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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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

For the quarterly period ended September 26, 2017

OR

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

Commission file number: 001-36749

THE HABIT RESTAURANTS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

36-4791171

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

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

(Address of Principal Executive Offices and Zip Code)

(949) 851-8881

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

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

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

As of October 30, 2017, there were 20,351,056 shares of the Registrant’s Class A common stock, par value $0.01 per share, outstanding and 5,673,968 shares of the Registrant’s Class B common stock, par value $0.01 per share, outstanding.

THE HABIT RESTAURANTS, INC.

TABLE OF CONTENTS

Page

PART I – FINANCIAL INFORMATION

3

ITEM 1.

Financial Statements

3

Condensed Consolidated Balance Sheets (Unaudited)

3

Condensed Consolidated Statements of Income (Unaudited)

4

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

5

Condensed Consolidated Statements of Cash Flows (Unaudited)

6

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

ITEM 2.

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

17

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

30

ITEM 4.

Controls and Procedures

30

PART II – OTHER INFORMATION

31

ITEM 1.

Legal Proceedings

31

ITEM 1A.

Risk Factors

31

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

ITEM 3.

Defaults Upon Senior Securities

31

ITEM 4.

Mine Safety Disclosures

31

ITEM 5.

Other Information

31

ITEM 6.

Exhibits

32

Signatures

33

2

PART I-FINANCIAL INFORMATION

ITEM 1. Financial Statements

THE HABIT RESTAURANTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

September 26,

2017

December 27,

(Unaudited)

2016

(in thousands, except share data)

ASSETS

Cash and cash equivalents

$

42,089

$

44,192

Accounts receivable

6,709

5,145

Inventory

1,558

1,519

Prepaid expenses and other current assets

1,619

1,672

Total current assets

51,975

52,528

Property and equipment, net

129,105

102,857

Tradenames

12,500

12,500

Goodwill

9,967

9,967

Deposits and other assets, net

3,349

2,907

Deferred tax assets

149,794

149,607

Total long-term assets

304,715

277,838

Total assets

$

356,690

$

330,366

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities

Accounts payable

$

11,816

$

9,734

Employee-related accruals

9,590

6,359

Accrued expenses

9,032

5,608

Income tax payable

167

167

Amounts payable to related parties under Tax Receivable Agreement,

current portion

2,026

2,014

Sales taxes payable

2,636

2,314

Deferred rent, current portion

1,075

769

Deferred franchise income, current portion

60

170

Total current liabilities

36,402

27,135

Deferred rent, net of current portion

17,390

14,465

Deemed landlord financing

11,917

6,036

Deferred franchise income, net of current portion

1,591

1,250

Amounts payable to related parties under Tax Receivable Agreement,

net of current portion

139,550

137,593

Total liabilities

206,850

186,479

Commitments and contingencies (Note 8)

Stockholders’ equity

Class A common stock, par value $0.01 per share; 70,000,000 shares authorized and 20,340,356 shares issued and outstanding at September 26, 2017 and 20,178,937 shares issued and outstanding at December 27, 2016.

203

202

Class B common stock, par value $0.01 per share; 70,000,000 shares authorized and 5,683,968 shares issued and outstanding at September 26, 2017 and 5,821,122 shares issued and outstanding at December 27, 2016.

57

58

Additional paid-in capital

112,559

110,056

Retained earnings

10,750

7,397

The Habit Restaurants, Inc. stockholders’ equity

123,569

117,713

Non-controlling interests

26,271

26,174

Total stockholders’ equity

149,840

143,887

Total liabilities and stockholders’ equity

$

356,690

$

330,366

See notes to condensed consolidated financial statements (unaudited).

3

THE HABIT RESTAURANTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

13 Weeks Ended

39 Weeks Ended

September 26,

September 27,

September 26,

September 27,

2017

2016

2017

2016

(amounts in thousands except share and per share data)

Revenue

$

84,639

$

71,885

$

246,607

$

209,958

Operating expenses

Restaurant operating costs (excluding depreciation and

amortization)

Food and paper cost

26,861

21,788

75,955

63,040

Labor and related expenses

28,532

23,727

81,566

68,040

Occupancy and other operating expenses

14,781

11,994

41,469

33,822

General and administrative expenses

8,281

7,429

24,369

21,555

Exchange related expenses

155

61

390

421

Depreciation and amortization expense

4,777

3,788

13,492

10,779

Pre-opening costs

813

569

1,943

1,361

Loss on disposal of assets

19

35

43

110

Total operating expenses

84,219

69,391

239,227

199,128

Income from operations

420

2,494

7,380

10,830

Other expenses

Tax Receivable Agreement liability adjustment

688

688

Interest expense, net

185

179

381

456

(Loss) income before income taxes

(453

)

2,315

6,311

10,374

(Benefit) provision for income taxes

(906

)

869

1,397

3,038

Net income

$

453

$

1,446

$

4,914

$

7,336

Less: net income attributable to non-controlling interests

(56

)

(677

)

(1,561

)

(3,996

)

Net income attributable to The Habit Restaurants, Inc.

$

397

$

769

$

3,353

$

3,340

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

Class A common stock:

Basic

$

0.02

$

0.04

$

0.17

$

0.20

Diluted

$

0.02

$

0.04

$

0.17

$

0.20

Weighted average shares of Class A common stock outstanding:

Basic

20,329,919

18,349,845

20,259,507

16,352,481

Diluted

20,386,655

18,354,218

20,311,264

16,357,724

See notes to condensed consolidated financial statements (unaudited).

4

THE HABIT RESTAURANTS, INC.

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

Common Stock A

Common Stock B

(amounts in thousands except share data)

Shares

Amounts

Shares

Amounts

Additional Paid-

in Capital

Retained Earnings

Non-controlling

Interests

Total

Stockholders’ equity at

December 27, 2016

20,178,937

$

202

5,821,122

$

58

$

110,056

$

7,397

$

26,174

$

143,887

Net income

3,353

1,561

4,914

Deferred tax assets

304

304

Tax distributions

(921

)

(921

)

Other distributions

(190

)

(190

)

Exchanges

131,820

1

(131,820

)

(1

)

Restricted stock units vested

29,599

Non-controlling interests

adjustment

869

(869

)

Forfeiture of Class B

common stock

(5,334

)

Stock-based

compensation

1,330

516

1,846

Stockholders’ equity at

September 26, 2017

20,340,356

$

203

5,683,968

$

57

$

112,559

$

10,750

$

26,271

$

149,840

See notes to condensed consolidated financial statements (unaudited).

5

THE HABIT RESTAURANTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

39 Weeks Ended

September 26,

September 27,

2017

2016

(amounts in thousands)

Cash flows from operating activities:

Net income

$

4,914

$

7,336

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

Depreciation and amortization expense

13,492

10,779

Amortization of financing fees

20

31

Stock-based compensation

1,846

1,366

Tax Receivable Agreement liability adjustment

688

Loss on disposal of assets

43

110

Deferred income taxes

1,397

3,038

Deferred rent

362

(16

)

Changes in assets and liabilities:

Accounts receivable

1,305

2,012

Inventory

(38

)

(115

)

Prepaid expenses

58

(117

)

Deposits and other assets

(199

)

(443

)

Accounts payable

1,444

77

Employee-related accruals

3,230

2,916

Accrued expenses

1,090

1,012

Income taxes payable

(6

)

(11

)

Sales taxes payable

323

229

Net cash provided by operating activities

29,969

28,204

Cash flows from investing activities:

Purchase of property and equipment

(30,648

)

(23,061

)

Proceeds on sale of assets

12

Net cash used in investing activities

(30,636

)

(23,061

)

Cash flows from financing activities:

Tax distributions to LLC members

(921

)

(1,513

)

Other distributions to LLC members

(190

)

(197

)

Payments on deemed landlord financing

(63

)

(50

)

Financing fees on long-term debt

(262

)

Net cash used in financing activities

(1,436

)

(1,760

)

Net change in cash and cash equivalents

$

(2,103

)

$

3,383

Cash and cash equivalents, beginning of period

44,192

46,991

Cash and cash equivalents, end of period

$

42,089

$

50,374

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for interest

$

637

$

461

Cash paid for income taxes

$

6

$

11

NON-CASH FINANCING

Deemed landlord financing

$

5,946

$

3,663

Unpaid purchase of property and equipment

$

5,104

$

2,517

See notes to condensed consolidated financial statements (unaudited).

6

THE HABIT RESTAURANTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Nature of Operations and Basis of Presentation

The condensed consolidated financial statements of The Habit Restaurants, Inc. include the accounts of The Habit Restaurants, LLC and its subsidiaries (collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The Habit Restaurants, Inc. was formed as a Delaware corporation on July 24, 2014, as a holding company for the purposes of facilitating an initial public offering (the “IPO”) of shares of Class A common stock. The Company acquired, by merger, entities that were members of The Habit Restaurants, LLC. The Company accounted for the merger as a non-substantive transaction in a manner similar to a transaction between entities under common control pursuant to Accounting Standards Codification (“ASC”) ASC 805-50 Transactions between Entities under Common Control, and as such, recognized the assets and liabilities transferred at their carrying amounts on the date of transfer. The Habit Restaurants, Inc. is a holding company with no direct operations that holds as its principal assets an equity interest in The Habit Restaurants, LLC and shares of subsidiaries, each of which in turn holds as its principal asset an equity interest in The Habit Restaurants, LLC, and relies on The Habit Restaurants, LLC to provide the Company with funds necessary to meet any financial obligations. As such, the Company has no independent means of generating revenue. In February 2013, HBG Franchise, LLC (“Franchise”), a wholly-owned subsidiary of The Habit Restaurants, LLC and a Delaware limited liability company, was formed to begin franchising the Company’s restaurant concept.

During the 39-week period ended September 26, 2017, 131,820 common units in The Habit Restaurants, LLC (“LLC Units”) were exchanged by the existing owners of The Habit Restaurants, LLC (the “Continuing LLC Owners”), and a corresponding number of shares of Class B common stock were cancelled in connection with such exchanges, for shares of Class A common stock. In addition, 29,599 restricted stock units vested during the 39-week period ended September 26, 2017 and 5,334 LLC Units were forfeited, and a corresponding number of shares of Class B common stock were then cancelled in connection with the forfeitures, during the 39-week period ended September 26, 2017. As a result of these exchanges, vesting of restricted stock units and forfeitures, as of September 26, 2017, The Habit Restaurants, Inc. directly or indirectly held 20,340,356 LLC Units, representing a 78.2% 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 recapitalization and the Company’s IPO, The Habit Restaurants, LLC limited liability company agreement (the “LLC Agreement”) was amended and restated to, among other things, create a single new class of non-voting LLC Units. The existing owners of The Habit Restaurants, LLC continue to hold LLC Units, and such existing owners (other than The Habit Restaurants, Inc. and its wholly-owned subsidiaries) were issued a number of shares of our Class B common stock equal to the number of LLC Units held by them. These LLC Units continue to be subject to any vesting, forfeiture, repurchase or similar provisions pursuant to the Pre-IPO agreement. Each share of Class B common stock provides its holder with no economic rights but entitles the holder to one vote on matters presented to The Habit Restaurants, Inc.’s stockholders. Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law. The Class B common stock is not publicly traded and does not entitle its holders to receive dividends or distributions upon a liquidation, dissolution or winding up of The Habit Restaurants, Inc.

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

The Habit Restaurants, LLC is treated by its members as a partnership for federal and applicable state income tax purposes and, as such, generally is not expected to be subject to income tax (except that it may be required to withhold and remit tax as a withholding agent). Instead, taxable income is allocated to holders of LLC Units, including the Company. Accordingly, the Company incurs income taxes on its allocable share of any net taxable income of The Habit Restaurants, LLC and also incurs expenses related to its operations. Pursuant to the LLC Agreement, The Habit Restaurants, LLC is required to make tax distributions to the holders of LLC Units, except that The Habit Restaurants, LLC’s ability to make such distributions may be subject to various limitations and restrictions, including the operating results of its subsidiaries, its cash requirements and financial condition, the applicable provisions of Delaware law that may limit the amount of funds available for distribution to its members, compliance by The Habit Restaurants, LLC and its subsidiaries with restrictions, covenants and financial ratios related to existing or future indebtedness, and other agreements entered into by The Habit Restaurants, LLC or its subsidiaries with third parties. In addition to tax expenses, The Habit Restaurants, Inc. incurs expenses related to its operations, plus payments under the TRA, which the Company expects will be significant. The Company intends to cause The Habit Restaurants, LLC to make distributions or, in the case of certain expenses, payments in an amount sufficient to allow The Habit Restaurants, Inc. to pay its taxes and operating expenses, including distributions to fund any ordinary course payments due under the TRA. Under the terms of the Company’s LLC Agreement, no member shall be obligated personally for any debt, obligation, or liability of the Company.

The Company is headquartered in Irvine, California, and, as of September 26, 2017, managed and operated 180 fast casual restaurants as “The Habit Burger Grill” in California, Arizona, Utah, New Jersey, Florida, Idaho, Virginia, Maryland and Pennsylvania. The restaurant’s menu includes charbroiled hamburgers, specialty sandwiches, fresh salads, and shakes and malts.

Additionally, with the formation of Franchise, the Company began franchising its restaurant concept. Franchise’s future operations are dependent upon the success of the Company’s restaurant concept. The Company has entered into three licensing and six franchise agreements through September 26, 2017. The Company had three licensed locations and 12 franchised locations from which it generates revenues as of September 26, 2017, which operate in California, Arizona, Nevada, Washington and the United Arab Emirates.

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. It is the Company’s opinion that all adjustments considered necessary for the fair presentation of its results of operations, financial position, and cash flows for the periods presented have been included and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 27, 2016, 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 2016, which ended on December 27, 2016, was a 52-week fiscal year. Fiscal year 2017, which will end on December 26, 2017, is also a 52-week fiscal year.

Note 2—Summary of Significant Accounting Policies

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

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 26, 2017 and December 27, 2016, the Company maintained approximately $15 million and $12 million, respectively, of its day-to-day operating cash balances with a major financial institution, of which $0.1 million and $0.2 million, respectively, represents restricted cash in an impound account for franchisees in the state of Washington. The remaining $27 million and $32 million at September 26, 2017 and December 27, 2016, respectively, was invested with a major financial institution and consisted entirely of U.S. Treasury instruments with a maturity of three months or less at the date of purchase. At September 26, 2017 and December 27, 2016 and at various times during the periods then ended, cash and cash equivalents balances were in excess of Federal Depository Insurance Corporation insured limits. While the Company monitors the cash balances in its operating accounts on a daily basis and adjusts the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating accounts.

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

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

Non-controlling Interests—The non-controlling interests on the condensed consolidated statements of income 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 26, 2017 the non-controlling interest was 21.8%.

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 26, 2017 and September 27, 2016, respectively:

13 Weeks Ended

39 Weeks Ended

September 26,

September 27,

September 26,

September 27,

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

2017

2016

2017

2016

Numerator:

Net income attributable to controlling and

non-controlling interests

$

453

$

1,446

$

4,914

$

7,336

Less: net income attributable to non-controlling

interests

$

(56

)

$

(677

)

$

(1,561

)

$

(3,996

)

Net income attributable to The Habit Restaurants, Inc.

$

397

$

769

$

3,353

$

3,340

Denominator:

Weighted average shares of Class A common stock

outstanding

Basic

20,329,919

18,349,845

20,259,507

16,352,481

Diluted

20,386,655

18,354,218

20,311,264

16,357,724

Net income attributable to The Habit Restaurants, Inc.

per share Class A common stock

Basic

$

0.02

$

0.04

$

0.17

$

0.20

Diluted

$

0.02

$

0.04

$

0.17

$

0.20

Below is a reconciliation of basic and diluted

share counts

Basic

20,329,919

18,349,845

20,259,507

16,352,481

Dilutive effect of stock options and restricted stock units

56,736

4,373

51,757

5,243

Diluted

20,386,655

18,354,218

20,311,264

16,357,724

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 5,683,968 LLC Units on the diluted EPS had no impact and were therefore excluded from the calculation.

As of September 26, 2017, there were 2,525,275 options authorized under our 2014 Omnibus Incentive Plan of which 1,275,013 and 661,111 had been granted as of September 26, 2017 and September 27, 2016, respectively. The number of dilutive shares of Class A common stock related to these options was calculated using the treasury stock method and 1,409 and 2,761 shares and 42,927 and 1,209 shares have been excluded from the diluted EPS for the 13 and 39 weeks ended September 26, 2017 and September 27, 2016, respectively, because they were anti-dilutive.

Recent Accounting Pronouncements—In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, Compensation-Stock Compensation (Topic 718) – Scope of Modification Accounting. This update applies to entities that change the terms or conditions of a share-based payment award. This update will provide clarity and reduce (i) the diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. This update is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. This guidance should be applied prospectively to an award modified on or after that adoption date. The Company has evaluated this guidance and determined there is no impact on its consolidated financial statements.

In February 2016, the FASB issued 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 lease asset for all leases, including operating leases, with a 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. This update will be applied 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 anticipates taking advantage of the practical expedient options. The Company’s operating lease obligations as of September 26, 2017 were approximately $233.4 million. The discounted minimum remaining operating lease obligations will be the starting point for determining the right-of-use asset and lease liability. The Company expects that adoption of the new guidance will have a material impact on its consolidated balance sheets due to recognition of the right-of-use asset and lease liability related to current operating leases. The Company is using their current lease software, which has been enhanced to account for ASC 842, and is continuing the process of validating occupancy information in preparation for retrospective reporting, disclosure and audit for this standard update on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This update is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. Accordingly, the Company will adopt this ASU on December 27, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company has determined that the standard will not impact recognition of revenue from company-operated restaurants or royalty revenue from franchisees and licensees, but will have an impact on the recognition of initial franchise and license fees. The Company has evaluated this standard and has concluded the adoption of this standard on recognition of revenue from franchise and license agreements as of September 26, 2017 will have an estimated cumulative impact of between $0.2 and $0.5 million on its consolidated financial statements and has decided to use the full retrospective method upon adoption.

Recently Adopted Accounting Pronouncements— In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. Under the new guidance, the recognition of an impairment charge is calculated based on the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance should be applied on a prospective basis, and is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted this standard in the first quarter of fiscal year 2017 and there was no impact on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230). This update provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2017. Early adoption is permitted. The update will be applied on a retrospective basis. The Company adopted this standard in the first quarter of fiscal year 2017 and there was no classification impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09 Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2016. The Company adopted this guidance in the first quarter of fiscal year 2017 and it did not have a material effect on the Company’s consolidated financial statements.

10

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 and the non-controlling interests on the condensed consolidated balance sheet were adjusted to reflect the non-controlling interests portion as of September 26, 2017, which was 21.8%. Net income attributable to non-controlling interests is calculated based on the non-controlling interests ownership percentage in effect at that time. The table below represents the weighted average non-controlling interests for the periods presented (dollar amounts in thousands):

13 Weeks Ended

39 Weeks Ended

September 26,

September 27,

September 26,

September 27,

2017

2016

2017

2016

Income before income taxes and Tax Receivable Agreement liability adjustment(1)

$

255

$

2,315

$

7,019

$

10,374

Weighted average non-controlling interests

ownership percentage

22.0

%

29.2

%

22.2

%

38.5

%

Net income attributable to non-controlling

interests

$

56

$

677

$

1,561

$

3,996

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 $27 million and $32 million at September 26, 2017 and December 27, 2016, respectively, and the Company classified such investments as Level 1. These investments consist entirely of U.S. Treasury instruments with a maturity of three months or less at the date of purchase and the interest income received from these instruments is included in interest expense, net in the condensed consolidated statements of income. These amounts are included in cash and cash equivalents in the accompanying condensed consolidated balance sheets.

11

Note 5—Property and Equipment, net

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

September 26,

December 27,

2017

2016

Leasehold improvements

$

86,382

$

73,112

Equipment

46,668

39,132

Furniture and fixtures

23,198

21,056

Buildings under deemed landlord financing

12,167

6,221

Smallwares

1,744

1,483

Vehicles

1,927

1,669

Construction in progress

18,553

8,863

190,639

151,536

Less: Accumulated depreciation and amortization

(61,534

)

(48,679

)

$

129,105

$

102,857

Depreciation expense was approximately $4,777,000 and $3,788,000 and $13,492,000 and $10,779,000 for the 13 and 39 weeks ended September 26, 2017 and September 27, 2016, 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 23 buildings under deemed landlord financing as of September 26, 2017 and the accounting owner of a total of 14 buildings under deemed landlord financing as of December 27, 2016, and they are included in the Company’s property and equipment, respectively. Included in the buildings under deemed landlord financing is the estimated construction costs of the landlord for the shell building.

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 income for the 39 weeks ended September 26, 2017 and September 27, 2016 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 22.07% and 29.24% for the 39 weeks ended September 26, 2017 and September 27, 2016, 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 26, 2017 and September 27, 2016 is a result of the changes in annual taxable income and related state income taxes (and forecast thereof which are used to calculate the tax provision during interim periods). The income tax provision would reflect an effective tax rate of 42.0% and 42.0% for the 39 week periods ended September 26, 2017 and September 27, 2016, respectively, if all of the income was taxed at Habit Restaurants, Inc. and the impact of discrete items and the non-controlling interests was disregarded.

Tax Receivable Agreement

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

Pursuant to the LLC Agreement, the Continuing LLC Owners have the right to exchange their LLC Units, together with a corresponding number of shares of Class B common stock (which will be cancelled in connection with any such exchange) for, generally, at the option of The Habit Restaurants, Inc. (such determination to be made by the disinterested members of our board of directors), (i) shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications or (ii) cash consideration (generally calculated based on the volume-weighted average price of the Class A common stock of The Habit Restaurants, Inc., as displayed under the heading Bloomberg VWAP on the Bloomberg page designated for the Class A common stock of The Habit Restaurants, Inc. for the 15 trading days immediately prior to the delivery date of a notice of exchange). At any time that an effective registration statement is on file with the SEC with respect to the shares of Class A common stock to be issued upon an exchange, The Habit Restaurants, Inc. may not provide cash consideration upon an exchange to a Continuing LLC Owner without the Continuing LLC Owner’s prior consent. These exchanges are expected to result in increases in the tax basis of the assets of The Habit Restaurants, LLC that otherwise would not have been available. Increases in tax basis resulting from such exchanges may reduce the amount of tax that The Habit Restaurants, Inc. would otherwise be required to pay in the future. This tax basis may also decrease gains (or increase losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets.

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

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

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

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 26, 2017, the Company recorded a liability of $141.6 million, representing the payments due to the Continuing LLC Owners under the TRA. The increase in the TRA liability during the 39 weeks ended September 26, 2017 is a result of the exchanges of LLC Units for shares of Class A common stock by the Continuing LLC Owners during the period.

As part of the TRA, there are costs associated with adjustments 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 $0.7 million for the third quarter of 2017 and are reflected in the condensed consolidated statements of income. There was no TRA adjustment in the prior year period.

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 26, 2017 due to changes of the deferred tax assets associated with the tax basis increase was $0.3 million.

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

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

Note 7—Long-Term Debt

On August 2, 2017, The Habit Restaurants, LLC executed a $20 million credit facility with Bank of the West (the “Credit Facility”) that matures on August 2, 2019. All borrowings under the Credit Facility will bear interest at a variable rate based upon LIBOR plus the applicable margin for LIBOR loans (as defined in the Credit Facility). The Credit Facility has no unused commitment fees. The Company incurred $0.3 million in deferred financing fees related to the Credit Facility that will be amortized over the length of the agreement. That amortization expense is included in interest expense, net on the accompanying condensed consolidated statements of income. As of September 26, 2017, The Habit Restaurants, LLC had no borrowings outstanding against the Credit Facility.

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 26, 2017, the Company and The Habit Restaurants, LLC were in compliance with all covenants.

Note 8—Commitments and Contingencies

Future commitments—The Company’s growth strategy includes new restaurant openings during fiscal year 2017 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 26, 2017, the Company had approximately $12.8 million in such commitments related to new restaurants.

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

Note 9—Management Incentive Plans

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

13 Weeks Ended

39 Weeks Ended

September 26,

September 27,

September 26,

September 27,

2017

2016

2017

2016

Stock-based compensation expense

$

675

$

499

$

1,846

$

1,366

2014 Omnibus Incentive Plan

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

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

The 2014 Omnibus Incentive Plan is administered by our board of directors or a committee of our board of directors (the “Administrator”). The Administrator has the authority to, among other things, interpret the 2014 Omnibus Incentive Plan, determine eligibility for, grant and determine the terms of awards under the 2014 Omnibus Incentive Plan, and to do all things necessary to carry out the purposes of the 2014 Omnibus Incentive Plan. The Administrator’s determinations under the 2014 Omnibus Incentive Plan are conclusive and binding. The Administrator will determine the time or times at which an award will vest or become exercisable. The maximum term of an award will not exceed ten years from the date of grant.

Non-Qualified Stock Options

The following table sets forth information about the fair value of the non-qualified stock option grants on the date of grant using the Black-Scholes option-pricing model and the weighted average assumptions used for such a grant for the 39 weeks ended September 26, 2017:

Options

Weighted

Average

Exercise

Price

Weighted

Average

Remaining

Contractual

Term

(Years)

Aggregate

Intrinsic

Value

Outstanding and expected to vest at December 27, 2016

491,440

$

22.69

9.1

$

Granted

469,491

$

16.27

Forfeited

(15,263

)

$

20.99

Exercised

$

Outstanding and expected to vest at September 26, 2017

945,668

$

19.53

8.8

$

Exercisable at September 26, 2017

130,454

$

24.51

8.0

$

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 26, 2017 and multiplying this result by the related number of options outstanding and expected to vest at September 26, 2017. The fair value of the common stock as of September 26, 2017 used in the above calculation was $12.30 per share, the closing price of the Company’s Class A common stock on September 26, 2017, the last trading day of the third quarter.

There was approximately $3.7 million of total unrecognized compensation costs related to options granted under the Plan as of September 26, 2017. That cost is expected to be recognized over a weighted average period of 3.7 years.

Restricted Stock Units

A summary of stock-based compensation activity related to restricted stock units for the 39 weeks ended September 26, 2017 are as follows:

Units

Weighted

Average

Fair

Value

Weighted

Average

Remaining

Contractual

Term

(Years)

Aggregate

Intrinsic

Value

Outstanding and expected to vest at December 27, 2016

145,047

$

22.38

9.0

$

2,589,089

Granted

135,411

$

15.96

Forfeited

(5,107

)

$

19.21

Vested

(29,599

)

$

23.24

Outstanding and expected to vest at September 26, 2017

245,752

$

18.80

8.9

$

3,022,750

The aggregate intrinsic value in the table above is obtained by multiplying the related number of units outstanding and expected to vest at September 26, 2017 by the fair value of the common stock as of September 26, 2017. The fair value of the common stock as of September 26, 2017 used in the above calculation was $12.30 per share, the closing price of the Company’s common stock on September 26, 2017, 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 26, 2017, total unrecognized stock-based compensation expense related to non-vested restricted stock units was approximately $3.9 million. That cost is expected to be recognized over a weighted average period of 3.8 years.

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 26, 2017 there was approximately $1.1 million of total unrecognized stock-based compensation expense related to these units. That cost is expected to be recognized over a weighted average period of 1.4 years.

The Habit Restaurants, Inc. was formed July 24, 2014 and prior to the IPO had not conducted any activities, other than (i) those incident to its formation, (ii) the merger transactions resulting in it holding interests, indirectly through its wholly-owned subsidiaries, in the Habit Restaurants, LLC (such interests collectively represented a less than 20% interest in the Habit Restaurants, LLC) and (iii) the preparation of the IPO registration statement. We conduct our business through The Habit Restaurants, LLC and its subsidiaries. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion includes certain forward-looking statements that involve risk, uncertainties and assumptions. For a discussion of important factors, including the continuing development of our business and other factors which could cause actual results to differ materially from the results referred to in the historical information and the forward-looking statements presented herein, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 27, 2016 (our “Annual Report”).

We operate on a 52- or 53-week fiscal year that ends on the last Tuesday of the calendar year. Each quarterly period has 13 weeks, except for a 53-week year when the fourth quarter has 14 weeks. Our 2016 fiscal year consisted of 52 weeks and our 2017 fiscal year will consist of 52 weeks.

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

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties such as the number of restaurants we intend to open and projected capital expenditures. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “envision,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “ongoing,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. These statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make, including, but not limited to, those discussed in "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" as filed in our Annual Report.

Overview

The Habit Burger Grill is a burger-centric, fast casual restaurant concept that specializes in preparing fresh, made-to-order char-grilled burgers and sandwiches featuring USDA choice tri-tip steak, grilled chicken and sushi-grade albacore tuna cooked over an open flame. In addition, we feature fresh made-to-order salads and an appealing selection of sides, shakes and malts. The char-grilled preparation of our fresh burgers topped with caramelized onions and fresh produce has generated tremendous consumer response resulting in our burger being named the “best tasting burger in America” in July 2014 in a comprehensive survey conducted by one of America’s leading consumer magazines. We operate in the approximately $47 billion fast casual restaurant segment, which we believe has created significant recent disruption in the restaurant industry and has historically gained market share from adjacent restaurant segments, resulting in significant growth opportunities for restaurant concepts such as The Habit.

History and Operations

The first location opened in Santa Barbara, California in 1969. Our restaurant concept has been, and continues to be built around a distinctive and diverse menu, headlined by fresh, char-grilled burgers and sandwiches made-to-order over an open flame and topped with fresh ingredients. Our Chief Executive Officer, Russell W. Bendel, joined The Habit in 2008, after KarpReilly, LLC (“KarpReilly”), a private investment firm based in Greenwich, Connecticut, acquired an equity interest in us in 2007. At the time of KarpReilly’s investment, we had 17 locations. Since then, we have grown our brand on a disciplined basis designed to capitalize on the large market opportunity available to us and, as of September 26, 2017, we had 195 locations, which includes 15 franchised/licensed locations. Our highly experienced management team has created and refined the infrastructure to create replicable restaurant-level systems, processes and training procedures that can deliver a high-quality experience that is designed to consistently exceed our customers’ expectations.

17

Growth Strategies and Outlook

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

We had 195 restaurants in 11 U.S. states and in the United Arab Emirates as of September 26, 2017, which includes 12 franchised and three licensed locations from which we generate revenue, but excludes the seven licensed locations in Santa Barbara County, California. We opened 19 company-operated restaurants and five franchised restaurants from December 27, 2016 through September 26, 2017. We expect to open a total of 31 to 33 company-operated restaurants and five to seven franchised/licensed restaurants in 2017. To increase comparable restaurant sales, we plan to continue delivering superior customer experiences, increasing customer frequency, attracting new customers and improving per customer spend. We believe we are well positioned for future growth, with a developed corporate infrastructure capable of supporting our expanding restaurant base. Additionally, we believe we have an opportunity to enhance our profitability as we benefit from increased economies of scale. However, these growth rates cannot be guaranteed.

Exchanges

During the 39 weeks ended September 26, 2017, 131,820 common units in The Habit Restaurants, LLC (“LLC Units”) were exchanged by the existing owners of The Habit Restaurants, LLC (the “Continuing LLC Owners”), and a corresponding number of shares of Class B common stock were then cancelled in connection with such exchanges, for shares of Class A common stock. In addition, 29,599 restricted stock units vested during the 39-week period ended September 26, 2017 and 5,334 LLC Units were forfeited, and a corresponding number of shares of Class B common stock were then cancelled in connection with the forfeitures, during the 39-week period ended September 26, 2017. As a result of these exchanges, vesting of restricted stock units and forfeitures, as of September 26, 2017, The Habit Restaurants, Inc. directly or indirectly held 20,340,356 LLC Units, representing a 78.2% economic interest in The Habit Restaurants, LLC, and continues to exercise exclusive control over the Habit Restaurants, LLC, as its sole managing member.

Tax Receivable Agreement (“TRA”)

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

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

Key Measures We Use to Evaluate Our Performance

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

Restaurant Revenue

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

18

Franchise/License Revenue

Franchise/license revenue consists of fees charged to, and royalty revenue collected from, franchise/license owners who enter into a franchise/license agreement with us. We currently recognize franchise/license revenue when all material obligations have been performed and conditions have been satisfied, typically when operations of a new franchise or licensed restaurant have commenced. The fees collected by the Company upon signing a franchise/license agreement are deferred until operations have commenced.

Comparable Corporate Restaurant Sales

Comparable corporate restaurant sales reflects the change in year-over-year sales for the comparable restaurant base. We include restaurants in the comparable restaurant base in the accounting period following its 18th full period of operations. Each of our periods is the applicable four or five week reporting period, except for the 12th period of a 53-week year, which contains six weeks. As of the end of fiscal years 2012, 2013, 2014, 2015 and 2016 there were 36, 51, 68, 90 and 114 company-operated restaurants, respectively, in our comparable restaurant base and as of the end of the 39 weeks ended September 26, 2017 there were 137 company-operated restaurants in the comparable restaurant base. This measure highlights performance of existing restaurants, as the impact of new restaurant openings is excluded.

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

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

The following table shows our quarterly company-operated comparable restaurant sales since 2012:

Fiscal Year 2015

Fiscal Year 2016

39 Weeks Ended

September 26, 2017

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Comparable Restaurant Sales

12.6

%

8.9

%

2.9

%

3.3

%

2.0

%

4.0

%

0.2

%

1.7

%

0.9

%

0.1

%

(0.2

)%

Comparable Restaurants

72

81

86

90

97

107

113

114

119

128

137

Restaurant Contribution

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

Restaurant Development

The schedule below reflects the number of restaurants opened during a particular reporting period. We closed one company-operated restaurant in the 39 weeks ended September 26, 2017 and we closed one company-operated restaurant in fiscal year 2016. Before we open new company-operated restaurants, we incur pre-opening costs. Pre-opening costs consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs and other related pre-opening costs. These are generally incurred over the three to five months prior to opening. Pre-opening costs also include net occupancy costs incurred between the date of possession and opening date of our restaurants. Some of our restaurants open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. Typically, our new restaurants have stabilized sales after approximately 13 to 26 weeks of operation, at which time the restaurant’s sales typically begin to grow on a consistent basis. In new markets, the length of time before average sales for new restaurants stabilize is less predictable and can be longer as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. New restaurants may not be profitable, and their sales performance may not follow historical patterns. The number and timing of restaurant openings has had, and is expected to continue to have, an impact on our results of operations. The following table shows the growth in our restaurant base for the fiscal years 2014, 2015 and 2016, respectively and for the 39 weeks ended September 26, 2017.

39 Weeks

Ended

Fiscal Year Ended

September 26,

2017

2016

2015

2014

Company-operated restaurant base

Beginning of period

162

137

109

85

Openings

19

26

28

24

Closures

(1

)

(1

)

Restaurants at end of period

180

162

137

109

Franchised/licensed restaurants(1)

Beginning of period

10

5

1

Openings

5

5

4

1

Restaurants at end of period

15

10

5

1

Total restaurants

Beginning of period

172

142

110

85

Openings

24

31

32

25

Closures

(1

)

(1

)

Restaurants at end of period

195

172

142

110

Year-over-year growth

Total restaurants

21.1

%

29.1

%

29.4

%

EBITDA and Adjusted EBITDA

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

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

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

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

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

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

13 Weeks Ended

39 Weeks Ended

September 26,

September 27,

September 26,

September 27,

Adjusted EBITDA Reconciliation

2017

2016

2017

2016

(amounts in thousands)

Net income

$

453

$

1,446

$

4,914

$

7,336

Non-GAAP adjustments:

(Benefit) provision for income taxes

(906

)

869

1,397

3,038

Interest expense, net

185

179

381

456

Depreciation and amortization

4,777

3,788

13,492

10,779

EBITDA

4,509

6,282

20,184

21,609

Stock-based compensation expense(a)

675

499

1,846

1,366

Loss on disposal of assets(b)

19

35

43

110

Pre-opening costs(c)

813

569

1,943

1,361

Tax Receivable Agreement liability adjustment(d)

688

688

Exchange related expenses(e)

155

61

390

421

Adjusted EBITDA

$

6,859

$

7,446

$

25,094

$

24,867

Critical Accounting Policies

Our discussion and analysis of operating results and financial condition are based upon our condensed consolidated financial statements. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Our critical accounting policies are those that materially affect our financial statements and involve difficult, subjective or complex judgments by management. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may be materially different from the estimates. There have been no significant changes to our critical accounting estimates as discussed in our Annual Report on From 10-K for the fiscal year ended December 27, 2016.

Income Taxes and Tax Receivable Agreement

We are subject to U.S. federal income taxes, in addition to state and local taxes, with respect to our allocable share of any net taxable income of The Habit Restaurants, LLC.

The Company accounts for uncertain tax positions in accordance with ASC 740, Income Taxes (“ASC 740”). ASC 740 prescribes a recognition threshold and measurement process for accounting for uncertain tax positions and also provides guidance on various related matters such as derecognition, interest, penalties, and required disclosures. The Company continues to maintain an uncertain tax liability of $167,000 at September 26, 2017. However, the Company continues to not recognize interest expense for uncertain tax positions for the period ended September 26, 2017 as the Company believes that the exposure would be immaterial. In the future, if an uncertain tax position arises, interest and penalties will be accrued and included on the provision for income taxes line of the Statements of Consolidated Income. The Company files tax returns in U.S. federal and state jurisdictions. Generally, the Company is subject to examination by U.S. federal (or state and local) income tax authorities for three to four years from the filing of a tax return.

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

Pursuant to the LLC Agreement, the Continuing LLC Owners 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 Securities and Exchange Commission 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. 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 exchanges monthly, effective in May 2017.

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

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

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

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

Results of Operations

Thirteen Weeks Ended September 26, 2017 Compared to Thirteen Weeks Ended September 27, 2016

The following table presents selected consolidated comparative results of operations for the 13 weeks ended September 26, 2017 compared to the 13 weeks ended September 27, 2016. Our operating results are presented as a percentage of total revenue, with the exception of restaurant operating costs, depreciation and amortization expense, pre-opening costs and loss on disposal of assets, which are presented as a percentage of restaurant revenue. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the table below may not sum to 100% due to rounding.

Consolidated Statement of Operations Data:

13 Weeks Ended

Increase /

(Decrease)

(amounts in thousands)

September 26, 2017

September 27, 2016

$

%

Revenue

Restaurant revenue

$

84,347

99.7

%

$

71,650

99.7

%

$

12,697

17.7

%

Franchise/license revenue

292

0.3

%

235

0.3

%

57

24.3

%

Total revenue

84,639

100.0

%

71,885

100.0

%

12,754

17.7

%

Operating expenses

Restaurant operating costs (excluding

depreciation and amortization)

Food and paper costs

26,861

31.8

%

21,788

30.4

%

5,073

23.3

%

Labor and related expenses

28,532

33.8

%

23,727

33.1

%

4,805

20.3

%

Occupancy and other operating expenses

14,781

17.5

%

11,994

16.7

%

2,787

23.2

%

General and administrative expenses

8,281

9.8

%

7,429

10.3

%

852

11.5

%

Exchange related expenses

155

0.2

%

61

0.1

%

94

154.1

%

Depreciation and amortization expense

4,777

5.7

%

3,788

5.3

%

989

26.1

%

Pre-opening costs

813

1.0

%

569

0.8

%

244

42.9

%

Loss on disposal of assets

19

0.0

%

35

0.0

%

(16

)

-45.7

%

Total operating expenses

84,219

99.5

%

69,391

96.5

%

14,828

21.4

%

Income from operations

420

0.5

%

2,494

3.5

%

(2,074

)

-83.2

%

Other expenses

Tax Receivable Agreement liability adjustment

688

0.8

%

0.0

%

688

*

Interest expense, net

185

0.2

%

179

0.2

%

6

3.4

%

(Loss) income before income taxes

(453

)

(0.5

)%

2,315

3.2

%

(2,768

)

-119.6

%

(Benefit) provision for income taxes

(906

)

(1.1

)%

869

1.2

%

(1,775

)

-204.3

%

Net income

$

453

0.5

%

$

1,446

2.0

%

$

(993

)

-68.7

%

*Not Calculable

Restaurant revenue. Restaurant revenue increased $12.7 million, or 17.7%, for the 13 weeks ended September 26, 2017 as compared to the 13 weeks ended September 27, 2016, primarily due to a $7.7 million increase in sales from new restaurants which were opened in the current year and a $5.2 million increase in sales from restaurants opened prior to the 2017 period that did not fall into the comparable restaurant base. The increase in revenue was also due in part to increased revenue of $0.3 million for catering trucks during the 13 weeks ended September 26, 2017 as compared to the 13 weeks ended September 27, 2016. We had eight catering trucks operating in the 13 weeks ended September 26, 2017 compared to six catering trucks operating in the 13 weeks ended September 27, 2016. Comparable restaurant sales decreased $0.1 million, or 0.2%, in the 13 weeks ended September 26, 2017 as compared to the comparable 2016 period. The comparable restaurant sales decrease was primarily due to a decrease in traffic of 1.0% partially offset by an increase in average transaction amount of 0.8% in the 13 weeks ended September 26, 2017 as compared to the comparable 2016 period. The increase was also partially offset by a decrease in sales of $0.4 million due to the closure of one restaurant in the 13 weeks ended September 26, 2017 and the closure of one restaurant in December of fiscal year 2016.

Franchise/license revenue. Franchise/license revenue increased $57,000 for the 13 weeks ended September 26, 2017 compared to the comparable 2016 period. The increase was due in part to an increase in royalty revenue of $100,000 in the current period as compared to the prior period, primarily as a result of the increased number of franchised/licensed locations. The increase was partially offset by a decrease in franchise fee revenue of $35,000 in the 13 weeks ended September 26, 2017 as compared to the prior period due to one franchise location opened in the current period as compared to two franchised locations opened in the comparable 2016 period.

Food and paper costs. Food and paper costs increased $5.1 million, or 23.3%, for 13 weeks ended September 26, 2017 as compared to the comparable 2016 period, primarily due to the increase in restaurant sales. As a percentage of revenue, food and paper costs increased to 31.8% in the 13 weeks ended September 26, 2017 from 30.4% in the prior year quarter. This increase was primarily driven by increases in chicken, produce and beef costs in the current period.

Labor and related expenses. Labor and related expenses increased $4.8 million, or 20.3%, for the 13 weeks ended September 26, 2017 as compared to the comparable 2016 period, primarily due to the increased labor costs needed to support new restaurants and higher restaurant sales. As a percentage of revenue, labor and related expenses increased to 33.8% in the third quarter of 2017 compared to 33.1% in the comparable quarter of 2016. Labor costs were higher primarily due to wage rate increases for hourly employees. On January 1, 2017, the State of California’s (where most of our restaurants are located) minimum wage was raised to $10.50 per hour. In addition, regulatory increases to minimum wages for future periods have been passed and therefore we expect to see increased labor costs to continue.

Occupancy and other operating expenses. Occupancy and other operating expenses increased $2.8 million, or 23.2%, for the 13 weeks ended September 26, 2017 as compared to the comparable period in 2016, primarily due to new restaurants. As a percentage of revenue, occupancy and other operating expenses increased to 17.5% in the third quarter of 2017 from 16.7% in the comparable quarter of 2016 primarily due to higher advertising costs, higher rent costs and higher utilities expenses in the current period as a percentage of restaurant revenue partially offset by a decrease in repairs and maintenance costs as a percentage of restaurant revenue. We expect to see higher rent costs to continue in the current fiscal year.

General and administrative expenses. General and administrative expenses increased $0.9 million, or 11.5%, for the third quarter of 2017 as compared to the prior year quarter, primarily due to costs associated with supporting an increased number of restaurants, including the increasing number of administrative employees, and field and corporate supervision. As a percentage of revenue, general and administrative expenses decreased to 9.8% for the 13 weeks ended September 26, 2017 compared to 10.3% in the comparable quarter of 2016.

Exchange related expenses. Exchange related expenses, which are costs associated with the exchange of LLC Units to Class A common stock by the Continuing LLC Owners, were $0.2 million for the third quarter of 2017 as compared to $0.1 in the prior year quarter.

Depreciation and amortization expenses. Depreciation and amortization increased $1.0 million, or 26.1%, for the third quarter of 2017 as compared to the prior year quarter, primarily due to the increased number of restaurants. As a percentage of revenue, depreciation and amortization increased to 5.7% in the third quarter of 2017 compared to 5.3% in the comparable quarter of 2016.

Pre-opening costs. Pre-opening costs increased $0.2 million for the third quarter of 2017 as compared to the prior year quarter. The company opened six new company-operated restaurants in the third quarter of 2017 compared to six new company-operated restaurants in the third quarter of 2016. Pre-opening costs also include expenses incurred for restaurants that are set to open in the near future. As a percentage of revenue, pre-opening costs increased to 1.0% in the third quarter of 2017 compared to 0.8% in the comparable quarter of 2016.

Tax Receivable Agreement liability adjustment. Tax Receivable Agreement expenses, which are costs associated with adjustments to the expected TRA liability as a result of updated estimated future tax savings at the federal, state and local level, were $0.7 million for the third quarter of 2017. There was no TRA expense in the prior year quarter.

Interest expense, net. Interest expense, net was $185,000 for the third quarter of 2017 as compared to $179,000 in the prior year quarter.

(Benefit) provision for income taxes. There was an income tax benefit of $0.9 million for the third quarter of 2017 compared to income tax expense of $0.9 million in the prior year quarter.

Thirty-Nine Weeks Ended September 26, 2017 Compared to Thirty-Nine Weeks Ended September 27, 2016

The following table presents selected consolidated comparative results of operations for the 39 weeks ended September 26, 2017 compared to the 39 weeks ended September 27, 2016. Our operating results are presented as a percentage of total revenue, with the exception of restaurant operating costs, depreciation and amortization expense, pre-opening costs and loss on disposal of assets, which are presented as a percentage of restaurant revenue. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the table below may not sum to 100% due to rounding.

Consolidated Statement of Operations Data:

39 Weeks Ended

Increase /

(Decrease)

(amounts in thousands)

September 26, 2017

September 27, 2016

$

%

Revenue

Restaurant revenue

$

245,704

99.6

%

$

209,416

99.7

%

$

36,288

17.3

%

Franchise/license revenue

903

0.4

%

542

0.3

%

361

66.6

%

Total revenue

246,607

100.0

%

209,958

100.0

%

36,649

17.5

%

Operating expenses

Restaurant operating costs (excluding

depreciation and amortization)

Food and paper costs

75,955

30.9

%

63,040

30.1

%

12,915

20.5

%

Labor and related expenses

81,566

33.2

%

68,040

32.5

%

13,526

19.9

%

Occupancy and other operating expenses

41,469

16.9

%

33,822

16.2

%

7,647

22.6

%

General and administrative expenses

24,369

9.9

%

21,555

10.3

%

2,814

13.1

%

Offering and exchange related expenses

390

0.2

%

421

0.2

%

(31

)

-7.4

%

Depreciation and amortization expense

13,492

5.5

%

10,779

5.1

%

2,713

25.2

%

Pre-opening costs

1,943

0.8

%

1,361

0.6

%

582

42.8

%

Loss on disposal of assets

43

0.0

%

110

0.1

%

(67

)

-60.9

%

Total operating expenses

239,227

97.0

%

199,128

94.8

%

40,099

20.1

%

Income from operations

7,380

3.0

%

10,830

5.2

%

(3,450

)

-31.9

%

Other expenses

Tax Receivable Agreement liability adjustment

688

0.3

%

0.0

%

688

*

Interest expense, net

381

0.2

%

456

0.2

%

(75

)

-16.4

%

Income before income taxes

6,311

2.6

%

10,374

4.9

%

(4,063

)

-39.2

%

Provision for income taxes

1,397

0.6

%

3,038

1.4

%

(1,641

)

-54.0

%

Net income

$

4,914

2.0

%

$

7,336

3.5

%

$

(2,422

)

-33.0

%

*Not Calculable

Restaurant revenue. Restaurant revenue increased $36.3 million, or 17.3%, for the 39 weeks ended September 26, 2017 as compared to the 39 weeks ended September 27, 2016, primarily due to a $12.0 million increase in sales from new restaurants which were opened in the current year and a $23.7 million increase in sales from restaurants opened prior to the 2017 period that did not fall into the comparable restaurant base. Comparable restaurant sales increased $0.4 million, or 0.2%, in the 39 weeks ended September 26, 2017 as compared to the comparable 2016 period. Comparable restaurant sales growth was primarily due to an increase in average transaction amount of 0.6% partially offset by a decrease in traffic of 0.4% in the 39 weeks ended September 26, 2017 as compared to the comparable 2016 period. The increase in revenue was also due in part to increased revenue of $1.2 million for catering trucks during the 39 weeks ended September 26, 2017 as compared to the 39 weeks ended September 27, 2016. We had eight catering trucks operating in the 39 weeks ended September 26, 2017 compared to six catering trucks operating in the 39 weeks ended September 27, 2016. The increase was also partially offset by a decrease in sales of $0.9 million due to the closure of one restaurant in the 13 weeks ended September 26, 2017 and the closure of one restaurant in December of fiscal year 2016.

Franchise/license revenue. Franchise/license revenue increased $361,000 for the 39 weeks ended September 26, 2017 compared to the comparable 2016 period. The increase was primarily due to an increase in royalty revenue of $256,000 in the current period as compared to the prior period, primarily as a result of the increased number of franchised/licensed locations. The increase was also due in part to increased franchise fees of $70,000 in the current period for five franchised locations that were opened during the period compared to three franchised locations opened in the prior period.

Food and paper costs. Food and paper costs increased $12.9 million, or 20.5%, for 39 weeks ended September 26, 2017 as compared to the comparable 2016 period, primarily due to the increase in restaurant sales. As a percentage of revenue, food and paper costs increased to 33.2% in the 39 weeks ended September 26, 2017 from 32.5% in the prior year period. This increase was primarily driven by increases in chicken, produce and beef costs in the current period.

Labor and related expenses. Labor and related expenses increased $13.5 million, or 19.9%, for the 39 weeks ended September 26, 2017 as compared to the comparable 2016 period, primarily due to the increased labor costs needed to support new restaurants and higher restaurant sales. As a percentage of revenue, labor and related expenses increased to 33.2% in the 39 weeks ended September 26, 2017 compared to 32.5% in the comparable period of 2016. Labor costs were higher primarily due to wage rate increases for hourly employees and the associated benefit costs for those increased wages. On January 1, 2017, the State of California’s (where most of our restaurants are located) minimum wage was raised to $10.50 per hour. In addition, regulatory increases to minimum wages for future periods have been passed and therefore we expect to see increased labor costs to continue.

Occupancy and other operating expenses. Occupancy and other operating expenses increased $7.6 million, or 22.6%, for the 39 weeks ended September 26, 2017 as compared to the comparable period in 2016, primarily due to new restaurants. As a percentage of revenue, occupancy and other operating expenses increased to 16.9% in the 39 weeks ended September 26, 2017 from 16.2% in the comparable period of 2016 primarily due to higher rent costs, higher utilities costs and higher advertising expenses in the current period as a percentage of restaurant revenue. We expect to see higher rent costs to continue in the current fiscal year.

General and administrative expenses. General and administrative expenses increased $2.8 million, or 13.1%, for the 39 weeks ended September 26, 2017 as compared to the prior year period, primarily due to costs associated with supporting an increased number of restaurants, including the increasing number of administrative employees, and field and corporate supervision. As a percentage of revenue, general and administrative expenses decreased to 9.9% for the 39 weeks ended September 26, 2017 compared to 10.3% in the comparable period of 2016.

Exchange related expenses. Exchange related expenses, which are costs associated with the exchange of LLC Units to Class A common stock by the Continuing LLC Owners, were $0.4 million for the 39 weeks ended September 26, 2017 compared to $0.4 million in the comparable prior year period.

Depreciation and amortization expenses. Depreciation and amortization increased $2.7 million, or 25.2%, for the 39 weeks ended September 26, 2017 as compared to the prior year period, primarily due to the increased number of restaurants. As a percentage of revenue, depreciation and amortization increased to 5.5% in the 39 weeks ended September 26, 2017 compared to 5.1% in the comparable period of 2016.

Pre-opening costs. Pre-opening costs increased $0.6 million for the 39 weeks ended September 26, 2017 as compared to the prior year period. The company opened 19 new company-operated restaurants in the 39 weeks ended September 26, 2017 compared to 15 new company-operated restaurants that opened in the comparable prior year period. Pre-opening costs also include expenses incurred for restaurants that are set to open in the near future. As a percentage of revenue, pre-opening costs increased to 0.8% in the 39 weeks ended September 26, 2017 compared to 0.6% in the comparable period of 2016.

Tax Receivable Agreement liability adjustment. Tax Receivable Agreement expenses, which are costs associated with adjustments to the expected TRA liability as a result of updated estimated future tax savings at the federal, state and local level, were $0.7 million for the 39 weeks ended September 26, 2017. There was no TRA expense in the prior year period.

Interest expense, net. Interest expense, net was $0.4 million for the 39 weeks ended September 26, 2017 compared to $0.5 million in the prior year period.

Provision for income taxes. Income tax expense was $1.4 million for the 39 weeks ended September 26, 2017 compared to $3.0 million in the prior year period.

Liquidity and Capital Resources

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

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

Potential Impacts of Market Conditions on Capital Resources

We have historically experienced increases in comparable restaurant sales and operating cash flows. However, the restaurant industry continues to be challenged and uncertainty exists as to the sustainability of these favorable trends.

We believe that expected cash flow from operations and our existing cash balance at September 26, 2017 are adequate to fund operating lease obligations, capital expenditures and working capital obligations for at least the next 12 months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow and our ability to manage costs and working capital successfully.

Summary of Cash Flows

Our primary sources of liquidity and cash flows are derived from our existing cash balance at September 26, 2017 and our operating cash flows. We use these to fund capital expenditures for new company-operated restaurant openings, reinvest in our existing restaurants, invest in infrastructure and information technology and maintain working capital. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have 20 to 30 days to pay our vendors.

The material changes in working capital from December 27, 2016 to September 26, 2017 were comprised of a $0.6 million decrease in current assets and a $9.3 million increase in current liabilities. The decrease in current assets was primarily due to a $2.1 million decrease in cash primarily attributed to the cash flow from operations and timing of payables and accrued expenses partially offset by an increase of $1.6 million in accounts receivable. The increase in current liabilities was primarily due to higher accounts payable and accrued expenses of $5.5 million which was due to the timing of payments and the increased number of locations under construction as well as higher employee related accruals of $3.2 million which is primarily due to the timing of pay dates.

39 Weeks Ended

September 26,

September 27,

(amounts in thousands)

2017

2016

Consolidated Statement of Cash Flows Data:

Net cash provided by operating activities

$

29,969

$

28,204

Net cash used in investing activities

(30,636

)

(23,061

)

Net cash used in financing activities

$

(1,436

)

$

(1,760

)

Cash Flows Provided by Operating Activities

Net cash provided by operating activities increased by $1.8 million to $30.0 million for the 39 weeks ended September 26, 2017 from $28.2 million for the 39 weeks ended September 27, 2016. There was an increase in the current period of $1.4 million related to the change in accounts payable and an increase in the current period of $0.3 million related to the change in employee related accruals.

Cash Flows Used in Investing Activities

Net cash used in investing activities increased by $7.6 to $30.6 million for the 39 weeks ended September 26, 2017 from $23.1 million for the 39 weeks ended September 27, 2016. There were 19 new company-operated restaurants opened during the 39 weeks ended September 26, 2017 compared to 15 new company-operated restaurants opened during the 39 weeks ended September 27, 2016. These amounts also include capital expenditures for future restaurant openings, remodels, maintaining our existing restaurants and other projects.

Cash Flows Used in Financing Activities

Net cash used in financing activities decreased by $0.4 million to $1.4 million for the 39 weeks ended September 26, 2017 from $1.8 million for the 39 weeks ended September 27, 2016. The difference was mainly attributed to lower tax distributions in the current period of $0.6 million partially offset by $0.3 million of financing fees on long-term debt incurred in the current period related to the Credit Facility.

Credit Facility

On August 2, 2017, The Habit Restaurants, LLC executed a $20 million credit facility with Bank of the West (the “Credit Facility”) that matures on August 2, 2019. All borrowings under the Credit Facility will bear interest at a variable rate based upon LIBOR plus the applicable margin for LIBOR loans (as defined in the Credit Facility). The Credit Facility has no unused commitment fees. The Company incurred $0.3 million in deferred financing fees related to the Credit Facility that will be amortized over the length of the agreement. That amortization expense is included in interest expense, net on the accompanying condensed consolidated statements of income.

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 26, 2017, the Company and The Habit Restaurants, LLC were in compliance with all covenants. As of September 26, 2017, The Habit Restaurants, LLC had no outstanding debt under the Credit Facility.

Contractual Obligations

The following table presents our commitments and contractual obligations as of September 26, 2017, as well as our long-term obligations:

(amounts in thousands)

Total

2017

2018-2019

2020-2021

2022 and thereafter

Long-term debt obligations(1)

$

$

$

$

$

Operating lease obligations(2)

233,371

5,115

50,982

51,749

125,525

Deemed landlord financing(3)

8,997

256

2,035

1,849

4,857

Purchase obligations

884

327

557

Total

$

243,252

$

5,698

$

53,574

$

53,598

$

130,382

Off-Balance Sheet Arrangements

As of September 26, 2017, we did not have any material off-balance sheet arrangements, except for restaurant leases.

JOBS Act

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

Subject to certain conditions set forth in the JOBS Act, we are also eligible for and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We may take advantage of these exemptions until we are no longer an emerging growth company. We will continue to be an emerging growth company until the earliest to occur of (i) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, (ii) the last day of the fiscal year in which we had total annual gross revenue of $1 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering, which is December 31, 2019.

Interest Rate Risk

We are exposed to market risk from changes in interest rates on debt. As of September 26, 2017, we had no outstanding borrowings.

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

Inflation

The primary inflationary factors affecting our operations are food, labor costs, energy costs and materials used in the construction of new restaurants. Increases in the minimum wage directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflationary increases in the costs of labor and material. Increases in food costs and labor costs has had an impact on fiscal year 2017 and has the potential to do so going forward.

Commodity Price Risk

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

Evaluation of Disclosure Controls and Procedures

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

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

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 26, 2017, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

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

30

PART II-OTHER INFORMATION

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

A description of the risk factors associated with our business is contained in the “Risk Factors” section of our Annual Report on Form 10-K for our fiscal year ended December 27, 2016. There have been no material changes to our Risk Factors as previously reported.

Recent Sales of Unregistered Securities

None.

None.

None.

None.

Description of Exhibit Incorporated

Herein by Reference

Exhibit

Number

Exhibit Description

Form

File No.

Filing Date

Exhibit

Number

Filed

Herewith

31.1

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

X

31.2

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

X

32.1

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

X

32.2

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

X

101.INS

XBRL Instance Document

X

101.SCH

XBRL Taxonomy Extension Schema Document

X

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

X

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

X

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

X

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

X

Signatures

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

The Habit Restaurants, Inc.

(Registrant)

November 2, 2017

/s/ Ira Fils

Date

Ira Fils

Chief Financial Officer and Secretary

(On behalf of the Registrant and as Principal Financial Officer)


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