

Non-cash loss on modification/extinguishment of debt

                  3,090        6,875        7,762               7,762   

Acquisition costs

                           18,951        11,988        6,963   

Equity-based compensation

    130        189        765        1,364        8,574        4,504        4,070   

Management and consulting fees(b)

    341        215        859        2,524        338        338          

Retention agreement payments(c)

    312        312        1,250        1,250        1,250        521        729   

IPO related expense(d)

    384        26        1,666                               

Non-cash adjustments(e)

    244        132        667        708        591        309        282   

Adjusted EBITDA

  $ 14,938      $ 12,888      $ 63,319      $ 50,363      $ 49,244      $ 23,196      $ 26,048   

 

(a) Excludes $0.2 million of pre-opening costs incurred by our joint venture in Mexico during the thirteen week period ended March 29, 2015 and during the fiscal year ended December 28, 2014, respectively.

 

(b) Consists primarily of payments to an affiliate of THL and advisors engaged by an affiliate of THL for advisory and consulting services. Upon consummation of this offering, our agreement with an affiliate of THL will terminate in accordance with its terms and we will pay a termination fee of approximately $7.8 million to an affiliate of THL. See “Certain Relationships and Related Party Transactions.”

 

(c) Consists of cash payments to our regional managers pursuant to retention and non-compete agreements put in place by our prior owner. The final payments under these agreements are due in October 2015.

 

(d) Represents external professional service costs incurred as the Company assessed and initiated the process of becoming a public company. These costs include accounting and legal fees for public readiness services, documentation of internal controls to comply with Section 404 of the Sarbanes-Oxley Act and external auditor fees incurred for review of all fiscal quarters included in the filing.

 

(e) Consists of non-cash portion of straight line rent expense.

 

 

15


Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and the other information included in this prospectus before deciding to purchase shares of our common stock. Any of these risks may have a material adverse effect on our business, results of operations, financial condition and prospects. Consequently, the trading price of our common stock could decline, and you could lose all or part of your investment. The risks described below are those known to us and that we currently believe may materially affect us. Additional risks not presently known to us or that we currently consider immaterial may also negatively affect us.

Risks Related to Our Business and Industry

The restaurant industry in general, and the specialty and fine-dining segment in particular, are affected by changes in economic conditions, including continuing effects from the recent recession, which could negatively affect our guest traffic, business, financial condition and results of operations.

Dining at restaurants is a discretionary activity for consumers, and, therefore, we are subject to the effects of any economic conditions. Our restaurants cater to both business and social guests. Accordingly, our business is susceptible to economic factors that may result in reduced discretionary spending by our clientele. We also believe that consumers generally tend to make fewer discretionary expenditures, including for high-end restaurant meals, during periods of actual or perceived negative economic conditions. The recession from late 2007 to mid-2009 reduced consumer confidence to historic lows, impacting the public’s ability and desire to spend discretionary dollars as a result of job losses, home foreclosures, significantly reduced home values, investment losses, bankruptcies and reduced access to credit, resulting in lower levels of customer traffic and lower average check sizes in our restaurants. Changes in spending habits as a result of another economic slowdown, inflation or lower consumer confidence are likely to decrease the number of restaurant guests and average revenue per guest and put pressure on pricing, which would adversely affect our business and financial performance.

The United States, Brazil 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. During the recent economic crisis and recession, our business was materially adversely affected by a significant decrease in revenues from our restaurants in the United States and Brazil due to adverse economic conditions in those areas. If negative economic conditions persist for a long period of time or become more pervasive, consumers might make long-lasting changes to their discretionary spending behavior, including dining out less frequently on a permanent basis and generating lower average check sizes at our restaurants. If restaurant revenue decreases, our profitability could decline as we spread fixed costs across a lower level of revenue. Reductions in staff levels, asset impairment charges and potential restaurant closures could result from prolonged negative restaurant sales. There can be no assurance that the macroeconomic environment or the regional economics in which we operate will improve significantly or that government stimulus efforts will improve consumer confidence, liquidity, credit markets, home values or unemployment, among other things.

The future performance of the United States and Brazilian economies is uncertain and may be affected by economic, political and other factors that are beyond our control. These factors, which also affect consumer spending on restaurant meals, include, among others, national, regional and local economic conditions, levels of disposable consumer income, consumer confidence and the effects of geopolitical incidents. We believe that any negative developments relating to these factors, whether actual or perceived, could adversely impact our business and financial performance.

We face significant competition from other restaurant companies, which could adversely affect our business and financial performance and make it difficult to expand in new and existing markets.

We must compete successfully with other restaurant companies in existing or new markets in order to maintain and enhance our overall financial performance. The restaurant industry in the United States, Brazil and internationally is highly competitive in terms of price, quality of service, restaurant location, atmosphere, and type and quality of food. We compete with restaurant chains and independently owned restaurants (including, among others, churrascaria operators) for guests, restaurant locations and experienced management and staff. Some of our competitors have

 

16


Table of Contents

greater financial and other resources, have been in business for a longer period of time, have greater name recognition and are more established in the markets where we currently operate and where we plan to open new restaurants. Any inability to compete successfully with other restaurant companies may harm our ability to maintain or increase our revenue, force us to close one or more of our restaurants or limit our ability to expand our restaurant base. Restaurant closings would reduce our revenue and could subject us to significant costs, including severance payments to employees, write-downs of leasehold improvements, equipment, furniture and fixtures, and legal expenses. In addition, we could remain liable for remaining future lease obligations for any terminated restaurant locations.

Churrascaria operators and other competitors in the steakhouse sector of our industry have continued to open restaurants in recent years. If we overestimate demand for our restaurants or underestimate the popularity of competing restaurants, we may be unable to realize anticipated revenue from existing or new restaurants. Similarly, if any of our competitors opens additional restaurants in existing or targeted markets, we may realize lower than expected revenue from our restaurants. Any decrease in the number of restaurant guests for any of our existing or new restaurants due to competition could reduce our revenue and adversely affect our business and financial performance, which could cause the market price of our common stock to decline.

Our Brazilian operations, and any other future international operations, expose us to economic, regulatory and other risks associated with such countries.

We have long-standing operations in Brazil, where we now have 10 restaurants. Our Brazilian restaurants accounted for 25.9% of our total revenue in 2013, 23.7% in 2014 and 19.6% in the thirteen weeks ended March 30, 2014 and 15.8% in the thirteen weeks ended March 29, 2015. While we do not currently operate any restaurants outside of the United States, Brazil and our joint venture restaurant in Mexico, we intend to expand into other international markets in the future. Our lack of experience in operating restaurants outside of the United States and Brazil increases the risk that any international expansion efforts that we may undertake may not be successful. In addition, international operations, including our operations in Brazil and Mexico, subject us to a number of risks, including:

 

    fluctuations in currency exchange rates;

 

    foreign and legal regulatory requirements;

 

    difficulties in managing and staffing international operations;

 

    potentially adverse tax consequences, including complexities of international tax systems and restrictions on the repatriation of earnings;

 

    expropriation or governmental regulation restricting foreign ownership or requiring divestiture;

 

    increases in the cost of labor (as a result of unionization or otherwise);

 

    the burdens of complying with different legal standards; and

 

    political, social and economic conditions.

We may begin to operate in countries known to have a reputation for corruption and are subject to the US Foreign Corrupt Practices Act of 1977 (“FCPA”), the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) regulations, other United States laws and regulations governing our international operations and similar laws in other countries. Any violation of the FCPA, OFAC regulations or other applicable anti-corruption laws, by us, our affiliated entities or their respective officers, directors, employees and agents could result in substantial fines, sanctions, civil and/or criminal penalties and curtailment of operations in certain jurisdictions and could adversely affect our financial condition, results of operations, cash flows or our availability of funds under our revolving line of credit. Further, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our management.

If we are unable to account for these risks while operating abroad, our reputation and brand value could be harmed. The occurrence of any of these risks could negatively affect our Brazilian operations and any future expansion into new geographic markets, which would have a material adverse effect on our business and results of operations.

 

17


Table of Contents

We are a multinational organization faced with increasingly complex tax issues in the jurisdictions in which we operate, including in Brazil, and we could be obligated to pay additional taxes in those jurisdictions.

As a multinational organization that operates in several jurisdictions, including the United States and Brazil, we may be subject to taxation in jurisdictions with increasingly complex tax laws, the application of which can be uncertain. The tax positions that we have taken or may take in the future may be subject to challenge on audit, and the authorities in these jurisdictions, including Brazil, could successfully assert that we are obligated to pay additional taxes, interest and penalties. In addition, the amount of taxes we pay could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. The authorities could also claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations.

Brazilian economic, political and other conditions, and Brazilian government policies or actions in response to these conditions, may negatively affect our business, results of operations and financial performance, as well as the market price of our common stock.

The Brazilian economy has been characterized by frequent and occasionally extensive intervention by the Brazilian government and unstable economic cycles. The Brazilian government has often changed monetary, taxation, credit, tariff and other policies to influence the course of the country’s economy. For example, the government’s actions to control inflation have at times involved setting wage and price controls, imposing exchange controls and limiting imports into Brazil. Additionally, in March and April of 2015, a series of protests began in Brazil against the current government and President. The initial protests occurred in cities throughout Brazil, including in Rio de Janeiro and Sao Paolo, on March 15, with protestors generally reported to number around a million, and continued throughout the remainder of March and into April. We have no control over, and cannot predict, what policies or actions the Brazilian government may take in the future, including in response to recent protesting activities. These factors, as well as uncertainty over whether the Brazilian government may implement changes in policy or regulations relating to these factors, could adversely affect us and our business, results of operations, financial performance and the market price of our common stock. We cannot predict what policies may be implemented by the Brazilian federal or state governments and whether these policies will negatively affect our business, financial condition, results of operations and prospects.

Our business, results of operations, financial condition and prospects may be adversely affected by exchange control policies, interest rates, liquidity of domestic capital and lending markets, social and political instability, and other economic, political, diplomatic and social developments affecting Brazil.

The Brazilian government regularly implements changes to tax regimes that may increase our tax burden. These changes include modifications in the rate of assessments, non-renewal of existing tax relief and, on occasion, enactment of temporary taxes the proceeds of which are earmarked for designated governmental purposes. Increases in our overall tax burden could negatively affect our overall financial performance and profitability.

Our reporting currency is the US dollar but a substantial portion of our revenue and costs and expenses are in the Brazilian real, so that exchange rate movements may affect our financial performance.

We generate revenue, and incur costs and expenses, in our Brazilian operations denominated in Brazilian reais. The results of our Brazilian operations are translated from reais into US dollars upon consolidation when we prepare our consolidated financial statements. When the US dollar weakens relative to the Brazilian real, the contribution of our Brazilian operations to our overall results of operations increases. By contrast, when the US dollar strengthens against the real, the contribution of our Brazilian operations tends to decrease.

The Brazilian currency has historically been subject to significant exchange rate fluctuations in relation to the US dollar and other currencies and has been devalued frequently over the past four decades. These exchange rate movements have been attributable to economic conditions in Brazil, Brazilian governmental policies and actions, developments in global foreign exchange markets and other factors. The real depreciated by 8.5% against the US dollar in

 

18


Table of Contents

2012, by 14.3% in 2013 and by 11.4% in 2014 and depreciated further by 29.4% on a year-over-year basis in the thirteen weeks ended March 29, 2015. Our reported consolidated results of operations have periodically been affected by the strength of the US dollar relative to the Brazilian real and further appreciation of the US dollar in the future periods could affect adversely our consolidated results of operations in those periods. Disruptions in financial markets may also result in significant changes in foreign exchange rates in relatively short periods of time which further increases the risk of an adverse currency effect. We do not currently use financial derivatives or hedging agreements to manage our currency exposure. In the future, we may choose to use a combination of natural hedging techniques and financial derivatives to protect against foreign currency exchange rate risks. However, such activities may be ineffective or may not offset more than a portion of the adverse financial effect resulting from foreign currency variations.

Our company’s principal asset is its ownership interest in Fogo de Chão (Holdings) Inc. and if that subsidiary or our other subsidiaries are restricted from distributing or repatriating funds to us, pursuant to law, regulation or otherwise, our liquidity, financial condition or results of operations could be materially and adversely affected.

We have no material assets other than our ownership of the equity interests in our subsidiaries and no independent means of generating revenue. To the extent that we need funds, and our subsidiaries are restricted from making such distributions under applicable law or regulation, or is otherwise unable to provide such funds, such restrictions or inability could materially adversely affect our liquidity, financial condition and results of operations.

Brazilian law permits the Brazilian government to impose temporary restrictions on conversions of Brazilian currency into foreign currencies and on remittances to foreign investors of proceeds from their investments in Brazil, whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to expect a pending serious imbalance. Any imposition of restrictions on conversions and remittances could hinder or prevent our Brazilian subsidiaries from converting Brazilian currency into US dollars or other foreign currencies and remitting abroad dividends or distributions. As a result, any imposition of exchange controls restrictions could reduce the market prices of the shares of our common stock.

Additionally, the terms of our Senior Credit Facilities include, and the terms of our New Credit Facility will include, a number of restrictive covenants that impose restrictions on our subsidiaries’ ability to, among other things, make certain restricted payments, including dividends to us.

Cash repatriation restrictions and exchange controls may also limit our ability to convert foreign currencies such as the real into US dollars or to remit payments by our Brazilian subsidiaries or businesses located in or conducted within a country imposing restrictions or controls. We may face similar risks in other international jurisdictions in which we operate. While we have repatriated cash historically, in the future we do not intend to repatriate or convert cash held in countries that have significant restrictions or controls in place, but should we need to do so to fund our operations, we may be unable to repatriate or convert such cash, or unable to do so without incurring substantial costs which may have a material adverse effect on our operating results and financial condition.

Our future success depends upon the continued appeal of our restaurant concept and we are vulnerable to changes to consumer preferences.

Our success depends, in considerable part, on the popularity of our menu offerings and the overall dining experience provided to guests by our restaurants. Any shift in consumer preferences away from our restaurant concept could negatively affect our financial performance. The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes and dining habits. There can be no assurance that consumers will continue to regard churrascaria-inspired or steakhouse-based food favorably or that we will be able to develop new products that appeal to consumer preferences. Our business, financial condition and results of operations depend in part on our ability to anticipate, identify and respond to changing consumer preferences. Any failure by us to anticipate and respond to changing guest preferences could make our restaurants less appealing and adversely affect our business.

 

19


Table of Contents

Our historical revenue and AUVs may not be indicative of our future financial performance.

Our revenue and AUVs have historically been, and will continue to be, affected by, among others, the following factors:

 

    our ability to execute effectively our business strategy;

 

    initial sales performance by new restaurants;

 

    competition;

 

    consumer and demographic trends, in particular for ethnic foods, and levels of beef consumption; and

 

    general economic conditions and conditions specific to the restaurant industry.

Existing restaurants may fail to maintain revenue and AUV levels consistent with our historical experience. New restaurants may not reach the historical revenue and AUV levels of our existing restaurants according to our plans, if at all. Any decrease in our revenue or AUVs would negatively affect our financial performance, which could cause the price of our common stock to fluctuate substantially.

Our future growth depends on our ability to open new restaurants in existing and new markets and to operate these restaurants profitably.

Our future financial performance will depend on our ability to execute our business strategy—in particular, to open new restaurants on a profitable basis. We currently operate 26 restaurants in the United States, 10 restaurants in Brazil and one joint venture restaurant in Mexico. We plan to open five to six restaurants during Fiscal 2015, which includes our first joint venture restaurant in Mexico City, which opened in May 2015. Over the next five years, we plan to increase our company-owned restaurant count by at least 10% annually, with North America being our primary market for new restaurant development. In addition, we plan to grow in Brazil as well as other international markets, however there is no guarantee that we will be able to increase the number of our restaurants in North America or in international markets. Our ability to successfully open new restaurants is, in turn, dependent upon a number of factors, many of which are beyond our control, including:

 

    finding and securing quality locations on acceptable financial terms;

 

    complying with applicable zoning, land use and environmental regulations;

 

    obtaining, for an acceptable cost, required permits and approvals;

 

    having adequate financing for construction, opening and operating costs;

 

    controlling construction and equipment costs for new restaurants;

 

    weather, natural disasters and disasters beyond our control resulting in delays;

 

    hiring, training and retaining management and other employees necessary to meet staffing needs; and

 

    successfully promoting new restaurants and competing in the markets in which these are located.

We continuously review potential sites for future restaurants. Typically, we experience a “start-up” period before a new restaurant achieves our targeted level of operating and financial performance which may include an initial start-up period of sales volatility. In addition, we face higher operating costs caused by start-up costs including higher food, labor and other direct operating expenses and other temporary inefficiencies associated with opening new restaurants. We may also face challenges such as lack of brand recognition, market familiarity and acceptance when we enter new markets.

 

20


Table of Contents

Our long-term success is highly dependent on our ability to successfully identify appropriate sites and develop and expand our operations in existing and new markets.

We intend to develop new restaurants in our existing markets, and selectively enter into new markets. There can be no assurance that any new restaurant that we open will have similar operating results to those of existing restaurants. There is no guarantee that a sufficient number of suitable restaurant sites will be available in desirable areas or on terms that are acceptable to us, and we may not be able to open our planned new restaurants on a timely basis, if at all. Further, if opened, these restaurants may not be operated profitably. As part of our growth strategy, we may enter into geographic markets in which we have little or no prior operating experience. Consumer recognition of our brand has been important in the success of restaurants in our existing markets and recognition may be lacking in new geographic markets. In addition, 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 expenses than restaurants we open in existing markets, thereby affecting our overall profitability. Any failure on our part to recognize or respond to these challenges may adversely affect the success of any new restaurants.

The number and timing of new restaurants opened during any given period, and their associated contribution to operating growth, may be negatively impacted by a number of factors including, without limitation:

 

    identification and availability of appropriate locations that will increase the number of restaurant guests and sales per unit;

 

    inability to generate sufficient funds from operations or to obtain acceptable financing to support our development;

 

    recruitment and training of qualified operating personnel in the local market;

 

    availability of acceptable lease arrangements;

 

    construction and development cost management;

 

    timely delivery of the leased premises to us from our landlords and punctual commencement of our buildout construction activities;

 

    delays due to the customized nature of our restaurant concepts and decor, construction and pre-opening processes for each new location;

 

    obtaining all necessary governmental licenses and permits, including our liquor licenses, on a timely basis to construct or remodel and operate our restaurants;

 

    inability to comply with certain covenants under our Senior Credit Facilities or our New Credit Facility that could limit our ability to open new restaurants;

 

    consumer tastes in new geographic regions and acceptance of our restaurant concept;

 

    competition in new markets, including competition for restaurant sites; unforeseen engineering or environmental problems with the leased premises;

 

    adverse weather during the construction period; anticipated commercial, residential and infrastructure development near our new restaurants; and

 

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

If we are unable to successfully open new restaurants, our financial results or revenue growth could be adversely affected and our business negatively affected as we expect a portion of our growth to come from new restaurants.

 

21


Table of Contents

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

Our growth plan includes opening a number of new restaurants. Our existing restaurant management systems, administrative staff, financial and management controls and information systems may be inadequate to support our planned expansion. Those demands on our infrastructure and resources may also adversely affect our ability to manage our existing restaurants. Managing our growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train and retain managers, gaucho chefs and other 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.

We believe our gaucho culture is an important contributor to our success. As we grow, however, we may have difficulty maintaining our culture or adapting it sufficiently to meet the needs of our operations. Our business, financial condition and results of operations could be materially adversely affected if we do not maintain our infrastructure and culture as we grow.

We have a history of net losses and may incur losses in the future.

We incurred net losses in Fiscal 2012 and Fiscal 2013. We may incur net losses in the future and we cannot assure you that we will achieve or sustain profitability.

Increases in the prices of, or reductions in the availability of, top-quality beef could reduce our operating margins and revenue.

We purchase substantial quantities of beef, particularly Angus Beef® (and its equivalent in Brazil), which is subject to significant price fluctuations due to conditions affecting livestock markets, weather, feed prices, industry demand and other factors. Our meat costs accounted for approximately 59% of our total food and beverage costs in the United States during 2013, approximately 57% during 2014 and approximately 58% during the thirteen weeks ended March 29, 2015. Because our restaurants in the United States feature Angus Beef®, we generally would expect to purchase this type of beef even in the face of significant price increases. If the price for beef increases in the future and we choose not to pass, or cannot pass, these increases on to our guests, our operating margins could decrease significantly. In addition, if key beef items become unavailable for us to purchase, our revenue could decrease.

We may experience higher operating costs, including increases in supplier prices and employee salaries and benefits, which could adversely affect our financial performance.

Our ability to maintain consistent quality throughout our restaurants depends, in part, upon our ability to acquire fresh food products, including Angus Beef® (and its equivalent in Brazil), and related items from reliable sources in accordance with our specifications and in sufficient quantities. We have pricing agreements in place with a few suppliers for our beef purchases in the United States and short term contracts with a limited number of suppliers for the distribution of our other food purchases and other supplies for our restaurants. We do not have any supply agreements or pricing agreements in place in Brazil, and therefore we are subject to risks of shortages and price fluctuations with respect to our food purchases for our restaurants in Brazil. Our largest supplier of beef accounted for 70% of our beef purchases in the United States in 2013, 77% in 2014 and 99% in the thirteen weeks ended March 29, 2015. Our dependence on a limited number of suppliers subjects us to risks of shortages, delivery interruptions and price fluctuations. If our suppliers do not perform adequately or otherwise fail to distribute supplies to our restaurants, we may be unable to replace them in a short period of time on acceptable terms. Any inability to so replace suppliers could increase our costs or cause shortages at our restaurants of food and other items that may cause us to remove popular items from a restaurant’s menu or temporarily close a restaurant, which could result in a loss of guests and, consequently, revenue during the time of the shortage and thereafter, if our guests change their dining habits as a result.

If we pay higher prices for food items or other supplies or increase compensation or benefits to our employees, we will sustain an increase in our operating costs. Many factors affect the prices paid for food and other items, including conditions affecting livestock markets, weather, changes in demand and inflation. Factors that may affect compensation and benefits paid to our employees include changes in minimum wage and employee benefits laws (as

 

22


Table of Contents

discussed below). Other factors that could cause our operating costs to increase include fuel prices, occupancy and related costs, maintenance expenditures and increases in other day-to-day expenses. If we are unable or unwilling to increase our menu prices or take other actions to offset increased operating costs, we could experience a decline in our financial performance.

We rely heavily on certain vendors, suppliers and distributors, which could adversely affect our business.

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, suppliers and distributors at a reasonable cost. We rely on US Foods, Inc. (“US Foods”) as one of our primary distributors. In Fiscal 2013 and 2014, and the thirteen weeks ended March 29, 2015, we spent approximately 70%,72%, and 72%, respectively, of our food and beverage costs in the United States on products and supplies procured from US Foods. Our agreement with US Foods can be terminated by either us or US Foods upon 60 days’ written notice. 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, suppliers or distributors 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 could materially adversely affect our business, financial condition and results of operations.

Our marketing programs may not be successful.

We believe our brand is critical to our business. We incur costs and expend other resources in our marketing efforts to raise brand awareness and attract and retain guests. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenue. Additionally, some of our competitors have greater financial resources, which enable them to spend significantly more than we are able to on marketing and advertising. Should our competitors increase spending on marketing and advertising or our marketing funds decrease for any reason, or should our advertising and promotions be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition.

Any negative publicity surrounding our restaurants or our sector of the industry could adversely affect the number of restaurant guests, which could reduce revenue in our restaurants.

We believe that any adverse publicity concerning the quality of our food and our restaurants generally could damage our brand and adversely affect the future success of our business. Company-specific adverse publicity, including inaccurate publicity, could take different forms, such as negative reviews by restaurant or word-of-mouth criticisms emanating from our guest base. Also, there has been a recent increase in the use of social media platforms and similar devices, including weblogs (blogs), social media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Many social media platforms immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. There is significant opportunity for dissemination of information, including inaccurate information. Information concerning our company may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, either of which may harm our business and financial performance. The harm may be immediate without affording us an opportunity for redress or correction.

Negative publicity relating to the consumption of beef, including in connection with food-borne illness, could result in reduced consumer demand for our menu offerings, which could reduce sales.

Instances of food-borne illness, including Bovine Spongiform Encephalopathy, which is also known as BSE, and aphthous fever, as well as hepatitis A, lysteria, salmonella and e-coli, whether or not found in the United States or Brazil or traced directly to one of our suppliers or our restaurants, could reduce demand for our menu offerings. We cannot guarantee that our internal controls and training will be fully effective in preventing all food safety issues at our restaurants, including instances of food-borne illnesses. Any negative publicity relating to these and other health-related matters may affect consumers’ perceptions of our restaurants and the food that we offer, reduce guest visits to our restaurants and negatively impact demand for our menu offerings. Adverse publicity relating to any of these matters, beef in general or other similar concerns could adversely affect our business and results of operations.

 

23


Table of Contents

Our company could face lawsuits relating to workplace and employment laws and fair credit reporting requirements, which, if determined adversely, could result in negative publicity or in payment of substantial damages by us.

Various federal and state labor laws govern our relationships with our employees and affect operating costs. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, citizenship requirements and other wage and benefit requirements for employees classified as non-exempt. Our business may be adversely affected by legal or governmental proceedings brought by or on behalf of our employees or guests. 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 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 record-keeping 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.

In recent years, a number of restaurant companies, including our company, have been subject to lawsuits and other claims, including class action lawsuits, alleging violations of federal and state law governing workplace and employment matters such as various forms of discrimination, wrongful termination, harassment and similar matters and violations of fair credit reporting requirements. A number of these lawsuits and claims against other companies have resulted in various penalties, including the payment of substantial damages by the defendants. In addition, lawsuits by employees are common in Brazil after termination of employment and we have been subject to a number of these lawsuits. Insurance may not be available at all or in sufficient amounts to cover all liabilities with respect to these matters. Accordingly, we may incur substantial damages and expenses resulting from claims and lawsuits, which would increase our operating costs, decrease funds available for the development of our business and result in charges to our income statements resulting in decreased profitability or net losses. Employee claims against us also create not only legal and financial liability but 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.

Litigation concerning food quality, health, employee conduct and other issues could require us to incur additional liabilities or cause guests to avoid our restaurants.

Restaurant companies have from time to time faced lawsuits alleging that a guest suffered illness or injury during or after a visit to a restaurant, including actions seeking damages resulting from food borne illness and relating to notices with respect to chemicals contained in food products required under state law. Similarly, food tampering, employee hygiene and cleanliness failures or improper employee conduct at our restaurants could lead to product liability or other claims. To date, we have not been a defendant in any lawsuit asserting such a claim. However, we cannot assure you that such a lawsuit will not be filed against us and we cannot guarantee to consumers that our internal controls and training will be fully effective in preventing claims. We are also subject to various claims arising in the ordinary course of our business, including personal injury claims, contract claims and other matters. In addition, we could become subject to class action lawsuits related to these and other matters in the future. 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 management attention and other resources from our operations and hurt our financial performance. A judgment significantly in excess of our insurance coverage for any claims would materially adversely affect our results of operations and financial condition. In addition, adverse publicity resulting from any such claims may negatively impact revenue at one or more of our restaurants.

 

24


Table of Contents

Our business is subject to extensive regulation and we may incur additional costs or liabilities as a result of government regulation of our restaurants.

Our business is subject to extensive federal, state, local and foreign government regulation, including, among others, regulations related to the preparation and sale of food, the sale of alcoholic beverages, zoning and building codes, land use and employee, health, sanitation and safety matters.

Typically, our licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at any time for cause. Alcoholic beverage control regulations govern various aspects of daily operations of our restaurants, including the minimum age of guests and employees, hours of operation, advertising, wholesale purchasing and inventory control, handling and storage. Any failure by any of our restaurants to obtain and maintain, on a timely basis, liquor or other licenses, permits or approvals required to serve alcoholic beverages or food, as well as any associated negative publicity, could delay or prevent the opening of, or adversely impact the viability of, and could have an adverse effect on, that restaurant and its operating and financial performance. We apply for our liquor licenses with the advice of outside legal counsel and licensing consultants. Because of the many and various state and federal licensing and permitting requirements, there is a significant risk that one or more regulatory agencies could determine that we have not complied with applicable licensing or permitting regulations or have not maintained the approvals necessary for us to conduct business within its jurisdiction. Any changes in the application or interpretation of existing laws may adversely impact our restaurants in that state, and could also cause us to lose, either temporarily or permanently, the licenses, permits and regulations necessary to conduct our restaurant operations, and subject us to fines and penalties.

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 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.

Our restaurants in the United States are subject to state “dram shop” laws, which generally allow a person to sue us if that person was injured by an intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. Recent litigation against restaurant chains has resulted in significant judgments, including punitive damages, under dram shop laws. A judgment against us under a dram shop law could exceed our liability insurance coverage policy limits and could result in substantial liability for us and have a material adverse effect on our results of operations. Our inability to continue to obtain such insurance coverage at reasonable cost also could have a material adverse effect on us. Regardless of whether any claims against us are valid or whether we are liable, we may be adversely affected by publicity resulting from such laws.

The costs of operating our restaurants may increase in the event of changes in laws governing minimum hourly wages, working conditions, overtime and tip credits, health care, workers’ compensation insurance rates, unemployment tax rates, sales taxes or other laws and regulations, such as those governing access for the disabled (including the Americans with Disabilities Act). If any of these costs were to increase and we were unable or unwilling to pass on such costs to our guests by increasing menu prices or by other means, our business and results of operations could be negatively affected.

Failure to comply with federal, state or local regulations could cause our licenses to be revoked and force us to cease the sale of alcoholic beverages at certain restaurants. Any difficulties, delays or failures in obtaining such licenses, permits or approvals could delay or prevent the opening of a restaurant in a particular area or increase the costs associated

 

25


Table of Contents

therewith. In addition, in certain states, including states where we have existing restaurants or where we plan to open a restaurant, the number of liquor licenses available is limited, and licenses are traded on the open market. Liquor, beer and wine sales comprise a significant portion of our revenue. If we are unable to maintain our existing licenses, our guest patronage, revenue and results of operations would be adversely affected. Or, if we choose to open a restaurant in those states where the number of licenses available is limited, the cost of a new license could be significant.

Any failure to protect and maintain our intellectual property rights could adversely affect the value of our brand.

We have registered our principal trademarks including the FOGO, FOGO DE CHÃO and BAR FOGO marks, the campfire design and other marks used by our restaurants as trade names, trademarks or service marks with the United States Patent and Trademark Office, in Brazil and in numerous foreign countries. The trademarks we currently use have not been registered in all of the countries outside of the United States in which we do business or may do business in the future. We may never register such trademarks in all of these countries and, even if we do, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. We believe that our intellectual property are valuable assets that are critical to our success. The success of our business depends on our continued ability to use our intellectual property in order to increase our brand awareness, and the unauthorized use or other misappropriation of our intellectual property in the United States or any foreign countries could diminish the value of our brands and restaurant concept and may cause a decline in our revenue. We are also aware of names similar to those of our restaurants used by third parties in certain limited geographical areas in the United States, Brazil and elsewhere. Protective actions taken by us with respect to these rights may fail to prevent unauthorized usage or imitation by others, which could harm our reputation, brands or competitive position and, if we commence litigation to enforce our rights, cause us to incur significant legal expenses.

In January 2015, the Brazilian Patent and Trademark Office published a request by Churrasciaria Vento Norte Ltda. (doing business as Vento Haragano) to partially nullify our trademark registration in Brazil for Fogo de Chão on the grounds that it violates the Brazilian Industrial Property Act for being descriptive. Vento Haragano has requested that the Brazilian Patent and Trademark Office declare that we not have exclusive rights to use the trademark Fogo de Chão at our locations in Brazil. If we lose the exclusive rights to use the trademark Fogo de Chão in Brazil, we could suffer damage or diminution of value to our brand. In addition, third parties may claim infringement by us in the future. Any such claim, whether or not it has merit, could be time consuming, result in costly legal expenses, cause delays in the launch of new products, or require us to enter into royalty or licensing agreements, all of which could harm our business and results of operations.

The impact of negative economic factors, including the availability of credit, on our landlords and other retail center tenants could negatively affect our financial results.

Negative effects on our existing and potential landlords due to any inaccessibility of credit and other unfavorable economic factors may, in turn, adversely affect our business and results of operations. If our landlords are unable to obtain financing or remain in good standing under their existing financing arrangements, they may be unable to provide construction contributions or satisfy other lease covenants to us. If any landlord files for bankruptcy protection, the landlord may be able to reject our lease in the bankruptcy proceedings. While we would have the option to retain our rights under the lease, we could not compel the landlord to perform any of its obligations and would be left with damages as our sole recourse. In addition, if our landlords are unable to obtain sufficient credit to continue to properly manage their retail sites, we may experience a drop in the level of quality of such retail centers. Our development of new restaurants may also be adversely affected by the negative financial situations of developers and potential landlords.

We occupy most of our restaurants under long-term non-cancelable leases, which we may be unable to renew at the end of the lease terms or which may limit our flexibility to move to new locations.

All but two of our restaurants in the United States are located in leased premises and all of our restaurants in Brazil are located in leased premises. Many of our current leases in the United States are non-cancelable and usually have terms ranging from 10 to 20 years, with renewal options for terms ranging from five to 10 years. We anticipate that leases that we enter into in the future in the United States will also be long-term and non-cancelable and have similar renewal options. If we were to close or fail to open a restaurant at a leased location, we would generally remain

 

26


Table of Contents

committed to perform our obligations under the applicable lease, which could include, among other things, payment of the base rent for the balance of the lease term. Our obligation to continue making rental payments and fulfilling other lease obligations under leases for closed or unopened restaurants could have a material adverse effect on our business and results of operations. In addition, lease rates in Brazil are typically readjusted every three years and the rent amounts are not predetermined as they are in the United States. If the landlord and we cannot agree on an adjusted rate, the dispute is submitted to a judicial resolution process. As a result, our lease rates in Brazil are subject to more volatility than those in the United States and we may not always be able to predict these rates due to the unpredictable nature of the judicial resolution process, which could be unfavorable to us.

At the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without substantial additional cost, if at all. If we are unable to renew our restaurant leases, we may be forced to close or relocate a restaurant, which could subject us to significant construction and other costs. For example, closing a restaurant, even for a brief period to permit relocation, would reduce the revenue contribution of that restaurant to our total revenue. Additionally, the revenue and profit, if any, generated at a relocated restaurant may not equal the revenue and profit generated at the previous restaurant location.

Long-term leases can, however, limit our flexibility to move a restaurant to a new location. For example, current locations may no longer be attractive in the event that demographic patterns shift or neighborhood conditions decline. In addition, long-term leases may affect our ability to take advantage of more favorable rent levels due to changes in local real estate market conditions. These and other location-related issues may affect the financial performance of individual restaurants.

Our rent expense could increase our vulnerability to adverse economic and industry conditions and could limit our operating and financial flexibility.

Our rent expense accounted for approximately 7.1% of our revenue in 2013, 6.4% in 2014 and 6.8% in the thirteen weeks ended March 29, 2015. We expect that new restaurants will typically be leased by us under operating leases. Substantial operating lease obligations could have significant negative consequences, including:

 

    increasing our vulnerability to adverse economic and industry conditions;

 

    requiring a substantial portion of our available cash to be applied to pay our rental obligations, thus reducing cash available for other purposes;

 

    limiting our ability to obtain any necessary financing; and

 

    limiting our flexibility in planning for, or reacting to, changes in our business or our industry.

We depend on cash flow from operations to pay our lease obligations and to fulfill our other cash requirements. If our restaurants do not generate sufficient cash flow and sufficient funds are not otherwise available to us from borrowings under bank loans or from other sources, we may not be able to meet our lease obligations, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which would have a material adverse effect on us.

Opening new restaurants in existing markets may negatively affect 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 affect 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 guests. Sales cannibalization between our restaurants may become significant in the future as we continue to expand our operations and could affect our sales growth, which could, in turn, materially adversely affect our business, financial condition and results of operations.

 

27


Table of Contents

Labor shortages or increases in labor costs could slow our growth and adversely affect our ability to operate our restaurants.

Our success depends, in part, upon our ability to attract, motivate and retain qualified employees, including restaurant managers and gaucho chefs necessary to meet the needs of our existing restaurants and to support our expansion program. Qualified personnel to fill these positions may be in short supply in some areas. If we are unable to continue to recruit and retain sufficiently qualified personnel, our business and our growth could be adversely affected. Any future inability to recruit and retain qualified personnel may delay openings of new restaurants and could adversely impact existing restaurants. Any such delays, any material increases in employee turnover rates in existing restaurants or any employee dissatisfaction could have a material adverse effect on our business and results of operations. In addition, competition for qualified employees could require us to pay higher wages, which could result in higher labor costs, which could, in turn, have a material adverse effect on our financial performance.

Increases in minimum wages or unionization activities could substantially increase our labor costs.

Under the minimum wage laws in most jurisdictions in the United States, we are permitted to pay certain hourly employees a wage that is less than the base minimum wage for general employees because these employees receive tips as a substantial part of their income. As of March 29, 2015, approximately 33.7% of our employees in the United States earn this lower minimum wage in their respective locations as tips constitute a substantial part of their income. If federal, state or local governments change their laws to require that all employees be paid the general employee minimum base wage regardless of supplemental tip income, our labor costs would increase substantially. Our labor costs would also increase if the minimum base wage increases. We may be unable or unwilling to increase our prices in order to pass increased labor costs on to our guests, in which case our operating margins would be adversely affected. Also, although none of our employees in the United States are currently covered under collective bargaining agreements, our employees in Brazil participate in industry-wide trade union programs. Additionally, our employees in the United States may elect or attempt to be represented by labor unions in the future. 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.

Our growth may be hindered by immigration restrictions, our inability to obtain necessary visas and work permits for foreign workers and changes in United States immigration laws and regulations, particularly with respect to L-1B visa eligibility.

Our future success could depend on our ability to attract and retain employees with specialized culinary skills. Many of our gaucho chefs in the United States are Brazilian nationals whose ability to work in the United States depends on obtaining and maintaining necessary visas and work permits (which may or may not be tied to their employment with us).

Immigration and work permit laws and regulations in the United States are subject to changes, both in substance as well as in the application of standards and enforcement. Immigration and work permit laws and regulations can be significantly affected by political considerations and economic conditions in the United States. We have been, and may in the future be, unable to obtain visas or work permits to bring necessary employees to the United States for any number of reasons including, among others, limits set by the US Department of Homeland Security or the US Department of State. The Department of Homeland Security’s Bureau of Citizenship & Immigration Services (USCIS, formerly INS) began to narrow its interpretation of L-1B visa eligibility as to all corporate petitioners in 2007 and 2008. Beginning in 2009, the USCIS ceased approving our L-1B visas and recommended that the petitions of 10 current L-1B visa holders be revoked. We contested the adverse actions before USCIS, and then sued USCIS in US District Court. The US District Court affirmed the USCIS denials in 2013, but we appealed that determination, and on October 21, 2014, the US Court of Appeals for the D.C. Circuit granted our appeal, rejected the USCIS denial, and remanded the representative L-1B petition in question to the district court, with instructions to vacate the denial and to remand to USCIS for further consideration in light of the Court’s correction of USCIS’s factual and legal adjudication errors. We anticipate that USCIS may reopen the representative L-1B petition following remand to the district court.

Due to the current climate and uncertainty relative to the process of requesting and obtaining L-1B visas, as well as recent denials of certain requests, we will continue to explore all available legal means to bring employees from Brazil to work in our restaurants in the United States. Continued compliance with existing US or foreign immigration

 

28


Table of Contents

laws or changes in such laws, making it more difficult to hire foreign nationals or limiting our ability to retain visas or work permits for current employees in the United States, could materially adversely affect our expansion strategy and, more generally, our business and financial performance.

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 Patient Protection and Affordable Care Act (“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 healthcare reform law 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. If we elect to offer such benefits we may incur substantial expense. If we fail to offer such benefits, or the benefits we elect to offer do not meet the applicable requirements, we may incur penalties. The healthcare reform law also requires individuals to obtain coverage or face individual penalties, so 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 healthcare reform 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 materially adversely affect our, business, financial condition and results of operations.

Legislation and regulations requiring the display and provision of nutritional information for our menu offerings, and new information or attitudes regarding diet and health or adverse opinions about the health effects of consuming our menu offerings, could affect consumer preferences and negatively impact our 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 health effects of consuming our menu offerings. These changes have resulted in, and may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiring us to disclose the nutritional content of our food offerings.

The PPACA establishes a uniform, federal requirement for certain restaurants to post certain nutritional information on their menus. Specifically, the PPACA amended the Federal Food, Drug and Cosmetic Act to require 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. The PPACA also requires covered restaurants to provide to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards about the availability of this information. The PPACA further permits the United States Food and Drug Administration to require covered restaurants to make additional nutrient disclosures, such as disclosure of trans-fat content. An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our offerings.

Furthermore, a number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information to guests, or have enacted legislation restricting the use of certain types of ingredients in restaurants. California is one of these, although its menu labeling law has been superseded by the PPACA.

Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming. Additionally, some government authorities are increasing regulations regarding trans-fats and sodium, which may require us to limit or eliminate trans-fats and sodium in our offerings, switch to higher cost ingredients or may hinder our ability to operate in certain markets. Some jurisdictions have banned certain cooking ingredients, such as trans-fats, or have discussed banning certain products, such as large sodas.

 

29


Table of Contents

Removal of these products and ingredients from our menus could affect product tastes, guest satisfaction levels, and sales volumes, whereas if we fail to comply with these laws or regulations, our business could experience a material adverse effect.

We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions or our ability to successfully implement the nutrient content disclosure requirements and to adapt our menu offerings to trends in eating habits. The imposition of additional menu-labeling laws could have an adverse effect on our results of operations and financial position, as well as on the restaurant industry in general.

A breach of security of confidential consumer information related to our electronic processing of credit and debit card transactions could substantially affect our reputation and financial results.

A significant majority of our 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 an adverse impact on our financial condition and results of operations. Further, adverse publicity resulting from these allegations may have a material adverse effect on us and our restaurants.

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, expanding our systems as we grow or a breach in security of these systems could result in delays in guest service and reduce efficiency in our operations. Remediation of such problems could result in significant, unplanned capital investments.

The historical financial information, including the combined historical financial information for the 2012 fiscal year, in this prospectus may not accurately predict our results or our costs of operations in the future.

The historical financial information in this prospectus does not reflect the added costs we expect to incur as a public company or the resulting changes that will occur in our capital structure and operations. The estimates used in our as adjusted financial information may not be similar to our actual experience as a public company. For purposes of presenting a comparison of our Fiscal 2012 results to the fiscal years ended December 29, 2013 and December 28, 2014, we have presented our Fiscal 2012 results as the mathematical addition of the respective Predecessor and Successor periods. We believe that this presentation provides meaningful information about our results of operations. This approach is not consistent with US GAAP, may yield results that are not strictly comparable on a period-to-period basis and may not reflect the actual results we would have achieved. Accordingly, the historical financial information in this prospectus may not be indicative of our future financial performance.

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

 

30


Table of Contents

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, our reported operating results would be adversely affected.

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

Changes to existing accounting rules or regulations may impact 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 example, 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 capital 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 materially adversely affect our business, financial condition and results of operations.

Loss of key management personnel could hurt our business and inhibit our ability to operate and grow successfully.

Our success will continue to depend, to a significant extent, on our leadership team and other key management personnel. If we are unable to attract and retain sufficiently experienced and capable management personnel, our business and financial results may suffer. If members of our leadership team or other key management personnel leave, we may have difficulty replacing them, and our business may suffer. There can be no assurance that we will be able to successfully attract and retain our leadership team and other key management personnel that we need. We also do not maintain any key man life insurance policies for any of our employees.

Our current insurance policies may not provide adequate levels of coverage against all claims, and we may incur losses that are not covered by our insurance.

We maintain insurance coverage for a significant portion of our risks and associated liabilities with respect to general liability, property and casualty liability, liquor liability, employer’s liability and other insurable risks. However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure. For example, insurance covering liability for violations of wage and hour laws has not generally been available. We also self-insure for workers’ compensation and health benefits under plans with high deductibles. Losses for such uninsured claims, if they occur, could have a material adverse effect on our business and results of operations.

Compliance with environmental laws may negatively affect our business.

We are subject to national, provincial, state and local laws and regulations in the United States, Brazil and Mexico 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 prior, existing or future restaurant sites could materially adversely affect 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 materially adversely affect our business, financial condition and results of operations.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

As of December 28, 2014, we had federal net operating loss carryforwards of approximately $31.5 million and state net operating loss carryforwards of approximately $22.9 million. Under Sections 382 and 383 of the Internal

 

31


Table of Contents

Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” its ability to use its prechange net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. In general, an “ownership change” generally occurs if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We have experienced an ownership change in the past and may experience ownership changes in the future as a result of this issuance or future transactions in our stock, some of which may be outside our control. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards, or other prechange tax attributes, to offset US federal and state taxable income may be subject to significant limitations. As of December 28, 2014, none of the operating loss carryforwards are subject to limitation.

The amount of money that we have borrowed and may, in the future borrow, may adversely affect our financial condition and operating activities.

As of March 29, 2015, we had total aggregate principal amount of outstanding debt of approximately $247.9 million (which is reduced by outstanding letters of credit). In addition, as of March 29, 2015, on a pro forma basis after giving effect to the consummation of our initial public offering, the consummation of the refinancing of our existing Senior Credit Facilities and entry into, and effectiveness of, our New Credit Facility and our use of proceeds therefrom as set forth under “Use of Proceeds” we would have had $188.9 million of outstanding debt and $59.4 million available to be borrowed under our New Credit Facility (which is reduced by outstanding letters of credit). Our Senior Credit Facilities, our New Credit Facility and any other debt incurred in the future, may have important consequences to holders of our common stock, including the following:

 

    our ability to obtain additional financing for working capital, capital expenditures, acquisitions or other purposes may be impaired;

 

    we may use a substantial portion of our cash flow from operations to service our indebtedness, rather than for operations or other purposes;

 

    our level of indebtedness could place us at a competitive disadvantage compared to our competitors with proportionately less debt; and

 

    our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited.

We expect that we will depend primarily upon cash flow from operations to pay interest and other amounts due under our New Credit Facility and any other indebtedness we may incur in the future. Our ability to make these payments depends on our future performance, which will be affected by business, financial, economic and other factors, many of which we cannot control. If we do not have sufficient funds, we may be required to refinance all or part of our then existing debt, sell assets or borrow more money. We may not be able to accomplish any of these alternatives on terms acceptable to us, if at all. In addition, the terms of existing or future debt agreements, including our Senior Credit Facilities and our New Credit Facility, may restrict us from adopting any of these alternatives.

Our Senior Credit Facilities impose, and our New Credit Facility will impose, operating and financial restrictions that may impair our ability to respond to changing business and industry conditions.

Our Senior Credit Facilities contain, and our New Credit Facility will contain, restrictions and covenants that generally limit our ability to, among other things:

 

    incur additional indebtedness;

 

    make investments;

 

    use assets as collateral in other transactions;

 

    sell assets or merge with or into other companies;

 

32


Table of Contents
    pay dividends to, or purchase stock from, our stockholders;

 

    enter into transactions with affiliates;

 

    sell stock or other ownership interests in our subsidiaries; and

 

    create or permit restrictions on our subsidiaries’ ability to make payments to us.

Our Senior Credit Facilities limit, and our New Credit Facility will limit, our ability to engage in these types of transactions even if we believed that a specific transaction would contribute to our future growth or improve our results of operations. Our Senior Credit Facilities require us to meet specified financial and operating results and maintain compliance with specified financial ratios. We are required to maintain two financial covenants, which include a Total Rent Adjusted Leverage Ratio and a Consolidated Interest Coverage Ratio (each as defined in the Senior Credit Facilities). These required ratios vary by quarter until maturity. Under the First Lien Credit Facility, we are required to maintain a maximum Total Rent Adjusted Leverage Ratio of 6.50 to 1 and a minimum Consolidated Interest Coverage Ratio of 2.05 to 1 for the first quarter of 2015 (7.00 to 1 and 1.55 to 1, respectively, under the Second Lien Credit Facility). As of March 29, 2015, our Total Rent Adjusted Leverage Ratio was 4.35 to 1 and our Consolidated Interest Coverage Ratio was 4.15 to 1 (each as defined in the Senior Credit Facilities). Under our New Credit Facility, we will be required to maintain a maximum Total Rent Adjusted Leverage Ratio (as defined under our New Credit Facility), at levels that may vary by quarter until maturity, and a minimum Consolidated Interest Coverage Ratio (as defined under our New Credit Facility), which, beginning with the third quarter ending September 27, 2015, will be 5.50 to 1 and 2.00 to 1, respectively. In addition, as of March 29, 2015, on a pro forma basis after giving effect to the consummation of our initial public offering, the consummation of the refinancing of our existing Senior Credit Facilities and entry into, and effectiveness of, our New Credit Facility and our use of proceeds therefrom as set forth under “Use of Proceeds,” our Total Rent Adjusted Leverage Ratio would have been 3.69 to 1 and our Interest Coverage Ratio would have been 13.38 to 1 (each as defined in the Senior Credit Facilities). As of the date hereof, we were in compliance with our Senior Credit Facilities’ financial covenants. However, breach of these provisions or failure to comply with these financial ratios could result in a default under the Senior Credit Facilities or our New Credit Facility, in which case our lenders would have the right to declare borrowings to be immediately due and payable. Our lenders may also accelerate payment of borrowings upon the occurrence of certain change of control events relating to us. If we are unable to repay borrowings when due, whether at maturity or following a default or change of control event, our lenders would have the right to take or sell assets pledged as collateral to secure the indebtedness. Any such actions taken by our lenders or other creditors would have a material adverse effect on our business and financial condition.

Risks Related to this Offering and Ownership of Our Common Stock

Following this offering, the THL Funds will continue to have a substantial ownership interest in our common stock. Conflicts of interest may arise because some of our directors are principals of the THL Funds.

After the consummation of this offering, the THL Funds will collectively beneficially own approximately 82% of our outstanding common stock, and approximately 80% of our outstanding common stock if the underwriters’ option to purchase additional shares is exercised in full. See “Principal Stockholders.” As a consequence, the THL Funds will be able to control matters requiring stockholder approval, including the election of directors, a merger, consolidation or sale of all or substantially all of our assets, and any other significant transaction. The interests of the THL Funds may not always coincide with our interests or the interests of our other stockholders.

The THL Funds could invest in entities that directly or indirectly compete with us. As a result of these relationships, when conflicts arise between the interests of the THL Funds and the interests of our stockholders, these directors may not be disinterested. The representatives of the THL Funds on our Board of Directors, by the terms of our amended and restated certificate of incorporation and a stockholders’ agreement that will be entered into in connection with this offering, are not required to offer us any transaction opportunity of which they become aware and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is expressly offered to them solely in their capacity as our directors.

 

33


Table of Contents

The THL Funds will own a substantial portion of our capital stock after this offering and may have conflicts of interest with other stockholders in the future.

The THL Funds will collectively beneficially own approximately 82% (or 80% if the underwriters’ option to purchase additional shares is exercised in full) of our outstanding common stock following the completion of this offering. As a result, the THL Funds could exert significant influence over, and could control, matters requiring stockholder approval, including the election of directors and approval of major corporate transactions. In addition, this concentration of ownership may delay or prevent a change of control of our company and make some transactions more difficult or impossible without the support of the THL Funds.

The interests of the THL Funds may not always be consistent with the interests of our company or of other stockholders. Accordingly, the THL Funds could cause us to enter into transactions or agreements of which holders of our common stock would not approve or make decisions with which such holders would disagree.

The THL Funds are in the business of making investments in companies and could from time to time acquire and hold interests in businesses that compete with us. The THL Funds may also pursue acquisition opportunities that may be complementary to our business, and as a result, desirable acquisitions may not be available to us.

An active market for our common stock may not develop, which could make it difficult for you to sell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for shares of our capital stock. We have applied to list our common stock on the NASDAQ under the symbol “FOGO.” However, we cannot assure you that an active public trading market for our common stock will develop on that exchange or elsewhere or, if developed, that any market will be active or sustained. Accordingly, we cannot assure you as to the liquidity of any such market, your ability to sell your shares of common stock or the prices that you may obtain upon sale of your shares. As a result, you could lose all or part of your investment in our common shares.

We will be a “controlled company” within the meaning of NASDAQ rules and, as a result, will be exempt from certain corporate governance requirements.

Upon completion of this offering, the THL Funds will continue to hold capital stock representing a majority of our outstanding voting power. So long as the THL Funds maintain holdings of more than 50% of the voting power of our capital stock, we will be a “controlled company” within the meaning of NASDAQ corporate governance standards. Under these standards, a company need not comply with certain corporate governance requirements, including:

 

    the requirement that a majority of our board of directors consist of “independent directors” as defined under NASDAQ rules;

 

    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;

 

    the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, or otherwise have director nominees selected by vote of a majority of the independent directors; and

 

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

If we are eligible to do so following this offering, we intend to utilize these exemptions. As a result, we would not have a majority of independent directors on our board of directors and our compensation committee and nominating and corporate governance committee would not consist entirely of independent directors and will not be subject to annual performance evaluations. If we are no longer eligible to rely on the controlled company exception, we will comply with all applicable NASDAQ corporate governance requirements, but we will be able to rely on phase-in periods for certain of these requirements in accordance with NASDAQ rules. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all NASDAQ corporate governance requirements.

 

34


Table of Contents

The market price of our common stock may decline, and you could lose all or a significant part of your investment.

The initial public offering price for our common stock was determined by negotiations between us and the underwriters and does not purport to be indicative of market prices after this offering. The market price of, and trading volume for, our common stock may be influenced by many factors, some of which are beyond our control, including, among others, the following:

 

    variations in our quarterly or annual operating results;

 

    changes in our earnings estimates (if provided) or differences between our actual financial and operating results and those expected by investors and analysts;

 

    initiatives undertaken by our competitors, including, for example, the opening of restaurants in our existing markets;

 

    actual or anticipated fluctuations in our or our competitors’ results of operations, and our and our competitors’ growth rates;

 

    the failure of securities analysts to cover our common stock after this offering, or changes in estimates by analysts who cover us and competitors in our industry;

 

    recruitment or departure of key personnel;

 

    adoption or modification of laws, regulations, policies, procedures or programs applicable to our business or announcements relating to these matters;

 

    any increased indebtedness we may incur in the future;

 

    actions by shareholders;

 

    announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments;

 

    the expiration of lock-up agreements entered into by our existing stockholders in connection with this offering;

 

    economic conditions;

 

    geopolitical incidents; and

 

    investor perceptions of us, our competitors and our industry.

As a result of these and other factors, investors in our common stock may experience a decrease, which could be substantial, in the value of their investment, including decreases unrelated to our financial performance or prospects.

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders and you may lose all or part of your investment.

Even if an active trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. The market price of our common stock may fluctuate or decline significantly in the future and you could lose all or part of your investment.

 

35


Table of Contents

Certain broad market and industry factors may materially decrease the market price of our common stock, regardless of our actual operating performance. The stock market in general has from time to time experienced extreme price and volume fluctuations, including recently. In addition, in the past, following periods of volatility in the overall market and decreases in the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Future sales of our common stock could cause the market price of such shares to fall.

If our existing stockholders sell substantial amounts of our common stock following this offering, the market price of our common stock could decrease significantly. The perception in the public market that major stockholders might sell substantial amounts of our common stock could also depress the market price of our common stock.

Immediately after completion of this offering, we will have 27,253,018 shares of common stock outstanding, including shares that will be beneficially owned by the THL Funds. In general, the common stock sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. In addition, under lock-up agreements entered into by us, our officers, directors and holders of all or substantially all our outstanding common stock in connection with this offering, the remaining shares of our common stock outstanding immediately after this offering will become eligible for sale in the public markets from time to time, subject to Securities Act restrictions, following expiration of an 180-day lock-up period.

Jefferies LLC and J.P. Morgan Securities LLC may, in their sole discretion and at any time or from time to time, without notice, release all or any portion of the shares of common stock subject to the lock-up agreements for sale in the public and private markets prior to expiration of the 180-day lock-up period. The market price for our common stock may drop significantly when the restrictions on resale by our existing stockholders lapse or if those restrictions on resale are waived. A decline in the market price of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

Future offerings of equity by us may adversely affect the market price of our common stock.

In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our common stock or by offering debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. Opening new restaurants in existing and new markets could require substantial additional capital in excess of cash from operations. We would expect to finance the capital required for new restaurants through a combination of additional issuances of equity, corporate indebtedness and cash from operations.

Issuing additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us. See “Description of Capital Stock.”

Our amended and restated bylaws designates a state or federal court located within the state of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our amended and restated bylaws will provide that, with certain limited exceptions, unless we consent in writing to the selection of an alternative forum, a state or federal court located within the state of Delaware will be the sole and exclusive forum for any stockholder (including any beneficial owner) to bring (i) any derivative action or proceeding

 

36


Table of Contents

brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case subject to said Delaware court having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

We do not intend to pay cash dividends for the foreseeable future.

We intend to retain all of our earnings for the foreseeable future to fund the operation and growth of our business and to repay indebtedness, and therefore, we do not anticipate paying any cash dividends to holders of our capital stock for the foreseeable future. Any future determination regarding the payment of any dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, liquidity, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not invest in our common stock.

Our future capital requirements are uncertain, and we may have difficulty raising money in the future on acceptable terms, if at all.

Our capital requirements depend on many factors, including the amounts required to open new restaurants and to service our indebtedness. To the extent that our capital resources are insufficient to meet these requirements, we may need to raise additional funds through financings or curtail our growth, reduce our costs and expenses, or sell certain of our assets. Any additional equity offerings or debt financings may be on terms that are not favorable to us. Equity offerings could result in dilution to our stockholders, and equity or debt securities issued in the future may have rights, preferences and privileges that are senior to those of our common stock. If our need for capital arises because of significant losses, the occurrence of these losses may make it more difficult for us to raise the necessary capital.

Purchasers of common stock in this offering will experience immediate and substantial dilution.

If you purchase shares of our common stock in this offering, the value of those shares based on our book value will immediately be less than the price you paid. This reduction in the value of your shares is known as dilution. Dilution occurs mainly because our earlier investors paid substantially less than the initial public offering price when they acquired their shares of our capital stock. If you purchase shares in this offering, you will incur immediate dilution of $20.78 in the net tangible book value per share. In addition, if we raise funds through equity offerings in the future, the newly issued shares will further dilute your percentage ownership interest in our company.

As a result of the completion of this offering, we will record a significant non-cash equity-based compensation charge due to the vesting of stock option rights and we may record a significant loss in the fiscal quarter in which this offering is completed.

Certain of our executive officers and employees have been granted stock options pursuant to our 2012 Plan. Of the 2,197,382 stock options outstanding as of May 1, 2015, 2,177,222 have performance-based vesting conditions and do not vest until the completion of a liquidity event occurs. We account for stock options granted to employees and directors with performance-based vesting conditions in accordance with Accounting Standards Codification Topic 718, CompensationStock Compensation (“ASC 718”). In accordance with ASC 718, we do not recognize compensation expense for awards with performance-based vesting conditions until the outcome of such performance condition becomes probable. Accordingly, upon the completion of this offering in June 2015, we will record a non-cash equity-based compensation charge of approximately $5.7 million ($3.6 million net of taxes). As a result, we may incur a net loss during the fiscal quarter in which this offering is completed.

 

37


Table of Contents

Provisions of our charter documents, Delaware law and other documents could discourage, delay or prevent a merger or acquisition at a premium price.

Our amended and restated certificate of incorporation and bylaws include provisions that:

 

    permit us to issue preferred stock in one or more series and, with respect to each series, fix the number of shares constituting the series and the designation of the series, the voting powers, if any, of the shares of the series and the preferences and other special rights, if any, and any qualifications, limitations or restrictions, of the shares of the series;

 

    restrict the ability of stockholders to act by written consent or to call special meetings;

 

    require the affirmative vote of 662/3% of the outstanding shares entitled to vote to approve certain transactions or to amend certain provisions of our certificate of incorporation or bylaws;

 

    limit the ability of stockholders to amend our certificate of incorporation and bylaws;

 

    require advance notice for nominations for election to the board of directors and for stockholder proposals; and

 

    establish a classified board of directors with staggered three-year terms.

These provisions may discourage, delay or prevent a merger or acquisition of our company, including a transaction in which the acquiror may offer a premium price for our common stock.

Our 2012 Plan also permits vesting of stock options and restricted stock, and payments to be made to the employees thereunder, in connection with a change of control of our company, which could discourage, delay or prevent a merger or acquisition at a premium price. In addition, our Senior Credit Facilities include, and our New Credit Facility will include, and other debt incurred by us in the future may include, provisions entitling the lenders to demand immediate repayment of borrowings upon the occurrence of certain change of control events relating to our company, which also could discourage, delay or prevent a business combination transaction.

The market price of our common stock could decline if securities or industry analysts do not publish research or reports about our company or if they downgrade us or other restaurant companies in our industry.

The market price of our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not influence or control the reporting of these analysts. In addition, if no analysts provide coverage of our company or if one or more of the analysts who do cover us downgrade shares of our company or other companies in our industry, the market price of our common stock could be negatively impacted. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which could, in turn, cause the market price of our common stock to decline.

We may be required to make payments to the underwriters if participants in our directed share program fail to pay for and accept shares that were subject to properly confirmed orders.

At our request, the underwriters have reserved for sale to our directors, officers, certain employees and certain other related parties at the initial public offering price up to 5% of the shares of our common stock being offered in this offering. We do not know if any of these persons will choose to purchase all or any portion of the reserved shares, but any purchases made by them will reduce the number of shares available to the general public. If all of these reserved shares are not purchased, the underwriters will offer the remainder to the general public on the same terms as the other shares of our common stock in this offering. In connection with the sale of these reserved shares, we have agreed to indemnify the underwriters against certain liabilities, including those that may be caused by the failure of the participants in the directed share program to pay for and accept delivery of shares of our common stock which were subject to a properly confirmed agreement to purchase. As a result, if participants in the directed share program fail to pay for and accept delivery of the shares of our common stock which they agreed to purchase, we will be required to indemnify the underwriters for losses incurred by them as a result of such failure.

 

 

38


Table of Contents

The future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise will dilute all other stockholdings.

After this offering, assuming the underwriters exercise their option to purchase additional shares in full, we will have an aggregate of 1,200,000 shares of common stock authorized but unissued and not reserved for issuance under our incentive plans (including 138,200 shares of our common stock issuable upon the exercise of stock options we expect to grant to employees upon the closing of this offering at an exercise price per share equal to the initial public offering price). We may issue all of these shares of common stock without any action or approval by our stockholders, subject to certain exceptions. Any common stock issued in connection with our incentive plans, the exercise of outstanding stock options or otherwise would dilute the percentage ownership held by the investors who purchase common stock in this offering.

Our costs could increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.

As a public company and particularly after we cease to be an “emerging growth company” (to the extent that we take advantage of certain exceptions from reporting requirements that are available under the JOBS Act as an “emerging growth company”), we could incur significant legal, accounting and other expenses not presently incurred. In addition, Sarbanes-Oxley, as well as rules promulgated by the SEC and the NASDAQ, require us to adopt corporate governance practices applicable to US public companies. These rules and regulations may increase our legal and financial compliance costs.

Sarbanes-Oxley, as well as rules and regulations subsequently implemented by the SEC and the NASDAQ, have imposed increased disclosure and enhanced corporate governance practices for public companies. We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards are likely to result in increased expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. We may not be successful in implementing these requirements and implementing them could adversely affect our business, results of operations and financial condition. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our financial results on a timely and accurate basis could be impaired.

We are an “emerging growth company” and may elect to comply with reduced reporting requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if we comply with the greater obligations of public companies that are not emerging growth companies immediately after the initial public offering, we may avail ourselves of the reduced requirements applicable to emerging growth companies from time to time in the future. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. However, we are choosing to opt out of any extended transition period, and as a result we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which

 

39


Table of Contents

would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

We have identified material weaknesses in our internal control over financial reporting, and if we are unable to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act it 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 the completion of this offering, 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 control 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. In order to have effective internal control over financial reporting, we will need to implement additional control activities, implement restricted access and other IT general controls, write and implement formal accounting policies, and hire additional qualified accounting, financial, and legal staff. 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.

In connection with the audit of our financial statements for the period ended December 29, 2013, for the Successor period from May 24, 2012 to December 30, 2012, and the Predecessor period from January 2, 2012 to July 20, 2012, we and our independent registered public accounting firm identified material weaknesses in internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In particular, we did not design an effective control environment with sufficient personnel with the appropriate level of accounting knowledge, experience and training to assess the completeness and accuracy of the technical accounting matters, principally related to accounting for business combinations and accounting for modifications of debt instruments, nor did we have a sufficient number of accounting personnel to allow for appropriate segregation of duties or thorough review and supervision of our financial closing process. We also did not design, maintain or implement effective control activities relating to formal accounting policies. Specifically, we did not design, maintain or implement policies and procedures to adequately review and account for transactions that arise in the normal course of business, which limited our ability to make accounting decisions and to detect and correct accounting errors.

The lack of adequate staffing levels and effective policies and controls resulted in several audit adjustments and a restatement of our operating subsidiary financial statements for the Successor period ended December 30, 2012 and the Predecessor period ended July 20, 2012. Additionally, these resulted in a revision to our December 29, 2013 consolidated financial statements. As of the date hereof, we have not fully re-designed, implemented and tested internal controls to remediate the material weaknesses. While we have begun the process of evaluating the design and operation of our internal control over financial reporting, we are in the early phases and may not complete our evaluation until after this offering is completed. We cannot predict the outcome of our evaluation at this time. During the course of the evaluation, we may identify additional control deficiencies, which could give rise to other material weaknesses, in addition to the material weaknesses described above. Each of the material weaknesses described above or any newly identified material weakness could result in a misstatement of our financial statements or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected.

We have taken initial steps to remediate the material weaknesses such as hiring additional accounting personnel in Fiscal 2014, including a chief financial officer, a director of financial reporting and a corporate treasury analyst. We cannot be certain that these measures will successfully remediate the material weaknesses or that other material weaknesses and control deficiencies will not be discovered in the future. If our efforts are not successful or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately on a timely basis or help prevent fraud, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting and cause the market price of our common stock to decline.

 

40


Table of Contents

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. If we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements, and we and our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Testing and maintaining internal controls could also divert our management’s attention from other matters that are important to the operation of our business.

 

41


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this prospectus constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “seeks,” “intends,” “targets” or the negative of these terms or other comparable terminology.

The forward-looking statements contained in this prospectus reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that our assumptions are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These factors include without limitation:

 

    changes in general economic or market conditions, both in the United States and Brazil;

 

    increased competition in our industry;

 

    risk associated with our Brazilian operations and any other future international operations;

 

    our ability to manage operations at our current size or manage growth effectively;

 

    our ability to successfully expand in the United States and other new markets;

 

    our ability to locate suitable locations to open new restaurants and to attract guests to our restaurants;

 

    the fact that we will rely on our operating subsidiaries to provide us with distributions to fund our operating activities, which could be limited by law, regulation or otherwise;

 

    our ability to continually innovate and provide our consumers with innovative dining experiences;

 

    our ability to maintain recent levels of comparable revenue or average revenue per square foot;

 

    the ability of our suppliers to deliver beef in a timely or cost-effective manner;

 

    our lack of long-term supplier contracts, our concentration of suppliers and distributors and potential increases in the price of beef;

 

    our ability to raise money and maintain sufficient levels of cash flow;

 

    conflicts of interest with the THL Funds;

 

    the fact that upon listing of our common stock, we will be considered a “controlled company” and exempt from certain corporate governance rules primarily relating to board independence, and we intend to use some or all of these exemptions;

 

    our entry into, and effectiveness of, our New Credit Facility and the terms and conditions we will be subject to thereunder;

 

    our ability to effectively market and maintain a positive brand image;

 

    changes in government regulation

 

    our ability to attract and maintain the services of our senior management and key employees;

 

42


Table of Contents
    the availability and effective operation of management information systems and other technology;

 

    changes in consumer preferences or changes in demand for upscale dining experiences;

 

    our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;

 

    our ability to maintain effective internal controls or the identification of additional material weaknesses;

 

    our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

 

    changes in accounting standards; and

 

    other risks described in the “Risk Factors” section of this prospectus.

Although we believe that the assumptions inherent in the forward-looking statements contained in this prospectus are reasonable, undue reliance should not be placed on these statements, which only apply as of the date hereof. Except as required by applicable securities law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

43


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $66.9 million, or $77.4 million if the underwriters exercise their option to purchase additional shares in full, based upon an assumed initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase or decrease in the assumed initial public offering price of $17.00 per share would increase or decrease, respectively, the net proceeds to us from this offering by approximately $4.1 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds of this offering, together with approximately $186.4 million of borrowings under our New Credit Facility (net of $2.5 million in capitalized issuance costs incurred by us in connection with the borrowings under our New Credit Facility), to repay approximately $246.5 million of outstanding indebtedness (inclusive of accrued interest and prepayment fees) under our Senior Credit Facilities and to pay fees and expenses related to our initial public offering and the refinancing of our Senior Credit Facilities. Our Senior Credit Facilities consist of a First Lien Credit Facility and a Second Lien Credit Facility (each as defined herein) as well as a revolving line of credit. Our $224 million First Lien Credit Facility has a maturity date of July 20, 2019 and bears interest at LIBOR plus a spread of 4.00%, with a LIBOR floor of 1.00%. Our $25 million Second Lien Credit Facility has a maturity date of January 20, 2020, and bears interest at LIBOR plus a spread of 9.50%, with a LIBOR floor of 1.50%. Our revolving line of credit has an interest rate of LIBOR plus a spread of 4.00%, with a LIBOR floor of 1.00%, and has a maturity date of July 20, 2017. Affiliates of certain of the underwriters are lenders under our First Lien Credit Facility and will be repaid with a portion of the proceeds of this offering. Because affiliates of Credit Suisse Securities (USA) LLC and Wells Fargo Securities, LLC are lenders under our First Lien Credit Facility and each will receive 5% or more of the net proceeds of this offering, Credit Suisse Securities (USA) LLC and Wells Fargo Securities, LLC are each deemed to have a “conflict of interest” under Rule 5121 of the Financial Industry Regulatory Authority, Inc., or FINRA. As a result, this offering will be conducted in accordance with FINRA Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the members primarily responsible for managing the public offering do not have a conflict of interest, are not affiliates of any member that has a conflict of interest and meet the requirements of paragraph (f)(12)(E) of FINRA Rule 5121. See “Use of Proceeds” and “Underwriting (Conflicts of Interest).”

 

44


Table of Contents

DIVIDEND POLICY

We do not expect to pay dividends on our common stock for the foreseeable future. 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 or to repay indebtedness.

Any future determination to declare and pay cash dividends will be at the discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, liquidity, contractual restrictions, restrictions imposed by our current and future financing arrangements and such other factors as our board of directors deems relevant. The terms of our Senior Credit Facilities also restrict, and the terms of our New Credit Facility will restrict, our ability to pay dividends on our common stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Senior Credit Facilities.”

Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks Related to This Offering and Ownership of Our Common Stock—We do not intend to pay cash dividends for the foreseeable future.”

 

45


Table of Contents

CAPITALIZATION

The following table describes our cash and cash equivalents and capitalization as of March 29, 2015. Our capitalization is presented:

 

    on an actual basis; and

 

    on a pro forma basis, reflecting (i) the consummation of a stock split effected upon the closing of this offering pursuant to which each share held by the holder of common stock will be reclassified into 25.4588 shares, (ii) the sale by us of 4,411,764 shares of our common stock in this offering at the assumed initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, and after deducting estimated offering expenses and estimated underwriting discounts and commissions payable by us, (iii) the consummation of the refinancing of our existing Senior Credit Facilities and entry into, and effectiveness, of our New Credit Facility, (iv) the application of the net proceeds from our initial public offering and borrowings under our New Credit Facility as set forth under “Use of Proceeds” and (v) the termination of the advisory services agreement between us and an affiliate of THL and the one-time termination fee paid by us to an affiliate of THL upon the consummation of this offering as set forth under the section “Unaudited Pro Forma Consolidated Financial Statements.”

You should read the information below with the sections entitled “Use of Proceeds,” “Selected Historical Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Consolidated Financial Statements,” “Description of Capital Stock” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

  As of March 29, 2015  
     Actual     Pro Forma(1)  
     (dollars in thousands)  

Cash and cash equivalents

   $ 17,304      $ 17,304   
  

 

 

   

 

 

 

Debt:

Revolving line of credit

$    $   

First Lien Term Loan

  218,975        

Second Lien Term Loan

  23,783        

New Credit Facility(2)

       188,884   
  

 

 

   

 

 

 

Total debt, including current portion(3)

  242,758      188,884   

Equity(4):

Fogo de Chão, Inc. shareholders’ equity

Preferred stock, $0.01 par value; no shares authorized, actual; 15,000,000 shares authorized, none issued and outstanding pro forma

         

Common stock, $0.01 value; 1,200,000 shares authorized, 897,184 issued and outstanding, actual; 200,000,000 authorized, 27,253,018 issued and outstanding, pro forma

  9      272   

Additional paid-in capital

  176,637      248,982   

Retained earnings

  12,251      (268

Accumulated other comprehensive loss

  (45,175   (45,175
  

 

 

   

 

 

 

Total Fogo de Chão, Inc. shareholders’ equity

  143,722      203,811   

Noncontrolling interest

  2,174      2,174   
  

 

 

   

 

 

 

Total equity

  145,896      205,985   
  

 

 

   

 

 

 

Total capitalization

$ 388,654    $ 394,869   
  

 

 

   

 

 

 

 

(1) A $1.00 increase or decrease in the assumed public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, would increase or decrease, respectively, each of additional paid-in capital, total stockholders’ equity and total capitalization by $4.1 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(2) Concurrently with the consummation of our initial public offering, we intend to refinance our existing Senior Credit Facilities and enter into the New Credit Facility. We expect that the loans under our New Credit Facility will bear interest at a base rate plus a margin ranging from 0.50% to 1.50% or at LIBOR plus a margin ranging from 1.50% to 2.50% and will mature in 2020. Borrowings under our New Credit Facility may vary significantly from time to time depending on our cash needs at any given time, and upon consummation of our initial public offering we expect that approximately $188.9 million will be drawn under our New Credit Facility.

 

46


Table of Contents
(3) As of March 29, 2015, total debt was comprised of: (i) our $25 million revolving line of credit, (ii) our $224 million First Lien Credit Facility, and (iii) our $25 million Second Lien Credit Facility. As of March 29, 2015, we had letters of credit and letters of guaranty totaling $1.7 million, which reduces the aggregate amount eligible to be drawn under our revolving line of credit by a corresponding amount. As of March 29, 2015, the total amount available to be borrowed under our revolving line of credit was approximately $23.3 million. On a pro forma basis, total debt would have been comprised of our New Credit Facility. As of March 29, 2015, on a pro forma basis, the total amount that would have been available to be borrowed under our New Credit Facility would have been approximately $59.4 million.

 

(4) Actual amounts do not give effect to the consummation of the stock split to be effected upon the closing of this offering.

 

47


Table of Contents

DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

Our historical net tangible book value as of March 29, 2015 was approximately $(164.7) million, or approximately $(183.59) per share (without giving any effect to the consummation of the stock split to be effected upon the closing of this offering). Historical net tangible book value per share is determined by dividing the amount of our net tangible book value, or total tangible assets less total liabilities, as of March 29, 2015 by the number of shares of our common stock outstanding as of March 29, 2015.

Dilution to new investors represents the difference between the amount per share paid by investors in this offering and the pro forma net tangible book value per share of our common stock immediately after the completion of this offering. After giving effect to (i) the consummation of a stock split effected upon the closing of this offering pursuant to which each share held by the holder of common stock will be reclassified into 25.4588 shares, (ii) our sale of the shares offered hereby at an assumed initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (iii) the consummation of the refinancing of our existing Senior Credit Facilities and entry into, and effectiveness, of our New Credit Facility, (iv) the application of the net proceeds therefrom as set forth under “Use of Proceeds” and (v) the termination of the advisory services agreement between us and an affiliate of THL and the one-time termination fee paid by us upon the consummation of this offering, our pro forma net tangible book value as of March 29, 2015 would have been $(102.9) million, or $(3.78) per share. This represents an immediate increase in pro forma net tangible book value of $179.81 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $20.78 per share to new investors. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

$ 17.00   

Historical net tangible book value per share as of March 29, 2015

$ (183.59

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

  179.81   
  

 

 

    

Pro forma net tangible book value per share after this offering

  (3.78
     

 

 

 

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

$ 20.78   
     

 

 

 

A $1.00 increase (decrease) in the assumed public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, would increase (decrease) our pro forma net tangible book value after this offering by $4.1 million, our pro forma net tangible book value per share after this offering by $0.15 per share of common stock, and the dilution in pro forma net tangible book value to new investors in this offering by $0.85 per share of common stock, assuming the number of shares on the cover of this prospectus remains the same.

If the underwriters’ option to purchase additional shares is fully exercised, the pro forma net tangible book value per share after this offering as of March 29, 2015, would be approximately $(3.31) per share and the dilution to new investors per share after this offering would be $20.31 per share.

The following table sets forth, on a pro forma basis as of March 29, 2015, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors who purchase shares of common stock in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average Price  
(dollars in thousands)    Number      Percent     Amount      Percent     Per Share  

Existing stockholders

     22,841,254         83.8   $ 172,351         69.7   $ 7.55   

New investors

     4,411,764         16.2   $ 75,000         30.3   $ 17.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

  27,253,018      100.0 $ 247,351      100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

48


Table of Contents

A $1.00 increase (decrease) in the assumed public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, would increase (decrease) total consideration paid by new investors by approximately $4.4 million, and increase (decrease) the percent of total consideration paid by all new investors by 1.2% (assuming the number of shares on the cover of this prospectus remains the same).

Upon completion of this offering, our existing stockholders will own 83.8%, and new investors will own 16.2% of the total number of shares of common stock outstanding after this offering. If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own 81.8%, and new investors would own 18.2%, of the total number of shares of common stock outstanding after this offering.

The foregoing tables and calculations assume no exercise of any stock-based awards outstanding as of March 29, 2015. Specifically, these tables and calculations exclude 2,247,790 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $10.21 per share and 317,799 shares of unvested restricted stock outstanding as of March 29, 2015. If all of these awards were exercised and vested, then:

 

    pro forma net tangible book value per share would increase to $(2.68) and would decrease dilution to new investors by $1.10 per share; and

 

    our existing stockholders, including the holders of these options, would own 85.2%, and our new investors would own 14.8%, of the total number of shares of our common stock outstanding upon the completion of this offering.

 

49


Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following tables present selected historical consolidated financial information of the Company (Successor) as of March 29, 2015 and for the thirteen week periods ended March 29, 2015 and March 30, 2014, as of December 28, 2014 and December 29, 2013, and for the fiscal years ended December 28, 2014 and December 29, 2013 and for the period from May 24, 2012 to December 30, 2012 and selected historical consolidated financial information of Fogo de Chão Churrascaria (Holdings) LLC (Predecessor) and subsidiaries for the period from January 2, 2012 to July 20, 2012.

The selected historical consolidated balance sheet data as of December 28, 2014 and December 29, 2013 and the consolidated statements of operations and cash flow data for the fiscal years ended December 28, 2014 and December 29, 2013 and for the periods May 24, 2012 (Inception) to December 30, 2012 (Successor) and January 2, 2012 to July 20, 2012 (Predecessor), have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations and cash flow data for the thirteen week periods ended March 29, 2015 and March 30, 2014 and the consolidated balance sheet data as of March 29, 2015 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Historical results for any prior period are not necessarily indicative of results that may be expected in any future period, and results for any interim period are not necessarily indicative of results that may be expected for the entire year.

The Successor was incorporated under the name Brasa (Parent) Inc. on May 24, 2012 in connection with the Acquisition on July 21, 2012 of Fogo de Chão Churrascaria (Holdings) LLC, a Delaware limited liability company, and its parent company, FC Holdings Inc., a Cayman Islands exempt company, by the THL Funds. The Successor owns 100% of Brasa Purchaser, which owns 100% of Brasa Holdings. Brasa Holdings owns 100% of Fogo Holdings, which owns our domestic and foreign operating subsidiaries.

The Successor, Brasa Purchaser, Brasa Holdings, Brasa Merger Sub Inc. and Fogo de Chão (Holdings) Inc. were formed during 2012 for the purpose of effecting the Acquisition, which was consummated on July 21, 2012. As a result of the Acquisition, the financial information for all periods after May 24, 2012 represent the financial information of the “Successor” company. Prior to, and including, July 20, 2012, the consolidated financial statements include the accounts of the Predecessor. Financial information in the Predecessor period principally relates to Fogo de Chão Churrascaria (Holdings) LLC and its subsidiaries. From May 24, 2012 to July 20, 2012, Successor had no activities other than the incurrence of transaction costs related to the Acquisition.

 

50


Table of Contents

You should read these tables in conjunction with the information contained under the headings “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus.

 

                            Successor          Predecessor  
    Thirteen Week Periods Ended     Fiscal Year Ended     May 24
(Inception) to
December 30,
2012
         January 2
to July 20,
2012
 
(dollars in thousands)   March 29,
      2015      
    March 30,
      2014      
    December 28,
2014
    December 29,
2013
          

Statement of Operations Data

               

Revenue

  $ 64,959      $ 61,317      $ 262,280      $ 219,239      $ 93,844          $ 108,516   

Restaurant operating costs:

               

Food and beverage costs

    19,164        18,547        78,330        67,002        29,381            34,512   

Compensation and benefit costs

    14,100        13,891        54,673        46,860        21,125            22,348   

Occupancy and other operating expenses (excluding depreciation and amortization)

    11,174        10,820        44,156        36,703        15,478            18,061   

Total restaurant operating costs

    44,438        43,258        177,159        150,565        65,984            74,921   

Marketing and advertising costs

    1,402        1,442        5,585        6,188        2,342            2,488   

General and administrative costs

    5,708        4,668        21,419        18,239        8,143            10,229   

Pre-opening costs

    1,003        788        1,951        4,764        1,119            1,359   

Acquisition costs

                                11,988            6,963   

Loss on modification/extinguishment of debt

                  3,090        6,875                   7,762   

Depreciation and amortization and other

    2,891        2,668        11,684        8,618        3,567            4,957   

Total costs and expenses

    55,442        52,824        220,888        195,249        93,143            108,679   

Income (loss) from operations

    9,517        8,493        41,392        23,990        701            (163

Other Expense:

               

Interest expense, net

    (3,757     (4,762     (17,121     (22,354     (10,908         (7,359

Other expenses

    (2     (4     (7     (101     (20         (68

Income (loss) before income taxes

    5,758        3,727        24,264        1,535        (10,227         (7,590

Income tax expense (benefit)

    1,252        965        6,991        2,472        (1,195         1,294   

Net income (loss)

    4,506        2,762        17,273        (937     (9,032         (8,884

Less: Loss attributable to noncontrolling interests

    (159            (282                         

Net income (loss) attributable to
Fogo de Chão, Inc.

  $ 4,665      $ 2,762      $ 17,555      $ (937   $ (9,032       $ (8,884

Earnings (loss) per common share(1)

               

Basic

  $ 5.20      $ 3.10      $ 19.69      $ (1.06   $ (10.21         *   

Diluted

  $ 5.14      $ 3.06      $ 19.42      $ (1.06   $ (10.21         *   

Weighted average common shares outstanding:

               

Basic

    896,679        890,439        891,523        885,940        884,850            *   

Diluted

    907,074        902,505        904,067        885,940        884,850            *   

Pro Forma Earnings Per Share Data(2):

               

Pro Forma Net Income

  $ 6,274        $ 24,593             

Pro Forma earnings per common share:

               

Basic

  $ 0.23        $ 0.91             

Diluted

  $ 0.23        $ 0.90             

Pro Forma weighted average common shares outstanding:

               

Basic

    27,240,177          27,108,911             

Diluted

    27,813,089          27,476,524             

 

* Not applicable.

 

(1) Historical share and per share information does not give effect to the consummation of the stock split to be effected upon the closing of this offering.

 

(2)

Pro forma amounts give effect to (i) the consummation of a stock split effected upon the closing of this offering pursuant to which each share held by the holder of common stock will be reclassified into 25.4588 shares, (ii) the issuance and sale by us of

 

51


Table of Contents
  4,411,764 shares of our common stock in this offering, assuming an initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, and after deducting estimated offering expenses and estimated underwriting discounts and commissions payable by us, (iii) the consummation of the refinancing of our existing Senior Credit Facilities and entry into, and effectiveness of, our New Credit Facility, (iv) the application of the net proceeds from our initial public offering and borrowings under our New Credit Facility as set forth under “Use of Proceeds” and (v) the termination of the advisory services agreement between us and an affiliate of THL and, with respect to the pro forma consolidated balance sheet, the one-time termination fee paid by us upon the consummation of this offering as set forth under “Use of Proceeds.” See “Unaudited Pro Forma Consolidated Financial Statements,” “Use of Proceeds” and “Capitalization.”
(dollars in thousands)    As of
March 29, 2015
     As of
December 28, 2014
     As of
December 29, 2013
 

Consolidated Balance Sheet Data

     

Cash and cash equivalents

   $ 17,304       $ 19,387       $ 16,010   

Total assets

     460,098         477,169         481,899   

Total debt

     242,758         243,045         252,283   

Total equity

     145,896         155,459         150,322   

 

52


Table of Contents

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma consolidated financial statements were prepared to give effect to (i) the consummation of a stock split effected upon the closing of this offering pursuant to which each share held by the holder of common stock will be reclassified into 25.4588 shares, (ii) the issuance and sale by us of 4,411,764 shares of our common stock in this offering, assuming an initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, and after deducting estimated offering expenses and estimated underwriting discounts and commissions payable by us, which represents only the shares offered by us and use of the net proceeds therefrom to repay outstanding indebtedness under our Senior Credit Facilities, (iii) the consummation of the refinancing of our existing Senior Credit Facilities and entry into, and effectiveness of, our New Credit Facility, (iv) the application of the net proceeds from our initial public offering and borrowings under our New Credit Facility as set forth under “Use of Proceeds” and (v) the termination of the advisory services agreement between us and an affiliate of THL and the one-time termination fee paid by us upon the consummation of this offering. The unaudited pro forma consolidated balance sheet as of March 29, 2015 gives effect to the transactions above as if they had been completed on March 29, 2015. The unaudited pro forma consolidated statements of operations for the thirteen week period ended March 29, 2015 and the fiscal year ended December 28, 2014 give effect to the transactions above as if they occurred on December 30, 2013 (the first day of Fiscal 2014). The unaudited pro forma consolidated financial statements are derived from, and should be read in conjunction with, our audited consolidated historical financial statements and the related notes to those statements included elsewhere in this prospectus.

The unaudited pro forma consolidated financial information was prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and should not be considered indicative of the consolidated financial position or results of operations that would have occurred if the transactions above had been completed on the dates indicated, nor are they necessarily indicative of our future consolidated financial position or results of operations. Our historical consolidated financial statements have been adjusted in the unaudited pro forma consolidated financial information to give effect to pro forma events that are (1) directly attributable to transactions above, (2) factually supportable and (3) with respect to the statements of operations, expected to have a continuing impact on the consolidated results.

 

53


Table of Contents

Fogo de Chão, Inc.

Unaudited Pro Forma Consolidated Balance Sheet

(in thousands)

 

     Historical                  Pro Forma  
     

March 29,
2015

    Pro Forma
Adjustments
    Note     

March 29,

2015

 

Assets

         

Current assets:

         

Cash and cash equivalents

   $ 17,304      $        A       $ 17,304   

Accounts receivable

     7,530                  7,530   

Inventories

     4,701                  4,701   

Deferred tax assets

     1,211                  1,211   

Prepaid expenses and other current assets

     3,692                        3,692   

Total current assets

     34,438                  34,438   

Property and equipment, net

     112,267                  112,267   

Prepaid rent

     573                  573   

Goodwill

     212,344                  212,344   

Intangible assets, net

     96,557                  96,557   

Other assets

     3,919        (112     B         3,807   

Total assets

   $ 460,098      $ (112            $ 459,986   

Liabilities and Equity

         

Current liabilities:

         

Accounts payable and accrued expenses

   $ 23,149      $ (4,249     C       $ 18,900   

Current portion of long-term debt

     4,788        (4,788     D           

Deferred revenue

     4,285                        4,285   

Total current liabilities

     32,222        (9,037        23,185   

Deferred rent

     11,670                  11,670   

Long-term debt, less current portion

     237,970        (49,086     D         188,884   

Deferred tax liabilities

     31,019        (2,078     F         28,941   

Other noncurrent liabilities

     1,321                        1,321   

Total liabilities

     314,202        (60,201              254,001   

Equity:

         

Fogo de Chão, Inc. shareholders’ equity:

         

Common stock

     9        263        E         272   

Additional paid-in capital

     176,637        72,345        E         248,982   

Retained earnings

     12,251        (12,519     F         (268

Accumulated other comprehensive loss

     (45,175                     (45,175

Total Fogo de Chão, Inc. shareholders’ equity

     143,722        60,089                 203,811   

Noncontrolling interests

     2,174                  2,174   

Total equity

     145,896        60,089                 205,985   

Total liabilities and equity

   $ 460,098      $ (112            $ 459,986   

 

54


Table of Contents

Fogo de Chão, Inc.

Unaudited Pro Forma Consolidated Statement of Operations

(in thousands, except per share amounts)

 

    Historical                 Pro Forma  
    

Thirteen

Week
Period
Ended
March 29,
2015

   

Pro

Forma
Adjustments

    Note    

Thirteen

Week Period
Ended
March 29,
2015

 

Revenue

  $ 64,959      $        $ 64,959   

Restaurant operating costs:

       

Food and beverage costs

    19,164                 19,164   

Compensation and benefit costs

    14,100        86        K        14,186   

Occupancy and other operating expenses (excluding depreciation and amortization)

    11,174                       11,174   

Total restaurant operating costs

    44,438        86                44,524   

Marketing and advertising costs

    1,402                 1,402   

General and administrative costs

    5,708        (46     G,K        5,662   

Pre-opening costs

    1,003                 1,003   

Depreciation and amortization

    3,004                 3,004   

Other operating (income) expense, net

    (113                    (113

Total costs and expenses

    55,442        40                55,482   

Income from operations

    9,517        (40       9,477   

Other income (expense):

       

Interest expense, net

    (3,757     2,676        H        (1,081

Other income (expense), net

    (2                    (2

Total other income (expense), net

    (3,759     2,676                (1,083

Income before income taxes

    5,758        2,636          8,394   

Income tax expense

    1,252        1,026        I        2,278   

Net income

    4,506        1,609          6,115   

Less: Loss attributable to noncontrolling interest

    (159                    (159

Net income attributable to Fogo de Chão, Inc.

  $ 4,665      $ 1,609              $ 6,274   

Earnings per common share attributable to Fogo de Chão, Inc.:(1)

       

Basic

  $ 5.20          J      $ 0.23   

Diluted

  $ 5.14          J      $ 0.23   

Weighted average common shares outstanding:

       

Basic

    896,679        26,343,498        J        27,240,177   

Diluted

    907,074        26,906,015        J        27,813,089   

 

(1) Historical share and per share information does not give effect to the consummation of the stock split to be effected upon the closing of this offering.

 

55


Table of Contents

Fogo de Chão, Inc.

Unaudited Pro Forma Consolidated Statement of Operations

(in thousands, except per share amounts)

 

    Historical                 Pro Forma  
    

Fiscal

Year

Ended
December 28,
2014

   

Pro

Forma
Adjustments

    Note    

Fiscal

Year

Ended
December 28,
2014

 

Revenue

  $ 262,280      $        $ 262,280   

Restaurant operating costs:

       

Food and beverage costs

    78,330                 78,330   

Compensation and benefit costs

    54,673        627        P        55,300   

Occupancy and other operating expenses (excluding depreciation and amortization)

    44,156                       44,156   

Total restaurant operating costs

    177,159        627                177,786   

Marketing and advertising costs

    5,585                 5,585   

General and administrative costs

    21,419        780        L,P        22,199   

Pre-opening costs

    1,951                 1,951   

Loss on modification of debt

    3,090                 3,090   

Depreciation and amortization

    11,638                 11,638   

Other operating (income) expense, net

    46                       46   

Total costs and expenses

    220,888        1,407                222,295   

Income from operations

    41,392        (1,407       39,985   

Other income (expense):

       

Interest expense, net

    (17,121     12,933        M        (4,188

Other income (expense), net

    (7                    (7

Total other income (expense), net

    (17,128     12,933                (4,195

Income before income taxes

    24,264        11,526          35,790   

Income tax expense

    6,991        4,488        N        11,479   

Net income

    17,273        7,038          24,311   

Less: Loss attributable to noncontrolling interest

    (282                    (282

Net income attributable to Fogo de Chão, Inc.

  $ 17,555      $ 7,038              $ 24,593   

Earnings per common share attributable to Fogo de Chão, Inc.:(1)

       

Basic

  $ 19.69          O      $ 0.91   

Diluted

  $ 19.42          O      $ 0.90   

Weighted average common shares outstanding:

       

Basic

    891,523        26,217,388        O        27,108,911   

Diluted

    904,067        26,572,457        O        27,476,524   

 

(1) Historical share and per share information does not give effect to the consummation of the stock split to be effected upon the closing of this offering.

 

56


Table of Contents

Fogo de Chão, Inc.

Notes to Unaudited Pro Forma Consolidated Financial Statements

(in thousands, except share amounts)

1. Description of Transactions

Concurrently with, and conditioned upon, the issuance and sale by us of 4,411,764 shares of our common stock in this offering, assuming an initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, and after deducting estimated offering expenses and estimated underwriting discounts and commissions payable by us, we intend to refinance our existing Senior Credit Facilities and enter into our New Credit Facility. We expect that the loans under our New Credit Facility will bear interest at a base rate plus a margin ranging from 0.50% to 1.50% or at LIBOR plus a margin ranging from 1.50% to 2.50% and will mature in 2020. Upon consummation of our initial public offering, we expect that approximately $188,884 will be drawn under our New Credit Facility and that we will use the net proceeds from our initial public offering as well as borrowings under the New Credit Facility to repay the outstanding existing debt under our Senior Credit Facilities. See “Use of Proceeds” and “Management’s Discussion and Analysis and Results of Operations—Liquidity and Capital Resources—Credit Facilities.” In addition, upon consummation of this offering, our advisory services agreement with an affiliate of THL will terminate and we will pay a termination fee of approximately $7,796 to an affiliate of THL.

In connection with the closing of this offering, the performance condition related to certain of our outstanding stock-based awards will be satisfied. These awards contain both performance-based and service-based vesting conditions and will only vest upon the completion of both conditions. As a result, we will record a one-time charge related to the portion of the awards’ service period that has been completed as of the date of the closing of this offering. The remaining stock-based compensation expense associated with these awards will be recorded over the remaining service period of such awards. Additionally, upon the closing of this offering, we expect to grant options to purchase 138,200 shares of our common stock to employees at an exercise price per share equal to the initial public offering price.

2. Pro Forma Adjustments

The following pro forma adjustments are included in the Company’s unaudited pro forma consolidated financial information related to the transactions described above:

Unaudited Pro Forma Consolidated Balance Sheet Adjustments

 

  (A) Cash — An adjustment was recorded to increase cash by $67,884 to reflect net proceeds from this offering of $66,950 plus an additional $934 related to initial public offering costs that we have already paid in cash as of March 29, 2015, which will be used to repay principal outstanding under our Senior Credit Facilities.

An adjustment was recorded to increase cash by $186,384 to reflect proceeds from our New Credit Facility (net of $2.5 million in capitalized issuance costs incurred by us in connection with the borrowings under our New Credit Facility), which will be drawn upon the consummation of our initial public offering.

An adjustment was recorded to decrease cash by $246,472 to reflect the repayment of principal, prepayment fees and interest outstanding under our Senior Credit Facilities upon the consummation of our initial public offering.

An adjustment was recorded to decrease cash by $7,796 to reflect the one-time termination fee that will be paid by us to an affiliate of THL upon the consummation of this offering.

 

  (B) Other assets – An adjustment was recorded to increase other assets by $2,500 to reflect the capitalized issuance costs incurred by us in connection with borrowings under our New Credit Facility.

An adjustment was recorded to decrease other assets by $1,707 to reflect the reclassification of deferred offering costs incurred in connection with this offering to stockholders’ equity upon the consummation of this offering.

An adjustment was recorded to decrease other assets by $905 to reflect the removal of deferred financing costs associated with our Senior Credit Facilities, which will be repaid and extinguished upon the closing of this offering.

 

57


Table of Contents

Fogo de Chão, Inc.

Notes to Unaudited Pro Forma Consolidated Financial Statements (Continued)

(in thousands, except share amounts) (Continued)

 

  (C) Accounts payable and accrued expenses – An adjustment was recorded to decrease accounts payable and accrued expenses by $3,476 to reflect the payment of accrued interest under our Senior Credit Facilities upon the consummation of our initial public offering.

An adjustment was recorded to decrease accounts payable and accrued expenses by $773 to reflect the payment of accrued initial public offering costs upon the consummation of this offering.

 

  (D) Long-term debt and current portion of long-term debt — Adjustments were recorded to decrease current portion of long-term debt and long-term debt by $4,788 and $237,970, respectively, to reflect the repayment of principal under our Senior Credit Facilities in connection with the consummation of our initial public offering.

Adjustments were recorded to increase long-term debt by $188,884 to reflect the entry into and borrowings under our New Credit Facility in connection with, and conditioned upon, the consummation of our initial public offering.

 

  (E) Common stock and additional paid-in capital — Adjustments were recorded to increase common stock and additional paid-in capital by $263 and $66,687, respectively, to reflect (i) shares issued in this offering whose proceeds will be used to repay outstanding principal under our Senior Credit Facilities and (ii) the 1-for-25.4588 stock split, which will be effected upon the closing of this offering.

An adjustment was recorded to increase additional paid-in capital by $5,658 to reflect a one-time non-cash charge we expect to incur upon the closing of this offering related to stock options that will vest as a result of the satisfaction of a performance-based vesting condition

 

  (F) Accumulated earnings — An adjustment was recorded to decrease accumulated earnings by $7,796 to reflect the one-time termination fee that will be paid by us to an affiliate of THL upon the consummation of this offering.

An adjustment was recorded to decrease accumulated earnings by $1,143 to reflect the loss on the extinguishment of debt and the write-off of debt issuance costs as a result of the repayment of outstanding indebtedness under our Senior Credit Facilities as described above.

An adjustment was recorded to reduce retained earnings by $3,580 to reflect the net impact of a one-time non-cash charge (net of a $2,078 tax benefit) we expect to incur upon the closing of this offering related to stock options that will vest as a result of the satisfaction of a performance-based vesting condition that will be met upon the consummation of our initial public offering in June 2015.

Unaudited Pro Forma Consolidated Statement of Operations Adjustments

Thirteen Weeks Ended March 29, 2015

 

  (G) General and administrative costs — An adjustment was recorded to eliminate general and administrative costs of $341 related to our advisory services agreement with an affiliate of THL, which will terminate upon the consummation of this offering.

 

  (H) Interest expense — An adjustment of $1,252 was recorded to record interest expense for the thirteen week period ended March 29, 2015 related to our New Credit Facility, which will be entered into in connection with the consummation of this offering. The New Credit Facility will bear interest, at a base rate plus a margin ranging from 0.50% to 1.50% or at LIBOR plus a margin ranging from 1.50% to 2.50%. For the purpose of preparing these unaudited pro forma consolidated financial statements, an interest rate of 2.30% was assumed, which reflects the rate in effect as of the date of this offering. A 1/8th percent increase in the LIBOR rate would result in an increase to the above noted interest expense of approximately $59.

 

58


Table of Contents

Fogo de Chão, Inc.

Notes to Unaudited Pro Forma Consolidated Financial Statements (Continued)

(in thousands, except share amounts) (Continued)

 

An adjustment of $3,928 was recorded to reduce interest expense for the thirteen week period ended March 29, 2015 to reflect the repayment of principal under our Senior Credit Facilities as described under “Use of Proceeds” as if such repayment had occurred on December 30, 2013.

 

  (I) Income tax expense — An adjustment of $1,175 was recorded to increase income tax expense for the thirteen week period ended March 29, 2015 to reflect the impact of the pro forma adjustments noted above using a blended federal and state statutory tax rate of 38.94%.

 

  (J) Weighted average shares outstanding basic and diluted — The weighted average shares outstanding used to compute basic and diluted net income per share for the thirteen week period ended March 29, 2015 have been adjusted to give effect to the issuance of shares issued in this offering whose proceeds will be used to repay outstanding principal under our Senior Credit Facilities, as if such issuances had occurred on December 30, 2013, as well as the 1-for-25.4588 stock split, which will be effected upon the closing of this offering.

The weighted average shares outstanding used to compute diluted net income per share for the thirteen week period ended March 29, 2015 have been adjusted by 308,267 shares to give effect to (i) stock options that would have vested in this period, as a result of the satisfaction of a performance-based vesting condition that will be met upon the consummation of this offering and (ii) the expected grant of stock options upon the closing of the offering.

 

  (K) Stock-based compensation expense - Adjustments were recorded to increase general and administrative and restaurant operating costs by $279 and $60, respectively, during the three months ended March 29, 2015 to reflect recurring stock-based compensation expense related to stock options that would have vested in this period as a result of the satisfaction of a performance-based vesting condition that will be met upon the consummation of our initial public offering.

Adjustments were recorded to increase general and administrative and restaurant operating costs by $16 and $26, respectively, during the three months ended March 29, 2015 to reflect recurring stock-based compensation expense related to the expected grant of 138,200 stock options upon the closing of the offering.

Year Ended December 28, 2014

 

  (L) General and administrative costs — An adjustment was recorded to eliminate general and administrative costs of $781 related to our advisory services agreement with an affiliate of THL, which will terminate upon the consummation of this offering.

 

  (M) Interest expense — An adjustment of $5,002 was recorded to record interest expense for the fiscal year ended December 28, 2014 related to our New Credit Facility, which will be entered into in connection with the consummation of this offering. The New Credit Facility will bear interest, at a base rate plus a margin ranging from 0.50% to 1.50% or at LIBOR plus a margin ranging from 1.50% to 2.50%. For the purpose of preparing these unaudited pro forma consolidated financial statements, an interest rate of 2.30% was assumed, which reflects the rate in effect as of the date of this offering. A 1/8th percent increase in the LIBOR rate would result in an increase to the above noted interest expense of approximately $236.

An adjustment of $17,935 was recorded to reduce interest expense for the fiscal year ended December 28, 2014 to reflect the repayment of principal under our Senior Credit Facilities as described under “Use of Proceeds” as if such repayment had occurred on December 30, 2013.

 

  (N) Income tax expense — An adjustment of $5,340 was recorded to increase income tax expense for the fiscal year ended December 28, 2014 to reflect the impact of the pro forma adjustments noted above using a blended federal and state statutory tax rate of 38.94%.

 

59


Table of Contents

Fogo de Chão, Inc.

Notes to Unaudited Pro Forma Consolidated Financial Statements (Continued)

(in thousands, except share amounts) (Continued)

 

  (O) Weighted average shares outstanding basic and diluted — The weighted average shares outstanding used to compute basic and diluted net income per share for the fiscal year ended December 28, 2014 have been adjusted to give effect to the issuance of shares issued in this offering whose proceeds will be used to repay outstanding principal under our Senior Credit Facilities, as if such issuances had occurred on December 30, 2013, as well as the 1-for-25.4588 stock split, which will be effected upon the closing of this offering.

The weighted average shares outstanding used to compute diluted net income per share for the fiscal year ended December 28, 2014 have been adjusted by 48,257 shares to give effect to (i) stock options that would have vested in this period, as a result of the satisfaction of a performance-based vesting condition that will be met upon the consummation of this offering and (ii) the expected grant of stock options upon the closing of the offering.

 

  (P) Stock-based compensation expense - Adjustments were recorded to increase general and administrative and restaurant operating costs by $1,384 and $332, respectively, during the fiscal year ended December 28, 2014 to reflect recurring stock-based compensation expense related to stock options that would have vested in this period as a result of the satisfaction of a performance-based vesting condition that will be met upon the consummation of our initial public offering.

Adjustments were recorded to increase general and administrative and restaurant operating costs by $177 and $295, respectively, during the fiscal year ended December 28, 2014 to reflect recurring stock-based compensation expense related to the expected grant of 138,200 stock options upon the closing of the offering.

The unaudited pro forma consolidated statements of operations do not include the following adjustments, which are one-time in nature and not expected to have a continuing impact on our results of operations:

 

    An adjustment to record a one-time non-cash stock-based compensation adjustment of $2,079, net of taxes for certain awards that will vest upon consummation of this offering. These awards contain both a performance-based and service-based vesting condition, which was not satisfied during Fiscal 2014 or during the thirteen weeks ended March 29, 2015. The above unaudited pro forma consolidated statements of operations reflect only the stock-based compensation expense that would have been incurred in each respective period had the performance condition for such awards been satisfied on December 30, 2013.

 

    An adjustment of approximately $7,796 to reflect the one-time termination fee to be paid by us to an affiliate of THL upon the consummation of this offering; and

 

    An adjustment of approximately $1,143 to reflect the loss on the extinguishment of debt and the write-off of debt issuance costs as a result of the repayment of outstanding indebtedness under our Senior Credit Facilities as described above.

 

60


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the “Selected Historical Consolidated Financial Information” section of this prospectus and our consolidated financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions set forth in the “Special Note Regarding Forward-Looking Statements” section and included elsewhere in this prospectus. Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the “Risk Factors” section and included elsewhere in this prospectus.

We operate on a 52- or 53-week fiscal year that ends on the Sunday that is closest to December 31 of that year. Each fiscal year generally is comprised of four 13-week fiscal quarters, although in the years with 53 weeks the fourth quarter represents a 14-week period. Fiscal 2012, Fiscal 2013 and Fiscal 2014 ended on December 30, 2012, December 29, 2013 and December 28, 2014, respectively, and each were comprised of 52 weeks. Fiscal 2015 is a 53-week fiscal year.

Overview

Fogo de Chão (fogo-dee-shoun) is a leading Brazilian steakhouse, or churrascaria, which has specialized for over 35 years in fire-roasting high-quality meats utilizing the centuries-old Southern Brazilian cooking technique of churrasco. We deliver a distinctive and authentic Brazilian dining experience through the combination of our high-quality Brazilian cuisine and our differentiated service model known as espeto corrido (Portuguese for “continuous service”) delivered by our gaucho chefs. We offer our guests a tasting menu of meats featuring up to 20 cuts, simply seasoned and carefully fire-roasted to expose their natural flavors.

Guests can begin their dining experience at the Market Table, which offers a wide variety of Brazilian-inspired side dishes, fresh-cut vegetables, seasonal salads, aged cheeses and cured meats, or they can receive immediate entrée service table-side from our gaucho chefs by turning a service medallion, found at each guest’s seat, green side up. Each gaucho chef rotates throughout the dining room, and is responsible for a specific cut of meat which they prepare, cook and serve to our guests continuously throughout their meal. Guests can pause the service at any time by turning the medallion to red and then back to green when they are ready to try additional selections and can communicate to our gauchos their preferred cut of meat, temperature and portion size. Our continuous service model allows customization and consumer engagement since our guests control the variety and quantity of their food and the pace of their dining experience. Through the combination of our authentic Brazilian cuisine, unique service model, prix fixe menu and engaging hospitality in an upscale restaurant atmosphere, we believe our brand delivers a differentiated dining experience relative to other specialty and fine-dining concepts and offers our guests a compelling value proposition.

Our Growth Strategies and Outlook

Our growth is based on the following strategies:

 

    Grow our restaurant base;

 

    Grow our comparable restaurant sales; and

 

    Improve margins by leveraging our infrastructure and investments in human capital.

We believe we are in the early stages of our growth with 37 current restaurants, 26 in the United States, 10 in Brazil and one in Mexico, our first joint venture restaurant. Based on internal analysis and a study prepared by Buxton, we believe there exists a long-term growth potential for over new 100 domestic sites, with additional new restaurants internationally. We have a long track record of successful new restaurant development, having grown our restaurant count by a multiple of 10 since 2000, and at a 11.5% CAGR since 2010. While new restaurants are expected to be a key driver of our growth, we believe positive comparable restaurant sales growth and margin expansion through leveraging our infrastructure will also contribute to strong future growth.

 

61


Table of Contents

Highlights and Trends

Restaurant Development

Restaurant openings reflects the number of new restaurants opened during a particular reporting period. We plan to open five to six restaurants during Fiscal 2015, including our first joint venture restaurant in Mexico City, which opened in May 2015. We believe our international joint venture restaurants will allow us to expand our restaurant footprint with limited capital investment by us. Over the next five years, we plan to increase our company-owned restaurant count by at least 10% annually, with North America being our primary market for new restaurant development. In addition, over the next five years, we plan to open three to five new restaurants in Brazil.

 

  Thirteen Week
Period Ended
  Fiscal Year  
      March 29, 2015          2014              2013              2012              2011      

Restaurant Activity

              

Beginning of period

     34         31         27         24         22   

Openings

     1         3         4         3         2   

Closings

                                       

 

 

Restaurants at end of period

  35      34      31      27      24   

2014 FIFA World Cup and Recent Events in Brazil

The 2014 World Cup (the “World Cup”) took place in Brazil from June 12 to July 13, 2014. The event positively impacted our operating results for Fiscal 2014 because our Brazil restaurants are located in cities that hosted World Cup matches. Of the 64 World Cup matches, 32 were hosted in cities where we operate. We estimate that the World Cup positively impacted revenue by approximately $5.0 million for Fiscal 2014. Comparable restaurant sales for our Brazil restaurants grew approximately 11.4% for Fiscal 2014. Adjusting comparable restaurant sales to exclude the impact of the World Cup we estimate that comparable restaurant sales for our Brazil restaurants grew approximately 1.7% for Fiscal 2014. As a result of the impact the World Cup had on our 2014 results in Brazil, we expect our comparable restaurant sales in Brazil to be lower in the second and the third quarter of 2015 as compared to the same quarters of 2014. We estimate the impact of the World Cup to be approximately $5.0 million of which between 55 to 60% of the impact was in the second quarter of 2014. Brazilian comparable restaurant revenue totaled $14.3 million and $14.6 million in the second and third quarter of 2014, respectively.

Additionally, in March and April of 2015, a series of protests began in Brazil against the current government and President. The initial protests occurred in cities throughout Brazil, including in Rio de Janeiro and Sao Paolo, on March 15, with protestors generally reported to number around a million, and continued throughout the remainder of March and into April. As a result of the protests, our restaurants in Brazil experienced reduced guest traffic in the second half of March and in April. Protests currently continue throughout Brazil and we anticipate that our results of operations in the second quarter of Fiscal 2015 could be impacted by the ongoing political activity.

New Credit Facility

Concurrently with, and conditioned upon, the consummation of our initial public offering, we intend to refinance our existing Senior Credit Facilities and enter into a new $250.0 million revolving credit facility (the “New Credit Facility”). We expect that the loans under our New Credit Facility will bear interest at a base rate plus a margin ranging from 0.50% to 1.50% or at LIBOR plus a margin ranging from 1.50% to 2.50% and will mature in 2020. We expect that the New Credit Facility will contain customary affirmative, negative and financial covenants applicable to us and certain of our subsidiaries, including financial maintenance covenants requiring us to maintain a maximum Total Rent Adjusted Leverage Ratio and a minimum Interest Coverage Ratio (each as defined in the New Credit Facility). Borrowings under our New Credit Facility may vary significantly from time to time depending on our cash needs at any given time, and upon consummation of our initial public offering we expect that approximately $188.9 million will be drawn under our New Credit Facility.

 

62


Table of Contents

Investments in Human Capital to Support Growth

To support our future growth and enhance our operations and management team, we have made substantial investments in personnel. Since January 2012, we have added 39 positions at an approximate annualized cost of $3.5 million at the corporate level and $2.0 million at the restaurant level in key functional corporate and restaurant areas including senior leadership, new restaurant site selection and analysis, new restaurant design, group dining, product innovation and in-restaurant employee training. Specifically, we have incurred $0.4 million in incremental personnel costs in 2012, $1.9 million in 2013 and $4.2 million in 2014 as a result of these investments.

2014 Credit Facility Refinancing

In April 2014, we refinanced $205 million of borrowings under our First Lien Credit Facility (as defined below), borrowed an additional $20 million under our First Lien Credit Facility and repaid $20 million of our Second Lien Credit Facility (as defined below) (the “2014 Credit Facility Refinancing”). Our $224 million new First Lien Credit Facility matures on July 20, 2019 and bears interest at LIBOR plus a spread of 4.00%, with a LIBOR floor of 1.00%. Our $25 million Second Lien Credit Facility matures on January 20, 2020, and bears interest at LIBOR plus a spread of 9.50%, with a LIBOR floor of 1.50%. Our revolving line of credit has an interest rate of LIBOR plus a spread of 4.00%, with a LIBOR floor of 1.00%, and has a maturity date of July 20, 2017. Following the completion of the 2014 Credit Facility Refinancing, interest rates decreased 110 basis points as compared to prior interest rates resulting in a $2.7 million decrease to our annual interest expense. For a further description of our Senior Credit Facilities (as defined below), see “Liquidity and Capital Resources—Senior Credit Facilities.” We intend to use the net proceeds from this offering to repay outstanding indebtedness under our Senior Credit Facilities. See “Use of Proceeds.”

Acquisition by Thomas H. Lee Partners, L.P.

Fogo de Chão, Inc. was incorporated under the name Brasa (Parent) Inc. on May 24, 2012, in connection with the Acquisition. The Company owns 100% of Brasa Purchaser, which owns 100% of Brasa Holdings. Brasa Holdings owns 100% of Fogo Holdings, which owns the Company’s domestic and foreign operating subsidiaries. Immediately prior to the Acquisition, (i) FC Holdings Inc. contributed all of its ownership interests in Fogo de Chão Churrascaria (Holdings) LLC to Fogo Holdings, (ii) Fogo de Chão Churrascaria (Holdings) LLC was merged with Fogo Holdings, which was the surviving corporation, and (iii) FC Holdings Inc. was domesticated in the state of Delaware into Brasa Holdings. Promptly thereafter, Brasa Parent acquired Brasa Holdings through a reverse subsidiary merger with Brasa Holdings, which was the surviving corporation. The Acquisition was financed by loans to Brasa Holdings and equity contributions by the THL Funds and certain members of management.

Initial Public Offering

This is our initial public offering of 4,411,764 shares of common stock at an assumed price to the public of $17.00 per share, the midpoint of the price range on the cover of this prospectus. Upon the consummation of this offering, after deducting underwriters discounts and commissions and offering expenses, we expect to receive net proceeds of approximately $66.9 million, or $77.4 million if the underwriters exercise their option to purchase additional shares in full, based upon an assumed initial public offering price of $17.00 per share of common stock, the midpoint of the price range on the cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of this offering, together with borrowings under our New Credit Facility, to repay the outstanding indebtedness under our Senior Credit Facilities and to pay fees and expenses related to our initial public offering and the refinancing of our Senior Credit Facilities. See “Use of Proceeds.”

As a result of the IPO, we plan to make a one-time non-recurring payment of $7.8 million in connection with the termination of our Advisory Services Agreement with an affiliate of THL. We expect to benefit from savings on management fees that we incurred as a private company, but we also expect to incur incremental costs as a public company such as legal, accounting, insurance and other compliance costs. We will continue to use our operating cash flows to fund capital expenditures to support restaurant growth, as well as to invest in our existing restaurants, infrastructure and information technology. See “Liquidity and Capital Resources.”

 

63


Table of Contents

Performance Indicators

We use the following key metrics in evaluating the performance of our restaurants:

New Restaurant Openings

Our ability to successfully open new restaurants and expand our restaurant base is critical to adding revenue capacity to meet our goals for growth. New restaurant openings contribute additional operating weeks and revenue to our business. Before a new restaurant opens, we incur pre-opening costs, as described below. New restaurants often open with an initial start-up period of sales volatility and sales and margins tend to stabilize within six to nine months of opening. New restaurants typically experience normal inefficiencies in the form of higher food, labor and other direct operating expenses and, as a result, restaurant contribution margins are generally lower during the start-up period of operation.

Comparable Restaurant Sales

We consider a restaurant to be comparable during the first full fiscal quarter following the eighteenth full month of operations. We adjust the sales included in the comparable restaurant calculation for restaurant closures, primarily as a result of remodels, so that the periods will be comparable. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable sales reflect changes in guest count trends as well as changes in average check, as described below. As of December 28, 2014, December 29, 2013 and December 30, 2012, there were 27, 25 and 22 restaurants, respectively, in our comparable restaurant base and as of March 29, 2015 and March 30, 2014 there were 27 and 25, respectively. This measure highlights performance of existing restaurants, as the impact of new restaurant openings is excluded.

Average Check Per Person

Average check is calculated by dividing total comparable restaurant sales by comparable restaurant guest counts for a given time period. Average check is influenced by menu prices and menu mix. Management uses this indicator to analyze trends in guests’ preferences, the effectiveness of menu offerings and per guest expenditures.

Average Unit Volumes

We measure average unit volumes (“AUVs”) on an annual (52-week) basis. AUVs consist of the average sales of all restaurants that have been open for a trailing 52-week period or longer. We adjust the sales included in AUV calculations for restaurant closures. This measurement allows us to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.

Guest Counts

Guest counts are measured by the number of entrées ordered at our restaurants over a given time period.

Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution is defined as revenue less restaurant operating costs (which include food and beverage costs, compensation and benefits costs and occupancy and certain other operating costs but exclude depreciation and amortization expense). Restaurant contribution margin is defined as restaurant contribution as a percentage of revenue. Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. See “Basis of Presentation” and “Summary Consolidated Financial and Other Information” for more information regarding restaurant contribution and restaurant contribution margin and a reconciliation to revenue.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA is defined as net income before interest, taxes and depreciation and amortization plus the sum of certain operating and non-operating expenses, including pre-opening costs, losses on modifications and extinguishment of debt, acquisition costs, equity-based compensation costs, management and consulting fees, retention

 

64


Table of Contents

agreement costs, IPO related costs, and other non-cash or similar adjustments. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of revenue. By monitoring and controlling our Adjusted EBITDA and Adjusted EBITDA Margin, we can gauge the overall profitability of our company. See “Basis of Presentation” and “Summary Consolidated Financial and Other Information” for more information regarding Adjusted EBITDA and Adjusted EBITDA Margin and a reconciliation to net income (loss).

Significant Components of Our Results of Operations

Revenue

Revenue primarily consists of food and beverage sales, net of any employee meals and complimentary meals. Revenue is recognized when food and beverage products are sold at our restaurants net of any discounts. Revenue in a given period is directly influenced by the number of operating weeks in such period, the number of restaurants we operate and comparable restaurant sales growth. Proceeds from the sale of gift cards that do not have expiration dates are recorded as deferred revenue at the time of the sale and recognized as revenue when the gift card is redeemed by the holder. The portion of gift cards sold which are never redeemed is commonly referred to as gift card breakage. We recognize gift card “breakage” revenue for gift cards when the likelihood of redemption becomes remote and we determine there is no legal obligation to remit the value of the unredeemed gift cards to governmental agencies.

Food and Beverage Costs

Food and beverage costs include the direct costs associated with food, beverage and distribution of our menu items. We measure food and beverage costs by tracking the cost as a percentage of revenue. Food and beverage costs as a percentage of revenue are generally influenced by the cost of food and beverage items, distribution costs and sales mix. These components are variable in nature, increase with revenue, are subject to increases or decreases based on fluctuations in commodity costs, including beef, lamb, pork, chicken and seafood prices, and depend in part on the controls we have in place to manage costs at our restaurants.

Compensation and Benefit Costs

Compensation and benefits costs comprise restaurant and regional management salaries and bonuses, hourly staff payroll and other payroll-related expenses, including bonus expenses, equity-based compensation, vacation pay, payroll taxes, fringe benefits and health insurance expenses and are measured by tracking hourly and total labor as a percentage of revenue.

Occupancy and Other Operating Expenses

Occupancy and other operating expenses comprise all occupancy costs, consisting of both fixed and variable portions of rent, common area maintenance charges, utility costs, credit card fees, real estate property taxes and other related restaurant supply and occupancy costs, but exclude depreciation and amortization expense, and are measured by tracking occupancy and other operating expenses as a percentage of revenue.

Marketing and Advertising Costs

Marketing and advertising costs include all media, production and related costs for both local restaurant advertising and national marketing. We measure the efficiency of our marketing and advertising expenditures by tracking these costs as a percentage of total revenue.

General and Administrative Costs

General and administrative costs are comprised of costs related to certain corporate and administrative functions that support development and restaurant operations. These expenses are generally fixed and reflect management, supervisory and staff salaries, employee benefits and bonuses, share-based compensation, travel expense, information systems, training, corporate rent, professional and consulting fees, technology and market research. We measure general and administrative costs by tracking general and administrative costs as a percentage of revenue.

 

65


Table of Contents

Pre-opening Costs

Pre-opening costs are costs incurred prior to, and directly associated with, opening a restaurant, and primarily consist of manager salaries, relocation costs, recruiting expenses, employee payroll and related training costs for new employees, including rehearsal of service activities, as well as straight line lease costs incurred prior to opening. In addition, pre-opening costs include public relations costs incurred prior to opening. We typically start incurring pre-opening costs four months prior to opening and these costs tend to increase four weeks prior to opening as we begin training activities.

Depreciation and Amortization Expense

Depreciation and amortization expense includes depreciation of fixed assets and certain definite life intangible assets. We depreciate capitalized leasehold improvements over the shorter of the total expected lease term or their estimated useful life.

Income Tax Expense

Income tax expense depends on the statutory tax rates in the countries where we operate. Historically we have generated taxable income in the United States and Brazil. Our provision includes federal, state and local current and deferred income tax expense.

Segment Reporting

We operate our restaurants using a single restaurant concept and brand. Each restaurant under our single global brand operates with similar types of products and menu, providing a continuous service style, similar contracts, customers and employees, irrespective of location. We have identified two operating segments: United States and Brazil, which is how we organize our restaurants for making operating decisions and assessing performance. Our joint venture in Mexico is included in the United States for segment reporting purposes as the operations of the joint venture are monitored by the United States segment management.

 

66


Table of Contents

Results of Operations

The following tables summarizes key components of our consolidated results of operations for the periods indicated, both in dollars and as a percentage of revenue:

Fiscal Quarter Ended March 29, 2015 (13 weeks) Compared to Fiscal Quarter Ended March 30, 2014 (13 weeks)

 

     Fiscal Quarter Ended     Fiscal Quarter Ended                     
     March 29, 2015     March 30, 2014                     
     (13 weeks)     (13 weeks)     Increase / (Decrease)  
(dollars in thousands)    Dollars      %(a)     Dollars      %(a)     Dollars      %(b)     %(c)  

Revenue

                 

U.S. Restaurant

   $ 54,702         84.2   $ 49,324         80.4   $ 5,378         10.9     3.8

Brazil Restaurant

     10,243         15.8        11,993         19.6        (1,750      (14.6     (3.8

Other

     14         0.0                       14         *        *   

Total revenue

   $ 64,959         100.0   $ 61,317         100.0   $ 3,642         5.9     *   

Restaurant operating costs

                 

Food and beverage costs

     19,164         29.5        18,547         30.2        617         3.3        (0.7

Compensation and benefit costs

     14,100         21.7        13,891         22.7        209         1.5        (1.0

Occupancy and other operating expenses (excluding depreciation and amortization)

     11,174         17.2        10,820         17.6        354         3.3        (0.4

Total restaurant operating costs

   $ 44,438         68.4   $ 43,258         70.5   $ 1,180         2.7     (2.1 %) 

Marketing and advertising costs

     1,402         2.2        1,442         2.4        (40      (2.8     (0.2

General and administrative costs

     5,708         8.8        4,668         7.6        1,040         22.3        1.2   

Pre-opening costs

     1,003         1.5        788         1.3        215         27.3        0.2   

Depreciation and amortization

     3,004         4.6        2,737         4.5        267         9.8        0.1   

Other operating (income) expense, net

     (113      (0.2     (69      (0.1     44         63.8        0.1   

Total costs and expenses

   $ 55,442         85.3   $ 52,824         86.1   $ 2,618         5.0     (0.8 %) 

Income from operations

   $ 9,517         14.7   $ 8,493         13.9   $ 1,024         12.1     0.8

Other income (expense):

                 

Interest expense, net

     (3,757      (5.8     (4,762      (7.8     (1,005      (21.1     (2.0

Other income (expense), net

     (2      (0.0     (4      (0.0     (2      (50.0     (0.0

Total other income (expense), net

   $ (3,759      (5.8 %)    $ (4,766      (7.8 %)    $ (1,007      (21.1 %)      (2.0 %) 

Income before income taxes

     5,758         8.9        3,727         6.1        2,031         54.5        2.8   

Income tax expense

     1,252         1.9        965         1.6        287         29.7        0.3   

Net income

     4,506         6.9        2,762         4.5        1,744         63.1        2.4   

Less: Loss attributable to noncontrolling interest

     (159      (0.2                    *         *        *   

Net income attributable to
Fogo de Chão, Inc.

   $ 4,665         7.2   $ 2,762         4.5   $ 1,903         68.9     2.7

 

(a) Calculated as a percentage of total revenue.

 

(b) Calculated percentage increase / (decrease) in dollars.

 

(c) Calculated increase / (decrease) in percentage of total revenue.

 

* Not meaningful.

 

67


Table of Contents

Revenue

Total revenue increased $3.6 million, or 5.9%, for the first quarter of Fiscal 2015, primarily due to a $5.5 million increase in non-comparable restaurant sales for new restaurants opened in 2014 and 2015. Total comparable restaurant sales increased 0.5% primarily driven by an increase in average check, offset by a reduction in guest traffic, all offset by a negative foreign exchange impact of $2.1 million.

U.S. restaurant revenue increased $5.4 million, or 10.9%, primarily due to increased non-comparable restaurant sales of $5.3 million and a 0.1% increase in comparable restaurant sales.

Brazil restaurant revenue decreased $1.8 million, or 14.6%, primarily due to a negative foreign exchange impact of $2.1 million, partially offset by a 2.3% increase in comparable restaurant sales.

Food and Beverage Costs

Food and beverage costs increased $0.6 million, or 3.3%, for the first quarter of Fiscal 2015, primarily due to a $1.5 million increase in food costs from new restaurants opened since the end of the prior period and the full period of operation of restaurants opened in the prior period, partially offset by a positive foreign exchange impact of $0.7 million. As a percentage of total revenue, total food and beverage costs decreased from 30.2% to 29.5%, due to management’s focus on waste reduction and production efficiencies.

Compensation and Benefit Costs

Compensation and benefit costs increased $0.2 million, or 1.5%, for the first quarter of Fiscal 2015, primarily due to a $0.9 million increase in additional labor needs resulting from new restaurants opened since the end of the prior period and the full period of operation of restaurants opened in the prior period, offset by foreign exchange impact of $0.3 million. As a percentage of total revenue, total compensation and benefits costs decreased from 22.7% to 21.7%, due to improved labor productivity and leverage on higher revenue at our comparable restaurants.

Occupancy and Other Operating Expenses

Occupancy and other operating expenses increased $0.4 million, or 3.3%, for the first quarter of Fiscal 2015, primarily due to a $0.8 million increase in expense resulting from new restaurants opened since the end of the prior period and the full period of operation of restaurants opened in the prior period, partially offset by a positive foreign exchange impact of $0.4 million and an overall reduction in restaurant supplies expense. As a percentage of total revenue, total occupancy and other operating costs decreased from 17.6% to 17.2%, primarily due to leverage on higher revenue at our comparable restaurants, and improving efficiencies in our non-comparable locations as they ramp up.

Marketing and Advertising Costs

Marketing and advertising costs were unchanged at $1.4 million for the first quarter of Fiscal 2015. As a percentage of total revenue, marketing and advertising costs decreased from 2.4% to 2.2%.

General and Administrative Costs

General and administrative costs increased $1.0 million, or 22.3%, for the first quarter of Fiscal 2015, due to a $0.4 million increase in compensation and benefit costs due to hiring additional corporate resources to enhance key functional areas and support future growth and a $0.6 million increase in legal and other professional services primarily attributable to establishing our joint ventures and preparing for the initial public offering of our common stock. As a percentage of total revenue, general and administrative costs increased from 7.6% to 8.8%.

Pre-opening Costs

Pre-opening costs increased $0.2 million to $1.0 million for the first quarter of Fiscal 2015, due to three restaurants incurring preopening costs during the first quarter of Fiscal 2015 versus two restaurants during the first quarter of Fiscal 2014.

 

68


Table of Contents

Interest Expense

Interest expense, net of interest income and capitalized interest, decreased $1.0 million, or 21.1%, for the first quarter of Fiscal 2015, due to a reduction in interest rates on our Senior Credit Facilities resulting from our 2014 Credit Facility Refinancing, as well as a decrease in outstanding principal balance owed on our Second Lien Credit Facility.

Income Tax Expense

Income tax expense increased $0.3 million to $1.3 million for the first quarter of Fiscal 2015, due to an increase in net income before income taxes of $2.0 million, offset by the release of the valuation allowance of $0.7 million and a $0.3 million discrete tax benefit recognized in the first quarter of Fiscal 2015 related to a true-up of the deferred tax asset on Fiscal 2014 alternative minimum tax credits.

Restaurant Contribution

 

     Fiscal Quarter Ended
March 29, 2015
    Fiscal Quarter Ended
March 30, 2014
    Increase / (Decrease)  
     (13 weeks)     (13 weeks)    
(dollars in thousands)    Dollars      %(a)     Dollars      %(a)     Dollars     %(b)     %(c)  

Revenue

                

U.S. Restaurant

   $ 54,702         84.2   $ 49,324         80.4   $ 5,378        10.9     3.8

Brazil Restaurant

     10,243         15.8        11,993         19.6        (1,750     (14.6     (3.8

Other

     14         0.0                0.0        14        *        *   

Total revenue

   $ 64,959         100.0   $ 61,317         100.0   $ 3,642        5.9     *   

Restaurant operating costs

                

U.S.

   $ 37,083         67.8   $ 34,303         69.5   $ 2,780        8.1     (1.7 %) 

Brazil

     7,355         71.8        8,955         74.7        (1,600     (17.9     (2.9

Total restaurant operating costs

   $ 44,438         68.4   $ 43,258         70.5   $ 1,180        2.7     (2.1 %) 

Restaurant contribution

                

U.S.

   $ 17,619         32.2   $ 15,021         30.5   $ 2,598        17.3     1.7

Brazil

     2,888         28.2        3,038         25.3        (150     (4.9     2.9   

Other

     14         *                       *        *        *   

Total restaurant contribution

   $ 20,521         31.6   $ 18,059         29.5   $ 2,462        13.6     2.1

 

(a) Calculated as a percentage of total revenue or segment revenue where applicable.

 

(b) Calculated percentage increase / (decrease) in dollars.

 

(c) Calculated increase / (decrease) in percentage of total revenue or segment revenue where applicable.

 

* Not meaningful.

Total restaurant contribution increased $2.5 million, or 13.6%, for the first quarter of Fiscal 2015, primarily due to a $2.3 million increase attributable to non-comparable restaurants. As a percentage of revenue, total restaurant contribution increased from 29.5% to 31.6%.

As a percentage of U.S. restaurant revenue, contribution margin increased 1.7% from 30.5% to 32.2%, due to a 0.3% reduction in food and beverage costs primarily due to management’s focus on waste reduction, a 1.4% reduction in compensation and benefit costs due to increased labor productivity, and a 0.1% decrease in occupancy and other operating expenses.

As a percentage of Brazil restaurant revenue, contribution margin improved 2.9% from 25.3% to 28.2%, due to a 1.1% reduction food and beverage costs primarily due to management’s focus on waste reduction, a 0.3% reduction in compensation and benefit costs due to leverage on higher revenue at our comparable restaurants and a 1.5% reduction in occupancy and other operating expenses due to leverage on higher revenue at our comparable stores and reduction in restaurant supplies expense.

 

69


Table of Contents

Fiscal Year Ended December 28, 2014 (52 weeks) Compared to Fiscal Year Ended December 29, 2013 (52 weeks)

 

     Fiscal Year Ended     Fiscal Year Ended                    
     December 28, 2014     December 29, 2013                    
     (52 weeks)     (52 weeks)     Increase / (Decrease)  
(dollars in thousands)    Dollars     %(a)     Dollars     %(a)     Dollars     %(b)     %(c)  

Revenue

              

U.S. Restaurant

   $ 199,131        75.9   $ 162,442        74.1   $ 36,689        22.6     1.8

Brazil Restaurant

     62,270        23.7        56,797        25.9        5,473        9.6        (2.2

Other

     879        0.3                      879        *        *   

Total revenue

   $ 262,280        100.0   $ 219,239        100.0   $ 43,041        19.6     *   

Restaurant operating costs

              

Food and beverage costs

     78,330        29.9        67,002        30.6        11,328        16.9        (0.7

Compensation and benefit costs

     54,673        20.8        46,860        21.4        7,813        16.7        (0.6

Occupancy and other operating expenses (excluding depreciation and amortization)

     44,156        16.8        36,703        16.7        7,453        20.3        0.1   

Total restaurant operating costs

   $ 177,159        67.5   $ 150,565        68.7   $ 26,594        17.7     (1.2 %) 

Marketing and advertising costs

     5,585        2.1        6,188        2.8        (603     (9.7     (0.7

General and administrative costs

     21,419        8.2        18,239        8.3        3,180        17.4        (0.1

Pre-opening costs

     1,951        0.7        4,764        2.2        (2,813     (59.0     (1.5

Loss on modification of debt

     3,090        1.2        6,875        3.1        (3,785     (55.1     (1.9

Depreciation and amortization

     11,638        4.4        8,989        4.1        2,649        29.5        0.3   

Other operating (income) expense, net

     46        0.0        (371     (0.2     (417     (112.4     (0.2

Total costs and expenses

   $ 220,888        84.2   $ 195,249        89.1   $ 25,639        13.1     (4.9 %) 

Income from operations

   $ 41,392        15.8   $ 23,990        10.9   $ 17,402        72.5     4.9

Other income (expense):

              

Interest expense, net

     (17,121     (6.5     (22,354     (10.2     (5,233     (23.4     (3.7

Other income (expense), net

     (7     (0.0     (101     (0.0     (94     (93.1     (0.0

Total other income (expense), net

   $ (17,128     (6.5 %)    $ (22,455     (10.2 %)    $ (5,327     (23.7 %)      (3.7 %) 

Income before income taxes

     24,264        9.3        1,535        0.7        22,729        *        8.6   

Income tax expense

     6,991        2.7        2,472        1.1        4,519        *        1.6   

Net income (loss)

     17,273        6.6        (937     (0.4     18,210        *        7.0   

Less: Loss attributable to noncontrolling interest

     (282     (0.1                   (282     *        *   

Net income (loss) attributable to
Fogo de Chão, Inc.

   $ 17,555        6.7   $ (937     (0.4 %)    $ 18,492        *        *   

 

(a) Calculated as a percentage of total revenue.

 

(b) Calculated percentage increase / (decrease) in dollars.

 

(c) Calculated increase / (decrease) in percentage of total revenue.

 

* Not meaningful.

Revenue

Total revenue increased $43.0 million, or 19.6%, for Fiscal 2014, primarily due to a $36.9 million increase in non-comparable restaurant sales for new restaurants opened in 2013 and 2014. Total comparable restaurant sales increased 4.9%, primarily driven by an increase in average check and guest traffic.

U.S. restaurant revenue increased $36.7 million, or 22.6%, due to increased non-comparable restaurant sales of $32.3 million and U.S. comparable restaurant sales increase of 2.9%, primarily driven by an increase in average check and guest traffic.

Brazil restaurant revenue increased $5.5 million, or 9.6%, due to increased comparable restaurant sales of 11.4% attributable to an increase in average check and guest traffic due to the World Cup in Brazil, an increase in non-comparable restaurant sales of $4.6 million, partially offset by a negative foreign exchange impact of $5.0 million.

 

70


Table of Contents

Other revenue includes gift card breakage revenue recognized by our U.S. operating segment during Fiscal 2014 related to gift cards whose likelihood of redemption was determined to be remote.

Food and Beverage Costs

Food and beverage costs increased $11.3 million, or 16.9%, for Fiscal 2014, primarily due to a $10.5 million increase in food costs from new restaurants opened since the end of the prior period and the full period of operation of restaurants opened in the prior period. As a percentage of total revenue, total food and beverage costs decreased from 30.6% to 29.9%, due to favorable pricing on beef contracts executed in 2014, and management’s focus on waste reduction and production efficiencies.

Compensation and Benefit Costs

Compensation and benefit costs increased $7.8 million, or 16.7%, for Fiscal 2014, primarily due to a $9.5 million increase in additional labor needs resulting from new restaurants opened since the end of the prior period and the full period of operation of restaurants opened in the prior period. As a percentage of total revenue, total compensation and benefits costs decreased from 21.4% to 20.8%, due to improved labor productivity and a reduction in benefits expense, and leverage on higher revenue at our comparable restaurants.

Occupancy and Other Operating Expenses

Occupancy and other operating expenses increased $7.5 million, or 20.3%, for Fiscal 2014, primarily due to a $7.1 million increase in expense resulting from new restaurants opened since the end of the prior period and the full period of operation of restaurants opened in the prior period. As a percentage of total revenue, total occupancy and other operating costs increased from 16.7% to 16.8%, primarily due to increased rent as a percentage of revenue for the new restaurants noted above partially offset by leverage on higher revenue at our comparable restaurants.

Marketing and Advertising Costs

Marketing and advertising costs decreased $0.6 million, or 9.7%, for Fiscal 2014. As a percentage of total revenue, marketing and advertising costs decreased from 2.8% to 2.1% primarily due to a reduction in national television spend during the fourth quarter of Fiscal 2014 compared to Fiscal 2013, as we focused on optimizing our marketing spend across various media.

General and Administrative Costs

General and administrative costs increased $3.2 million, or 17.4%, for Fiscal 2014, due to a $1.6 million increase in compensation expense due to hiring additional corporate resources to enhance key functional areas and support future growth. As a percentage of total revenue, general and administrative costs decreased from 8.3% to 8.2% as revenue growth exceeded our fixed base of general and administrative costs despite our continued investments in personnel to support future growth and increased legal and travel expenses associated with establishing our joint ventures.

Pre-opening Costs

Pre-opening costs decreased $2.8 million to $2.0 million for Fiscal 2014, due to three restaurants incurring pre-opening costs during Fiscal 2014 versus five restaurants in Fiscal 2013.

Loss on Modification of Debt

Loss on modification of debt was $3.1 million in Fiscal 2014, due to non-cash charges related to our 2014 Credit Facility Refinancing.

Interest Expense

Interest expense decreased $5.2 million, or 23.4%, for Fiscal 2014, primarily due to a reduction in interest rates on our Senior Credit Facilities resulting from our 2014 Credit Facility Refinancing.

 

71


Table of Contents

Income Tax Expense

Income tax expense increased $4.5 million to $7.0 million for Fiscal 2014, due to an increase in net income before income taxes of $22.7 million, offset by a reduction in the valuation allowance of $1.7 million in the current period.

During Fiscal 2014, we identified errors of $0.6 million in consolidated income tax expense for Fiscal 2013, and $0.6 million in consolidated comprehensive loss for the period from May 24, 2012 to December 30, 2012. The errors related to accounting entries made in connection with deferred tax assets recorded on cumulative translation adjustments in Fiscal 2012, and the subsequent recording of a valuation allowance on such adjustments in Fiscal 2013. The Company corrected these errors in the fourth quarter of Fiscal 2014, which had an effect of reducing income tax expense by $0.6 million, and reducing other comprehensive income for Fiscal 2014.

 

Restaurant Contribution

                 
     Fiscal Year Ended
December 28, 2014
    Fiscal Year Ended
December 29, 2013
    Increase /(Decrease)  
     (52 weeks)     (52 weeks)    
(dollars in thousands)    Dollars      %(a)     Dollars      %(a)     Dollars      %(b)     %(c)  

Revenue

                 

U.S. Restaurant

   $ 199,131         75.9   $ 162,442         74.1   $ 36,689         22.6     1.8

Brazil Restaurant

     62,270         23.7        56,797         25.9        5,473         9.6        (2.2

Other

     879         0.3                       879         *        *   

Total revenue

   $ 262,280         100.0   $ 219,239         100.0   $ 43,041         19.6     *   

Restaurant operating costs

                 

U.S.

   $ 137,007         68.8   $ 113,111         69.6   $ 23,896         21.1     (0.8 %) 

Brazil

     40,152         64.5        37,454         65.9        2,698         7.2        (1.4

Total restaurant operating costs

   $ 177,159         67.5   $ 150,565         68.7   $ 26,594         17.7     (1.2 %) 

Restaurant contribution

                 

U.S.

   $ 62,124         31.2   $ 49,331         30.4   $ 12,793         25.9     0.8

Brazil

     22,118         35.5        19,343         34.1        2,775         14.3        1.4   

Other

     879         *                       *         *        *   

Total restaurant contribution

   $ 85,121         32.5   $ 68,674         31.3   $ 16,447         23.9     1.2

 

(a) Calculated as a percentage of total revenue or segment revenue where applicable.

 

(b) Calculated percentage increase / (decrease) in dollars.

 

(c) Calculated increase / (decrease) in percentage of total revenue or segment revenue where applicable.

 

* Not meaningful.

Total restaurant contribution increased $16.4 million, or 23.9%, for Fiscal 2014, primarily due to a $9.8 million increase in new restaurants opened since the end of the prior period and the full period of operation of restaurants opened in the prior period. As a percentage of revenue, total restaurant contribution increased from 31.3% to 32.5%.

As a percentage of U.S. restaurant revenue, contribution margin increased 0.8% from 30.4% to 31.2%, due to a 0.7% reduction in food and beverage costs due to favorable pricing on beef contracts executed in Fiscal 2014, management’s focus on waste reduction and a 0.6% reduction in compensation and benefit costs due to increased labor productivity, partially offset by a 0.5% increase in occupancy and other operating expenses attributable to the new restaurants noted above.

As a percentage of Brazil restaurant revenue, contribution margin improved 1.4% from 34.1% to 35.5%, due to a 1.0% reduction in compensation and benefit costs and a 0.7% reduction in occupancy and other operating expenses due to leverage on higher revenue at our comparable restaurants for labor and operating expenses, offset by commodity increases on our food and beverage costs.

Other revenue includes gift card breakage revenue recognized by our U.S. operating segment during Fiscal 2014 related to gift cards whose likelihood of redemption was determined to be remote.

 

72


Table of Contents

Financial Presentation

The historical consolidated financial information has been derived from the financial statements and accounting records of Fogo de Chão, Inc. (Successor) for periods on and after May 24, 2012, and from the financial statements and accounting records of the “Predecessor” company for the period prior to July 21, 2012. Financial information in the Predecessor period relates to Fogo de Chão Churrascaria (Holdings) LLC and its subsidiaries. For purposes of presenting a comparison of our Fiscal 2013 results to Fiscal 2012, we have presented our 2012 results first as standalone results for the Predecessor for the period from January 2, 2012 to July 20, 2012 and the Successor for the period from May 24, 2012 (Inception) to December 30, 2012 and next as the mathematical addition of the Predecessor and Successor periods. We believe that the presentation with mathematical additions provides meaningful information about our results of operations on a period-to-period basis. This approach is not consistent with US GAAP, may yield results that are not strictly comparable on a period-to-period basis and may not reflect the actual results we would have achieved. The table and discussion showing the period from May 24, 2012 (Inception) to December 30, 2012 is presented first and the table and discussion showing the combined 2012 results follow.

Fiscal Year Ended December 29, 2013 (52 weeks) Compared to the Period from May 24 (Inception) to December 30, 2012 (23 operating weeks)

 

                 Successor                             Predecessor  
     Fiscal Year Ended
December 29, 2013
    Period from
May 24 (Inception) to
December 30, 2012
                            Period from
January 2 to
July 20, 2012
 
     (52 weeks)     (23 weeks)     Increase / (Decrease)           (29 weeks)  
(dollars in thousands)    Dollars     %(a)     Dollars     %(a)     Dollars     %(b)     %(c)           Dollars  

Revenue

                     

U.S. Restaurant

   $ 162,442        74.1   $ 66,853        71.2   $ 95,589        143.0     2.9        $ 79,327   

Brazil Restaurant

     56,797        25.9        26,991        28.8        29,806        110.4        (2.9          29,189   

Total revenue

   $ 219,239        100.0   $ 93,844        100.0   $ 125,395        133.6     *           $ 108,516   

Restaurant operating costs

                     

Food and beverage costs

     67,002        30.6        29,381        31.3        37,621        128.0        (0.7          34,512   

Compensation and benefit costs

     46,860        21.4        21,125        22.5        25,735        121.8        (1.1          22,348   

Occupancy and other operating expenses (excluding depreciation and amortization)

     36,703        16.7        15,478        16.5        21,225        137.1        0.2             18,061   

Total restaurant operating costs

   $ 150,565        68.7   $ 65,984        70.3   $ 84,581        128.2     (1.6 %)         $ 74,921   

Marketing and advertising costs

     6,188        2.8        2,342        2.5        3,846        164.2        0.3             2,488   

General and administrative costs

     18,239        8.3        8,143        8.7        10,096        124.0        (0.4          10,229   

Pre-opening costs

     4,764        2.2        1,119        1.2        3,645        325.7        1.0             1,359   

Acquisition costs

            0.0        11,988        12.8        (11,988     *        (12.8          6,963   

Loss on modification/extinguishment of debt

     6,875        3.1               0.0        6,875        *        3.1             7,762   

Depreciation and amortization

     8,989        4.1        3,736        4.0        5,253        140.6        0.1             5,114   

Other operating (income) expense, net

     (371     (0.2     (169     (0.2     (202     119.5        0.0             (157

Total costs and expenses

   $ 195,249        89.1   $ 93,143        99.3   $ 102,106        109.6     (10.2 %)         $ 108,679   

Income (loss) from operations

   $ 23,990        10.9   $ 701        0.7   $ 23,289        *        10.2        $ (163

Other income (expense):

                     

Interest expense, net

     (22,354     (10.2     (10,908     (11.6     11,446        104.9        (1.4          (7,359

Other income (expense), net

     (101     0.0        (20     0.0        81        405.0        0.0             (68

Total other income (expense), net

   $ (22,455     (10.2 %)    $ (10,928     (11.6 %)    $ 11,527        105.5     (1.4 %)         $ (7,427

Income (loss) before income taxes

     1,535        0.7        (10,227     (10.9     11,762        *        11.6             (7,590

Income tax expense (benefit)

     2,472        1.1        (1,195     (1.3     3,667        *        2.4             1,294   

Net income (loss)

   $ (937     (0.4 %)    $ (9,032     (9.6 %)    $ 8,095        89.6     9.2        $ (8,884

 

(a) Calculated percentage of total revenue.

 

(b) Calculated percentage increase / (decrease) in dollars.

 

73


Table of Contents
(c) Calculated increase / (decrease) in percentage of total revenue.

 

* Not meaningful.

Revenue

Total revenue increased $125.4 million, or 133.6%, for Fiscal 2013, primarily due to 29 additional company operating weeks in the current period.

U.S. restaurant revenue increased $95.6 million, or 143.0%, for Fiscal 2013, primarily due to 29 additional company operating weeks in the current period.

Brazil restaurant revenue increased $29.8 million, or 110.4%, for Fiscal 2013, primarily due to 29 additional company operating weeks in the current period.

Food and Beverage Costs

Food and beverage costs increased $37.6 million, or 128.0%, for Fiscal 2013, primarily due to 29 additional company operating weeks in the current period.

Compensation and Benefit Costs

Compensation and benefit costs increased $25.7 million, or 121.8%, for Fiscal 2013, primarily due to 29 additional company operating weeks in the current period. As a percentage of total revenue, total compensation and benefit costs decreased from 22.5% during the period from May 24, 2012 to December 30, 2012 to 21.4% during Fiscal 2013.

Occupancy and Other Operating Expenses

Occupancy and other operating expenses increased $21.2 million, or 137.1%, for Fiscal 2013, primarily due to 29 additional company operating weeks in the current period. As a percentage of total revenue, total occupancy and other operating expenses increased from 16.5% during the period from May 24, 2012 to December 30, 2012 to 16.7% during Fiscal 2013.

Marketing and Advertising Costs

Marketing and advertising costs increased $3.8 million, or 164.2%, for Fiscal 2013, primarily due to 29 additional company operating weeks in the current period. As a percentage of total revenue, marketing and advertising costs increased from 2.5% during the period from May 24, 2012 to December 30, 2012 to 2.8% during Fiscal 2013.

General and Administrative Costs

General and administrative costs increased $10.1 million, or 124.0%, for Fiscal 2013, primarily due to 29 additional company operating weeks in the current period. As a percentage of total revenue, general and administrative costs decreased from 8.7% during the period from May 24, 2012 to December 30, 2012 to 8.3% during Fiscal 2013.

Pre-opening Costs

Pre-opening costs increased $3.6 million to $4.8 million for Fiscal 2013, primarily due to five restaurants incurring pre-opening costs during the current period compared to one in the prior period.

Loss on Modification of Debt

Loss on modification of debt was $6.9 million in Fiscal 2013 due to non-cash charges related to the re-pricing of our First Lien Credit Facility in August 2013.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $5.3 million, or 140.6%, for Fiscal 2013, primarily due to 29 additional company operating weeks in the current period.

 

74


Table of Contents

Interest Expense

Interest expense increased $11.4 million, or 104.9%, for Fiscal 2013, primarily due to 29 additional company operating weeks in the current period.

Income Tax Expense (Benefit)

Income tax expense increased to $2.5 million for Fiscal 2013, from a benefit of $1.2 million for the period from May 24, 2012 to December 30, 2012, primarily due to net income before tax of $1.5 million in the current period compared to a net loss before tax of $10.2 million in the prior period.

Restaurant Contribution

 

                  Successor                              Predecessor  
     Fiscal Year Ended
December 29,
2013
    Period from
May 24 (Inception) to
December 30, 2012
                             Period from
January 2 to
July 20, 2012
 
     (52 weeks)     (23 weeks)     Increase / (Decrease)           (29 weeks)  
(dollars in thousands)    Dollars      %(a)     Dollars      %(a)     Dollars      %(b)     %(c)           Dollars  

Revenue

                        

U.S. Restaurant

   $ 162,442         74.1   $ 66,853         71.2   $ 95,589         143.0     2.9        $ 79,327   

Brazil Restaurant

     56,797         25.9        26,991         28.8        29,806         110.4        (2.9          29,189   

Total revenue

   $ 219,239         100.0   $ 93,844         100.0   $ 125,395         133.6     *           $ 108,516   

Restaurant operating costs

                        

U.S.

   $ 113,111         69.6   $ 49,336         73.8   $ 63,775         129.3     (4.2 %)         $ 56,343   

Brazil

     37,454         65.9        16,648         61.7        20,806         125.0        4.2             18,578   

Total restaurant operating costs

   $ 150,565         68.7   $ 65,984         70.3   $ 84,581         128.2     (1.6 %)         $ 74,921   

Restaurant contribution

                        

U.S.

   $ 49,331         30.4   $ 17,517         26.2   $ 31,814         181.6     4.2        $ 22,984