NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Nature of Operations and Basis of Presentation
The condensed consolidated financial statements of The Habit Restaurants, Inc. include the accounts of The Habit Restaurants, LLC and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The Habit Restaurants, Inc. was formed as a Delaware corporation on July 24, 2014, as a holding company for the purposes of facilitating an initial public offering (the “IPO”) of shares of Class A common stock. The Company acquired, by merger, entities that were members of The Habit Restaurants, LLC. The Company accounted for the merger as a non-substantive transaction in a manner similar to a transaction between entities under common control pursuant to Accounting Standards Codification (“ASC”) ASC 805-50 Transactions between Entities under Common Control, and as such, recognized the assets and liabilities transferred at their carrying amounts on the date of transfer. The Habit Restaurants, Inc. is a holding company with no direct operations that holds as its principal assets an equity interest in The Habit Restaurants, LLC and shares of subsidiaries, each of which in turn holds as its principal asset an equity interest in The Habit Restaurants, LLC, and relies on The Habit Restaurants, LLC to provide the Company with funds necessary to meet any financial obligations. As such, the Company has no independent means of generating revenue. In February 2013, HBG Franchise, LLC (“Franchise”), a wholly-owned subsidiary of The Habit Restaurants, LLC and a Delaware limited liability company, was formed to begin franchising the Company’s restaurant concept.
During the 39-week period ended September 24, 2019, 30,000 common units in The Habit Restaurants, LLC (“LLC Units”) were exchanged by the existing owners of The Habit Restaurants, LLC (the “Continuing LLC Owners”) for shares of Class A common stock, and a corresponding number of shares of Class B common stock were then cancelled in connection with such exchanges. In addition, during the 39-week period ended September 24, 2019, 77,617 restricted stock units vested, of which 15,283 were withheld to satisfy tax withholding obligations. As a result of these exchanges, vesting of restricted stock units and withholdings for tax obligations, as of September 24, 2019, The Habit Restaurants, Inc. directly or indirectly held 20,760,052 LLC Units, representing a 79.5% economic interest in The Habit Restaurants, LLC, and continues to exercise exclusive control over the Habit Restaurants, LLC, as its sole managing member.
In connection with the Company’s recapitalization and IPO, The Habit Restaurants, LLC limited liability company agreement (the “LLC Agreement”) was amended and restated to, among other things, create a single new class of non-voting LLC Units. The Continuing LLC Owners continue to hold LLC Units, and such existing owners (other than The Habit Restaurants, Inc. and its wholly-owned subsidiaries) were issued a number of shares of our Class B common stock equal to the number of LLC Units held by them. These LLC Units continue to be subject to any vesting, forfeiture, repurchase or similar provisions pursuant to the pre-IPO agreement. Each share of Class B common stock provides its holder with no economic rights but entitles the holder to one vote on matters presented to The Habit Restaurants, Inc.’s stockholders. Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law. The Class B common stock is not publicly traded and does not entitle its holders to receive dividends or distributions upon a liquidation, dissolution or winding up of The Habit Restaurants, Inc.
As the sole managing member of The Habit Restaurants, LLC, the Company has the right to determine when distributions will be made to the holders of LLC Units, and the amount of any such distributions (in each case subject to the requirements with respect to the tax distributions described below). If The Habit Restaurants, Inc. authorizes a distribution, such distribution will be made to the holders of LLC Units, including The Habit Restaurants, Inc., pro rata in accordance with their respective ownership of the LLC Units (other than, for clarity, certain non-pro rata distributions to the Company to satisfy certain of the Company’s obligations). Notwithstanding the foregoing, The Habit Restaurants, LLC bears the cost of or reimburses The Habit Restaurants, Inc. for certain expenses incurred by The Habit Restaurants, Inc. The Company also entered into a tax receivable agreement (“TRA”).
8
The Habit Restaurants, LLC is treated by its members as a partnership for federal and applicable state income tax purposes and, as such, generally is not expected to be subject to income tax (except that it may be required to withhold and remit tax as a withholding agent). Instead, taxable income is allocated to holders of LLC Units, including the Company. Accordingly, the Company incurs income taxes on its allocable share of any net taxable income of The Habit Restaurants, LLC and also incurs expenses related to its operations. Pursuant to the LLC Agreement, The Habit Restaurants, LLC is required to make tax distributions to the holders of LLC Units, except that The Habit Restaurants, LLC’s ability to make such distributions may be subject to various limitations and restrictions, including the operating results of its subsidiaries, its cash requirements and financial condition, the applicable provisions of Delaware law that may limit the amount of funds available for distribution to its members, compliance by The Habit Restaurants, LLC and its subsidiaries with restrictions, covenants and financial ratios related to existing or future indebtedness, and other agreements entered into by The Habit Restaurants, LLC or its subsidiaries with third parties. In addition to tax expenses, The Habit Restaurants, Inc. incurs expenses related to its operations, plus payments under the TRA, which the Company expects will be significant. The Company intends to cause The Habit Restaurants, LLC to make distributions or, in the case of certain expenses, payments in an amount sufficient to allow The Habit Restaurants, Inc. to pay its taxes and operating expenses, including distributions to fund any ordinary course payments due under the TRA. Under the terms of the LLC Agreement, no member shall be obligated personally for any debt, obligation, or liability of the Company.
The Company is headquartered in Irvine, California, and, as of September 24, 2019, managed and operated 237 fast casual restaurants as “The Habit Burger Grill” in California, Arizona, Utah, New Jersey, Florida, Idaho, Virginia, Maryland, Pennsylvania, Nevada and North Carolina. The restaurant’s menu includes charbroiled hamburgers, specialty sandwiches, fresh salads, and shakes and malts.
Additionally, with the formation of Franchise, the Company began franchising its restaurant concept. Franchise’s future operations are dependent, among other factors, upon the success of the Company’s restaurant concept. The Company had entered into seven licensing and seven franchise agreements as of September 24, 2019. The Company had six licensed locations and 22 franchised locations from which it generates revenues as of September 24, 2019, which operate in California, Arizona, Nevada, Washington and China.
The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. It is the Company’s opinion that all adjustments considered necessary for the fair presentation of its results of operations, financial position, and cash flows for the periods presented have been included and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 25, 2018, included in the Company’s annual report on Form 10-K. The Company uses a 52 or 53-week fiscal year ending on the last Tuesday of the calendar year. In a 52-week fiscal year, each quarter includes 13 weeks of operations. In a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations. Fiscal year 2018, which ended on December 25, 2018, was a 52-week fiscal year. Fiscal year 2019, which will end on December 31, 2019, is a 53-week fiscal year.
Note 2—Summary of Significant Accounting Policies
Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The Company’s significant estimates include estimates for impairment of property and equipment, workers’ compensation insurance reserves and income tax receivable liabilities.
Reclassifications—Certain comparative prior year amounts in the condensed consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications have no effect on previously reported net income or earnings per share.
9
Concentration of Credit Risk—Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. At September 24, 2019 and December 25, 2018, the Company maintained approximately $13.1 million and $9.5 million, respectively, of its day-to-day operating cash balances with a major financial institution, of which $0.3 million and $0.4 million, respectively, represents restricted cash in an impound account for franchisees developing in states that require segregation of fees paid for stores not opened. At September 24, 2019 and December 25, 2018, the Company maintained approximately $0.4 million and $0.3 million, respectively, at the restaurant level for operating purposes. The remaining $23.8 million and $15.1 million at September 24, 2019 and December 25, 2018, respectively, was invested with a major financial institution and consisted entirely of U.S. Treasury instruments with a maturity of five months or less at the date of purchase. At September 24, 2019 and December 25, 2018 and at various times during the periods then ended, cash and cash equivalents balances were in excess of Federal Depository Insurance Corporation insured limits. While the Company monitors the cash balances in its operating accounts on a daily basis and adjusts the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating accounts.
Fair Value Measurements—The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to the short maturities of these instruments.
Impairment of Long-lived Assets—The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related assets to its estimated fair value. Fair value is generally based on a discounted cash flow analysis. Based on its review for the 39 weeks ended September 24, 2019, the Company does not believe that any indicators of impairment of its long-lived assets has occurred and accordingly no such write-downs have been recorded. The Company recorded a non-cash impairment charge of $3.1 million in the third quarter of 2018 for three restaurants in the Orlando, Florida market.
Restaurant Closure Charges—During the 13 weeks ended September 24, 2019, the Company closed three restaurants in the Orlando, Florida market, all of which were previously impaired during the third quarter of 2018, and also decided not to move forward with the development of a fourth restaurant in the Orlando, Florida market. The Company recorded restaurant closure charges of $0.6 million during the 13 and 39 weeks ended September 24, 2019. There were no restaurant closure charges in the prior year periods. Restaurant closure charges consist primarily of lease termination costs, rent expense related to closed restaurants, severance and other direct costs related to closed restaurants.
Self-insurance Program—Beginning in fiscal year 2018, the Company began a modified self-insurance workers’ compensation program. In order to minimize the exposure under the self-insurance program, the Company purchased stop-loss coverage both on a per-occurrence and on an aggregate basis. The self-insured losses under the program are accrued based on the Company’s estimate of the expected liability for both claims incurred and incurred but not reported basis. The accruals for the modified self-insurance program involve certain management judgments and assumptions regarding the frequency and severity of claims, recent historical patterns of claim development, independent actuarial assessments, and the Company’s experience with claim-reserve management and settlement practices. These accruals are included in employee-related accruals in the accompanying condensed consolidated balance sheet. As of September 24, 2019 and December 25, 2018, the accruals related to the self-insurance workers’ compensation program were $4.9 million and $3.1 million, respectively. The Company’s actual losses may be significantly different than the estimates currently recorded.
Income Taxes—The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company may record a valuation allowance, if conditions are applicable, to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
Non-controlling Interests—The non-controlling interests on the condensed consolidated statements of operations represents the portion of earnings or loss before income taxes attributable to the economic interest in the Company’s subsidiary, The Habit Restaurants, LLC, held by the Continuing LLC Owners. Non-controlling interests on the condensed consolidated balance sheet represents the portion of net assets of the Company attributable to the non-controlling Continuing LLC Owners, based on the portion of the LLC Units owned by such unit holders. As of September 24, 2019 and September 25, 2018, the non-controlling interest was 20.5% and 20.7%, respectively.
10
Earnings per Share—Basic earnings per share (“basic EPS”) is computed by dividing net income attributable to The Habit Restaurants, Inc. by the weighted average number of shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect during the reporting period to all dilutive potential shares outstanding resulting from employee stock-based awards.
The following table sets forth the calculation of basic and diluted earnings per share for the 13 and 39 weeks ended September 24, 2019 and September 25, 2018, respectively:
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
September 24,
|
|
|
September 25,
|
|
|
September 24,
|
|
|
September 25,
|
|
(amounts in thousands, except share and per share data)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to controlling and
non-controlling interests
|
|
$
|
1,365
|
|
|
$
|
(864
|
)
|
|
$
|
3,814
|
|
|
$
|
2,654
|
|
Less: (net income) loss attributable to non-controlling
interests
|
|
$
|
(327
|
)
|
|
$
|
244
|
|
|
$
|
(980
|
)
|
|
$
|
(563
|
)
|
Net income (loss) attributable to The Habit Restaurants, Inc.
|
|
$
|
1,038
|
|
|
$
|
(620
|
)
|
|
$
|
2,834
|
|
|
$
|
2,091
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of Class A common stock
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,756,782
|
|
|
|
20,552,532
|
|
|
|
20,724,105
|
|
|
|
20,498,945
|
|
Diluted
|
|
|
20,772,041
|
|
|
|
20,552,532
|
|
|
|
20,769,178
|
|
|
|
20,577,722
|
|
Net income (loss) attributable to The Habit Restaurants, Inc.
per share Class A common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.14
|
|
|
$
|
0.10
|
|
Diluted
|
|
$
|
0.05
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.14
|
|
|
$
|
0.10
|
|
Below is a reconciliation of basic and diluted
share counts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,756,782
|
|
|
|
20,552,532
|
|
|
|
20,724,105
|
|
|
|
20,498,945
|
|
Dilutive effect of stock options and restricted stock units
|
|
|
15,259
|
|
|
|
—
|
|
|
|
45,073
|
|
|
|
78,777
|
|
Diluted
|
|
|
20,772,041
|
|
|
|
20,552,532
|
|
|
|
20,769,178
|
|
|
|
20,577,722
|
|
Diluted earnings per share of Class A common stock is computed similarly to basic earnings per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents using the treasury method, if dilutive. The Company’s Class B common stock represent voting interests and do not participate in the earnings of the Company. Accordingly, there is no earnings per share related to the Company’s Class B common stock. The Company’s LLC Units are considered common stock equivalents for this purpose. The number of additional shares of Class A common stock related to these common stock equivalents is calculated using the if-converted method. The potential impact of the exchange of the 5,349,889 LLC Units on the diluted EPS had no impact and were therefore excluded from the calculation.
As of September 24, 2019, there were 3,525,275 options authorized under our 2014 Omnibus Incentive Plan, as amended (the “Amended and Restated 2014 Omnibus Incentive Plan”), of which 2,527,077 and 1,870,309 had been granted as of September 24, 2019 and September 25, 2018, respectively. See Note 10—Management Incentive Plans for additional information. The number of dilutive shares of Class A common stock related to these options was calculated using the treasury stock method and 1,840,387 and 2,274 shares and 1,687,155 and 27,036 shares have been excluded from the diluted EPS for the 13 and 39 weeks ended September 24, 2019 and September 25, 2018, respectively, because they were anti-dilutive.
11
Recently Adopted Accounting Pronouncements—In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 Leases, which supersedes ASC 840 Leases and creates a new topic, ASC 842 Leases. This update requires lessees to recognize a lease liability and a right-of-use asset for all leases, including operating leases, with an expected term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This transition method option is in addition to the existing transition method of using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company adopted this ASU in the beginning of the first quarter of fiscal year 2019 and used the cumulative-effect transition method. The Company elected the available practical expedient options which allows an entity to not reassess whether any existing or expired contracts contain leases, not reassess lease classifications for existing or expired leases, and an entity does not need to reassess initial direct costs for any existing leases.
Upon transition, the Company recorded an increase to opening equity of $1.0 million, net of tax, of which $0.7 million was recognized in retained earnings and $0.3 million in non-controlling interests, with a corresponding decrease of $18.6 million in property and equipment, net, a decrease in deemed landlord financing of $19.8 million and a decrease of $0.2 million in deferred tax assets, related to the derecognition of the buildings that the Company had determined that it was the accounting owner of under build to suit lease guidance contained in ASC 840 Leases. The leases where the Company had previously determined that it was the accounting owner are now accounted for as operating leases under the new standard which will result in an increase in occupancy and other operating expenses and a decrease in depreciation and amortization expense and interest expense, net on its consolidated income statement. The new standard will not have a material impact on the Company’s consolidated income statement for its existing operating leases. In addition, upon transition, the Company also recognized $174.4 million for operating lease liabilities based on the present value of the remaining minimum rental payments using discount rates based on the Company’s borrowing rate as of the effective date and $149.8 million for right-of-use assets based upon the lease liabilities adjusted for deferred rent and lease incentives balances of $24.6 million at adoption. See Note 8—Leases for additional information.
Note 3—Non-controlling Interests
Pursuant to the LLC Agreement, the Continuing LLC Owners have the right to exchange their LLC Units, together with a corresponding number of shares of Class B common stock (which will be cancelled in connection with any such exchange) for, generally, at the option of the Company (such determination to be made by the disinterested members of our board of directors), (i) shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications or (ii) cash consideration. At any time that an effective registration statement is on file with the SEC with respect to the shares of Class A Common Stock to be issued upon an exchange, The Habit Restaurants, Inc. may not provide cash consideration upon an exchange to a Continuing LLC Owner without the Continuing LLC Owner’s prior consent. The Company amended its LLC Agreement in May 2016, pursuant to which the Company processes exchange requests every other week, rather than weekly, effective in June 2016. The Company further amended its LLC Agreement in March 2017, pursuant to which the Company processes exchange requests monthly, effective in May 2017.
The non-controlling interests represents the portion of earnings or loss attributable to the economic interest held by the non-controlling Continuing LLC Owners. The non-controlling interests upon the completion of the IPO was 65.5%. Upon completion of the follow-on offering in April 2015, the non-controlling interests portion was 47.1%. The non-controlling interests portion changes as Continuing LLC Owners exchange their LLC Units, together with a corresponding number of shares of Class B common stock, for Class A common stock. The non-controlling interests on the condensed consolidated balance sheet were adjusted to reflect the non-controlling interests portion as of September 24, 2019 and September 25, 2018, which was 20.5% and 20.7%, respectively. The amounts of these changes are reflected in the condensed consolidated statements of stockholders’ equity. The amount recorded in equity for the 39 weeks ended September 24, 2019 and September 25, 2018 was $0.3 million and $1.5 million, respectively. Net income attributable to non-controlling interests is calculated based on the non-controlling interests ownership percentage in effect at that time. The following table represents the weighted average non-controlling interests for the periods presented (dollar amounts in thousands):
12
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
September 24,
|
|
|
September 25,
|
|
|
September 24,
|
|
|
September 25,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Income (loss) before income taxes of The Habit Restaurants, LLC and its subsidiaries
|
|
$
|
1,597
|
|
|
$
|
(1,184
|
)
|
|
$
|
4,780
|
|
|
$
|
2,622
|
|
Weighted average non-controlling interests
ownership percentage
|
|
|
20.5
|
%
|
|
|
20.6
|
%
|
|
|
20.5
|
%
|
|
|
21.5
|
%
|
Net income (loss) attributable to non-controlling
interests
|
|
$
|
327
|
|
|
$
|
(244
|
)
|
|
$
|
980
|
|
|
$
|
563
|
|
Note 4—Fair Value Measurements
Fair value measurements enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair values of the Company’s investments in marketable securities are based on quoted prices in active markets for identical assets. The fair value of the investments in marketable securities was approximately $23.8 million and $15.1 million at September 24, 2019 and December 25, 2018, respectively, and the Company classified such investments as Level 1. These investments consist entirely of U.S. Treasury instruments with a maturity of five months or less at the date of purchase and the interest income received from these instruments is included in interest expense, net in the condensed consolidated statements of operations. These amounts are included in cash and cash equivalents in the accompanying condensed consolidated balance sheets.
Note 5—Property and Equipment, net
Property and equipment consists of the following (amounts in thousands):
|
|
September 24,
|
|
|
December 25,
|
|
|
|
2019
|
|
|
2018
|
|
Leasehold improvements
|
|
$
|
135,076
|
|
|
$
|
120,890
|
|
Equipment
|
|
|
78,662
|
|
|
|
68,532
|
|
Furniture and fixtures
|
|
|
30,334
|
|
|
|
28,487
|
|
Buildings under deemed landlord financing
|
|
|
—
|
|
|
|
19,566
|
|
Smallwares
|
|
|
2,482
|
|
|
|
2,260
|
|
Vehicles
|
|
|
2,460
|
|
|
|
2,392
|
|
Construction in progress
|
|
|
9,427
|
|
|
|
8,370
|
|
|
|
|
258,441
|
|
|
|
250,497
|
|
Less: Accumulated depreciation and amortization
|
|
|
(108,585
|
)
|
|
|
(89,751
|
)
|
|
|
$
|
149,856
|
|
|
$
|
160,746
|
|
Depreciation and amortization expenses were $7.1 million and $6.3 million for the 13 weeks ended September 24, 2019 and September 25, 2018, respectively, and $20.5 million and $18.0 million for the 39 weeks ended September 24, 2019 and September 25, 2018, respectively.
As a result of the application of build-to-suit lease guidance contained in ASC 840-40-55 Costs Incurred by a Lessee Prior to Entering into a Lease Agreement, the Company has determined that it was the accounting owner of a total of 31 buildings under deemed landlord financing as of December 25, 2018, and they are included in the Company’s property and equipment. Included in the buildings under deemed landlord financing is the estimated construction costs of the landlord for the shell building. The Company has determined that these locations will be accounted for as operating leases under ASC 842 Leases, and these amounts were derecognized with the adoption of ASC 842 at the beginning of the first quarter of fiscal year 2019.
13
Note 6—Income Taxes
The Habit Restaurants, Inc. is subject to U.S. federal and state income taxation on its allocable portion of the income of The Habit Restaurants, LLC. The “Provision for income taxes” in the accompanying condensed consolidated statements of operations for the 39 weeks ended September 24, 2019 and September 25, 2018 is based on an estimate of the Company’s annualized effective income tax rate. The Habit Restaurants, LLC operates as a limited liability company which is not itself subject to federal income tax. Accordingly, the portion of the Company’s subsidiary earnings attributable to the non-controlling interests are subject to tax when reported as a component of the non-controlling interests’ taxable income.
As a result of the recapitalization and the IPO that occurred in fiscal year 2014, the portion of The Habit Restaurants, LLC’s income attributable to The Habit Restaurants Inc. is now subject to U.S. federal, state and local income taxes and is taxed at the prevailing corporate tax rates. The income tax provision reflects a tax rate of 15.21% and (121.26)% for the 39 weeks ended September 24, 2019 and September 25, 2018, respectively. The effective tax rate varies significantly from the federal statutory rate due to the income attributable to the non-controlling interests which is not taxed at the entity level. The change in tax rate for the 39 weeks ended September 24, 2019 and September 25, 2018 is a result of the changes in annual taxable income and related state income taxes (and forecasts thereof which are used to calculate the tax provision during interim periods). The income tax provision would reflect an effective tax rate of 28.64% and 29.97% for the 39-week periods ended September 24, 2019 and September 25, 2018, respectively, if all of the income was taxed at Habit Restaurants, Inc. and the impact of non-recurring and discrete items and the non-controlling interests was disregarded.
Effects of the Tax Cuts and Jobs Act
Tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Act”), was enacted on December 22, 2017. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions was for tax years beginning after December 31, 2017. Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed. SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Act.
As of September 25, 2018, the Company’s accounting for the Act was complete. As noted at the fiscal year ended December 26, 2017, the Company was able to reasonably estimate certain effects related to the reduction in the U.S. corporate income tax rate to 21%, including the impact of the Company’s assessment of 100% bonus depreciation for qualified assets placed in service after September 27, 2017 and the inclusion of performance based compensation in determining the excessive compensation limitation. Therefore, the Company recorded provisional adjustments associated with these items during the fiscal year ended December 26, 2017. The Company updated its provision adjustments as related to the bonus depreciation for qualified assets and the impact related to the TRA payments during the first quarter of fiscal 2018, within the prescribed measurement period. The Company finalized the impacts of the Act in 2018 and there were no further changes to the estimates recorded in the second and third quarters of 2018 income tax provision within the prescribed measurement period of SAB 118. The Company finalized the tax returns related to tax year 2018 by its extended due date of October 15, 2019.
14
Tax Receivable Agreement
In connection with the IPO that occurred in fiscal year 2014, the Company entered into the TRA. Under the TRA, the Company generally will be required to pay to the Continuing LLC Owners 85% of the amount of cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes directly or indirectly (or is deemed to realize in certain circumstances) as a result of (i) certain tax attributes created as a result of the IPO and any sales or exchanges (as determined for U.S. federal income tax purposes) to or with the Company of their interests in The Habit Restaurants, LLC for shares of our Class A common stock or cash, including any basis adjustment relating to the assets of The Habit Restaurants, LLC and (ii) tax benefits attributable to payments made under the TRA (including imputed interest). The Habit Restaurants, Inc. generally will retain 15% of the applicable tax savings. The amount payable to the Continuing LLC Owners under the TRA is disclosed in the accompanying condensed consolidated balance sheets. In addition, the TRA provides for interest, at a rate equal to one year LIBOR, accrued from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. To the extent that the Company is unable to timely make payments under the TRA for any reason, such payments will be deferred and will accrue interest at a rate equal to one year LIBOR plus 200 basis points until paid (although a rate equal to one year LIBOR will apply if the inability to make payments under the TRA is due to limitations imposed on the Company or any of our subsidiaries by a debt agreement in effect on the date of the IPO). The Company’s ability to make payments under the TRA and to pay its tax liabilities to taxing authorities generally will depend on our receipt of cash distributions from The Habit Restaurants, LLC.
Pursuant to the LLC Agreement, the Continuing LLC Owners have the right to exchange their LLC Units, together with a corresponding number of shares of Class B common stock (which will be cancelled in connection with any such exchange) for, generally, at the option of The Habit Restaurants, Inc. (such determination to be made by the disinterested members of our board of directors), (i) shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications or (ii) cash consideration (generally calculated based on the volume-weighted average price of the Class A common stock of The Habit Restaurants, Inc., as displayed under the heading Bloomberg VWAP on the Bloomberg page designated for the Class A common stock of The Habit Restaurants, Inc. for the 15 trading days immediately prior to the delivery date of a notice of exchange). At any time that an effective registration statement is on file with the SEC with respect to the shares of Class A common stock to be issued upon an exchange, The Habit Restaurants, Inc. may not provide cash consideration upon an exchange to a Continuing LLC Owner without the Continuing LLC Owner’s prior consent. These exchanges are expected to result in increases in the tax basis of the assets of The Habit Restaurants, LLC that otherwise would not have been available. Increases in tax basis resulting from such exchanges may reduce the amount of tax that The Habit Restaurants, Inc. would otherwise be required to pay in the future. This tax basis may also decrease gains (or increase losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets.
If the Internal Revenue Service (the “IRS”) or a state or local taxing authority challenges the tax basis adjustments that give rise to payments under the TRA and the tax basis adjustments are subsequently disallowed, the recipients of payments under the agreement will not reimburse any payments the Company previously made to them. Any such disallowance would be taken into account in determining future payments under the TRA and would, therefore, reduce the amount of any such future payments. Nevertheless, if the claimed tax benefits from the tax basis adjustments are disallowed, the Company’s payments under the TRA could exceed its actual tax savings, and the Company may not be able to recoup payments under the TRA that were calculated on the assumption that the disallowed tax savings were available.
The TRA provides that (i) in the event that the Company materially breaches the TRA, (ii) if, at any time, the Company elects an early termination of the TRA, or (iii) upon certain mergers, asset sales, other forms of business combinations or other changes of control, the Company’s (or our successor’s) obligations under the TRA (with respect to all LLC Units, whether or not LLC Units have been exchanged or acquired before or after such transaction) would accelerate and become payable in a lump sum amount equal to the present value of the anticipated future tax benefits calculated based on certain assumptions, including that the Company would have sufficient taxable income to fully utilize the deductions arising from the tax deductions, tax basis and other tax attributes subject to the TRA. The Company’s payment obligations under the TRA with respect to interests in The Habit Restaurants, LLC treated as sold for U.S. federal income tax purposes to the Company in connection with the IPO are calculated based on the IPO price of our Class A common stock net of underwriting discounts.
As a result of the foregoing, (i) the Company could be required to make payments under the TRA that are greater than or less than the specified percentage of the actual tax savings the Company realizes in respect of the tax attributes subject to the agreements and (ii) the Company may be required to make an immediate lump sum payment equal to the present value of the anticipated future tax savings, which payment may be made years in advance of the actual realization of such future benefits, if any of such benefits are ever realized. In these situations, the Company’s obligations under the TRA could have a substantial negative impact on its liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that the Company will be able to finance its obligations under the TRA in a manner that does not adversely affect its working capital and growth requirements.
15
Payments under the TRA are intended to be treated as additional consideration for the applicable interests in The Habit Restaurants, LLC treated as sold or exchanged (as determined for U.S. federal income tax purposes) to or with the Company, except with respect to certain actual or imputed interest amounts payable under the TRA.
As of September 24, 2019, the Company recorded a liability of $83.2 million, representing the payments due to the Continuing LLC Owners under the TRA. As of September 24, 2019, $0.4 million of the TRA liability is classified as a current liability.
As part of the TRA, there are adjustments associated with revisions to the expected TRA liability as a result of updated estimated future tax savings at the federal, state and local level. The amounts of these adjustments were $0.4 million for the 39-week period ended September 24, 2019, and $1.5 million for the 39-week period ended September 25, 2018 and these adjustments are reflected in the condensed consolidated statements of operations.
In addition, from time to time we may have adjustments to deferred tax assets as a result of changes in the tax basis associated with the TRA. The amounts of these changes are reflected in the consolidated statements of stockholders’ equity. The amount recorded in equity for the 39 weeks ended September 24, 2019 and September 25, 2018 due to changes of the deferred tax assets associated with the tax basis increase was $36,000 and $92,000, respectively.
Payments are due under the TRA for a given year if the Company has a net realized tax benefit. The realized tax benefit is intended to measure the decrease or increase in the actual tax liability of the Company attributable to the tax benefits defined in the TRA (i.e., basis adjustments and imputed interest), using a “with and without” methodology. Payments are anticipated to be made under the TRA for approximately 20-25 years, with a payment due after the filing of the Company’s federal income tax return, which is due on or about October 15th of any given year (including extensions). The payments are to be made in accordance with the terms of the TRA. The Company shall pay or cause to be paid within five business days after the obligations became due (i.e., payable within 95-125 calendar days after the due date of the federal income tax return (taking into account valid extensions) dependent upon the type of holder of the TRA). The timing of the payments are subject to certain contingencies including whether the Company will have sufficient taxable income to utilize all of the tax benefits defined in the TRA.
Obligations pursuant to the TRA are obligations of the Company. They do not impact the non-controlling interest. These obligations are not income tax obligations and have no impact on the tax provision or the allocation of taxes.
Note 7—Long-Term Debt
On August 2, 2017, The Habit Restaurants, LLC executed a $20 million credit facility with Bank of the West (the “Credit Facility”), with a maturity date of August 2, 2019. In October 2018 and September 2019, the Company extended the maturity date on the Credit Facility to August 1, 2020 and August 1, 2021, respectively. All borrowings under the Credit Facility will bear interest at a variable rate based upon LIBOR plus the applicable margin for LIBOR loans (as defined in the Credit Facility). The Credit Facility has no unused commitment fees. As part of the initial execution of the Credit Facility, the Company incurred $0.3 million in deferred financing fees that will be amortized over the length of the agreement. That amortization expense is included in interest expense, net on the accompanying condensed consolidated statements of operations. As of September 24, 2019, The Habit Restaurants, LLC had no borrowings outstanding against the Credit Facility. Interest related to the Credit Facility and principal payments, if applicable, are due monthly.
The Credit Facility is secured by all the assets of The Habit Restaurants, LLC, and the Company is required to comply with certain financial covenants therein. The Credit Facility contains customary representations, warranties, negative and affirmative covenants, including a maximum lease adjusted leverage ratio of 4.00 to 1.00 and a minimum EBITDA of $21.4 million for the twelve month period then ended at the end of each fiscal quarter. As of September 24, 2019, the Company and The Habit Restaurants, LLC were in compliance with all covenants.
On January 4, 2018 the Company executed an irrevocable standby letter of credit for $1.5 million related to the Company’s self-insured workers’ compensation coverage. In conjunction with the renewal of the Company’s self-insured workers’ compensation coverage in October 2018, the Company increased its irrevocable standby letter of credit to $3.25 million. The increased standby letter of credit expires on January 5, 2020. In conjunction with the renewal of the Company’s self-insured workers’ compensation coverage in October 2019, the Company executed an additional standby letter of credit for $1.4 million which expires on October 31, 2020. These letters of credit are a reduction of the borrowing capacity of our Credit Facility.
Note 8—Leases
The Company leases its restaurant facilities and corporate offices under non-cancelable operating leases. Our restaurant leases generally have terms ranging from 10 to 20 years with renewal options ranging from five to 20 years. The Company currently has no
16
finance leases. The Company determines if an agreement is a lease at inception. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on our condensed consolidated balance sheet at commencement date, which is the date the Company gains access to the property. The lease liability is determined based on the present value of the minimum rental payments. Since most of the Company’s leases do not provide an implicit rate of return, the Company uses its incremental borrowing rate in effect at the time of lease commencement. The ROU asset is determined based on the lease liability adjusted for lease incentives received. Lease expense is recognized on a straight-line basis over the lease term. The restaurants’ leases generally include land and buildings and require various expenses incidental to the use of the property, such as common area maintenance, property taxes and insurance. These costs are separate from the minimum rent payment and are not considered in the determination of the lease liability and ROU asset. The Company has not noted any material instances in its leases where these costs were combined with the minimum rent payment, and has therefore elected the policy to not separate lease from non-lease components if they are combined with the minimum rent payment. Certain leases require contingent rent above the minimum lease payments based on a percentage of sales, these contingent amounts are excluded in determining the lease liability and right-of-use asset and are accounted for as period expenses. The option periods are not included in the determination of the lease liability and right-of-use asset as the Company is not reasonably certain if it will extend at the time of lease commencement.
The following table represents the lease costs for the 13 and 39 weeks ended September 24, 2019 (amounts in thousands):
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
September 24,
|
|
|
September 24,
|
|
|
|
2019
|
|
|
2019
|
|
Operating lease cost
|
|
|
7,064
|
|
|
|
20,443
|
|
Contingent rent
|
|
|
249
|
|
|
|
741
|
|
Total lease cost
|
|
$
|
7,313
|
|
|
$
|
21,184
|
|
Supplemental cash flow information related to leases (amounts in thousands):
|
|
39 Weeks Ended
|
|
|
|
September 24,
|
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
21,209
|
|
Supplemental balance sheet information related to leases:
|
|
September 24,
|
|
|
2019
|
Weighted Average Remaining Lease Term
|
|
|
Operating leases
|
|
8.6 years
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
|
4.7%
|
Maturities of lease liabilities (amounts in thousands):
Fiscal year end
|
|
Operating Leases
|
|
2019
|
|
$
|
7,563
|
|
2020
|
|
|
30,190
|
|
2021
|
|
|
29,878
|
|
2022
|
|
|
28,477
|
|
2023
|
|
|
26,925
|
|
2024 and thereafter
|
|
|
105,598
|
|
Total lease payments
|
|
|
228,631
|
|
Less: imputed interest
|
|
|
(42,494
|
)
|
Lease liabilities as of September 24, 2019
|
|
$
|
186,137
|
|
As of September 24, 2019, we have additional leases that have not yet commenced of $39.2 million that are expected to commence during the remainder of fiscal year 2019 and fiscal year 2020 with lease terms ranging from 10 to 20 years.
17
Note 9—Commitments and Contingencies
Future commitments—The Company’s growth strategy includes new restaurant openings during fiscal year 2019 and beyond. In connection with the build out of the restaurants, the Company may be obligated for a portion of the start-up and/or construction costs. As of September 24, 2019, the Company had approximately $2.4 million in such commitments related to new restaurants.
Litigation—The Company is involved in various claims and legal actions that arise in the ordinary course of business. Management does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s consolidated financial position, results of operations, liquidity and capital resources. A significant increase in the number of litigated claims or an increase in amounts owing under successfully litigated claims could materially adversely affect the Company’s business, financial condition, results of operations, and cash flows.
Note 10—Management Incentive Plans
Stock-based compensation is included in general and administrative expenses on the accompanying condensed consolidated statements of operations. The stock-based compensation expense related to the Amended and Restated 2014 Omnibus Incentive Plan and to units issued under The Habit Restaurants, LLC Management Incentive Plan is summarized in the table below for the periods indicated (in thousands):
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
September 24,
|
|
|
September 25,
|
|
|
September 24,
|
|
|
September 25,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock-based compensation expense
|
|
$
|
795
|
|
|
$
|
687
|
|
|
$
|
2,440
|
|
|
$
|
2,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Omnibus Incentive Plan
Prior to the completion of the Company’s IPO, the board of directors adopted The Habit Restaurants, Inc. 2014 Omnibus Incentive Plan (the “2014 Omnibus Incentive Plan”) and, subsequent to the IPO, all equity-based awards have been granted under the 2014 Omnibus Incentive Plan. The 2014 Omnibus Incentive Plan also permits grants of cash bonuses. This plan authorized 2,525,275 total options and restricted stock units. No awards may be granted under the plan after November 19, 2024. In April 2019, our board of directors adopted the Amended and Restated 2014 Omnibus Incentive Plan, which required and received stockholder approval at our 2019 Annual Meeting of Stockholders. This amendment increased the authorized options and restricted stock units by 1,000,000 shares. This amendment also amended the 2014 Omnibus Incentive Plan to provide for an aggregate annual limit on compensation payable to each non-employee director (whether or not pursuant to the Amended and Restated 2014 Omnibus Incentive Plan), require a minimum vesting period of at least one year for 95% of awards, expressly prohibit automatic “reload” grants of additional awards upon exercise of a stock option or SAR, expand our authority to claw back awards granted under the Amended and Restated 2014 Omnibus Incentive Plan and proceeds on the exercise or disposition of such awards, expressly prohibit “gross-ups” or other payments in respect of any excise taxes assessed on any awards granted under the Amended and Restated 2014 Omnibus Incentive Plan and expressly prohibit the payment of dividends and dividend equivalents on unvested awards.
The purpose of the Amended and Restated 2014 Omnibus Incentive Plan is to advance the Company’s interests by providing for the grant to eligible individuals of equity-based and other incentive awards.
The Amended and Restated 2014 Omnibus Incentive Plan is administered by our board of directors or a committee of our board of directors (the “Administrator”). The Administrator has the authority to, among other things, interpret the Amended and Restated 2014 Omnibus Incentive Plan, determine eligibility for, grant and determine the terms of awards under the Amended and Restated 2014 Omnibus Incentive Plan and to do all things necessary to carry out the purposes of the Amended and Restated 2014 Omnibus Incentive Plan. The Administrator’s determinations under the Amended and Restated 2014 Omnibus Incentive Plan are conclusive and binding. The Administrator will determine the time or times at which an award will vest or become exercisable. The maximum term of an award will not exceed ten years from the date of grant.
18
Non-Qualified Stock Options
The following table sets forth information about the fair value of the non-qualified stock option grants on the date of grant using the Black-Scholes option-pricing model and the weighted average assumptions used for such a grant for the 39 weeks ended September 24, 2019:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding and expected to vest at December 25, 2018
|
|
|
1,315,834
|
|
|
$
|
15.71
|
|
|
8.2
|
|
|
$
|
—
|
|
Granted
|
|
|
401,000
|
|
|
$
|
10.12
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(56,105
|
)
|
|
$
|
13.91
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest at September 24, 2019
|
|
|
1,660,729
|
|
|
$
|
14.60
|
|
|
|
8.0
|
|
|
$
|
—
|
|
Exercisable at September 24, 2019
|
|
|
523,572
|
|
|
$
|
19.10
|
|
|
|
6.9
|
|
|
$
|
—
|
|
The aggregate intrinsic value in the table above is obtained by subtracting the weighted average exercise price from the fair value of the underlying common stock as of September 24, 2019 and multiplying this result by the related number of options outstanding and expected to vest at September 24, 2019. The fair value of the common stock as of September 24, 2019 used in the above calculation was $8.80 per share, the closing price of the Company’s Class A common stock on September 24, 2019, the last trading day of the third quarter.
There was approximately $3.2 million of total unrecognized compensation costs related to options granted under the Plan as of September 24, 2019. That cost is expected to be recognized over a weighted average period of 3.1 years.
Restricted Stock Units
A summary of stock-based compensation activity related to restricted stock units for the 39 weeks ended September 24, 2019 are as follows:
|
|
Units
|
|
|
Weighted
Average
Fair
Value
|
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding and expected to vest at December 25, 2018
|
|
|
339,233
|
|
|
$
|
14.04
|
|
|
|
1.9
|
|
|
$
|
3,422,861
|
|
Granted
|
|
|
175,351
|
|
|
$
|
10.22
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(19,007
|
)
|
|
$
|
12.47
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(77,617
|
)
|
|
$
|
15.84
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest at September 24, 2019
|
|
|
417,960
|
|
|
$
|
12.17
|
|
|
|
1.8
|
|
|
$
|
3,678,048
|
|
During the 39 weeks ended September 24, 2019, the Company made payments of $0.2 million related to tax withholding obligations for the vesting of restricted stock units in exchange for 15,283 shares withheld. There were no payments made during the 39 weeks ended September 25, 2018. The aggregate intrinsic value in the table above is obtained by multiplying the related number of units outstanding and expected to vest at September 24, 2019 by the fair value of the common stock as of September 24, 2019. The fair value of the common stock as of September 24, 2019 used in the above calculation was $8.80 per share, the closing price of the Company’s common stock on September 24, 2019, the last trading day of the third quarter.
The fair value of the restricted stock units is the quoted market value of our common stock on the date of grant. As of September 24, 2019, total unrecognized stock-based compensation expense related to non-vested restricted stock units was approximately $3.7 million. That cost is expected to be recognized over a weighted average period of 3.1 years.
19
The Habit Restaurants, LLC Management Incentive Plan
In connection with the IPO, the Company converted all of the outstanding vested and unvested Class C units into an equivalent amount of vested and unvested LLC Units of The Habit Restaurants, LLC, respectively. As of September 24, 2019, there was no unrecognized stock-based compensation expense related to these units.
20