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ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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This Form 10-Q contains or incorporates
by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and the disclosure
of risk factors in the Company’s form 10-K for the fiscal year ended September 24, 2019. Also, documents subsequently filed
by us with the SEC and incorporated herein by reference may contain forward-looking statements. We caution investors that any forward-looking
statements made by us are not guarantees of future performance and actual results could differ materially from those in the forward-looking
statements as a result of various factors, including but not limited to the following:
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(I)
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We compete with numerous well-established competitors who have substantially
greater financial resources and longer operating histories than we do. Competitors have increasingly offered selected food items
and combination meals, including hamburgers, at discounted prices, and continued discounting by competitors may adversely affect
revenues and profitability of Company restaurants.
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(II)
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We may be negatively impacted if we experience same store sales declines.
Same store sales comparisons will be dependent, among other things, on the success of our advertising and promotion of new and
existing menu items. No assurances can be given that such advertising and promotions will in fact be successful.
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We may also be negatively impacted by other
factors common to the restaurant industry such as: changes in consumer tastes away from red meat and fried foods; increases in
the cost of food, paper, labor, health care, workers' compensation or energy; inadequate number of hourly paid employees; and/or
decreases in the availability of affordable capital resources. We caution the reader that such risk factors are not exhaustive,
particularly with respect to future filings. For further discussion of our exposure to market risk, refer to Part I, Item 1A, “Risk
Factors” in our Annual Report on Form 10-K for the fiscal year ended September 24, 2019.
Overview.
Good Times Restaurant Inc., through its
subsidiaries (collectively, the “Company” or “we”, “us” or “our”) operates and
franchises/licenses full-service hamburger-oriented restaurants under the name Bad Daddy’s Burger Bar (Bad Daddy’s)
and operates and franchises hamburger-oriented drive-through restaurants under the name Good Times Burgers & Frozen Custard
(Good Times).
We are focused on targeted unit growth
of the Bad Daddy’s concept while at the same time growing same store sales and improving the profitability of both the Bad
Daddy’s and the Good Times concepts.
Growth Strategies and Outlook.
We believe there are significant opportunities
to develop new units, grow customer traffic and increase awareness of our brands. The following sets forth key elements of our
growth strategy:
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·
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Relentlessly pursue same stores sales at both concepts
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·
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Improve operational efficiencies and expense management
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·
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Pursue disciplined and targeted growth of Bad Daddy’s Burger Bar restaurants
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Restaurant locations.
As of December 31, 2019, we operated, franchised
or licensed a total of thirty-nine Bad Daddy’s restaurants and thirty-three Good Times restaurants. The following table presents
the number of restaurants operating at the end of the first fiscal quarters of 2020 and 2019.
Company-Owned/Co-Developed/Joint-Venture:
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Bad Daddy’s
Burger Bar
|
|
|
Good Times Burgers
& Frozen Custard
|
|
|
Total
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Alabama
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Colorado
|
|
|
12
|
|
|
|
12
|
|
|
|
25
|
|
|
|
26
|
|
|
|
37
|
|
|
|
38
|
|
Georgia
|
|
|
4
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
4
|
|
North Carolina
|
|
|
14
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
13
|
|
Oklahoma
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
South Carolina
|
|
|
3
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
1
|
|
Tennessee
|
|
|
2
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
1
|
|
Total
|
|
|
37
|
|
|
|
32
|
|
|
|
25
|
|
|
|
26
|
|
|
|
62
|
|
|
|
58
|
|
Franchise/License
|
|
Bad Daddy’s
Burger Bar
|
|
|
Good Times Burgers
& Frozen Custard
|
|
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Total
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Colorado
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
7
|
|
|
|
6
|
|
|
|
7
|
|
North Carolina
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
South Carolina
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Wyoming
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Total
|
|
|
2
|
|
|
|
2
|
|
|
|
8
|
|
|
|
9
|
|
|
|
10
|
|
|
|
11
|
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Results
of Operations
The following presents certain historical
financial information of our operations. This financial information includes results for our quarter ended December 31, 2019 and
December 25, 2018.
Net Revenues. Net revenues
for the quarter ended December 31, 2019 increased $5,449,000 or 21.5% to $30,814,000 from $25,365,000 for the quarter ended December
25, 2018. Bad Daddy’s concept revenues increased $4,561,000 while our Good Times concept revenues increased $888,000.
Bad Daddy’s restaurant sales increased
$4,563,000 to $22,813,000 for the quarter ended December 31, 2019 from $18,250,000 for the quarter ended December 25, 2018, primarily
attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the quarter ended December 31,
2019, and the impact of the 53rd week of the fiscal year. We estimate the impact of the extra week of sales to be approximately
$2,015,000. Bad Daddy’s same store restaurant sales decreased 3.4% during the quarter ended December 31, 2019 compared to
the same prior-year quarter. Bad Daddy’s restaurants are included in same store sales after they have been open a full eighteen
months. The average menu price increase for the quarter ended December 31, 2019 over the same prior-year quarter was approximately
2.5%. There were twenty-five restaurants included in the same store sales base at the end of the quarter. Additionally, net revenues
were reduced by $2,000 in lower franchise royalties and license fees compared to the prior-year quarter. Franchise revenues in
the current and prior year quarters each include franchisee advertising contributions of $4,000.
Good Times restaurant sales increased $883,000
to $7,780,000 for the quarter ended December 31, 2019 from $6,897,000 for the quarter ended December 25, 2018. Good Times same
store restaurant sales increased 5.8% during the quarter ended December 31, 2019 compared to the same prior-year quarter and benefitted
from an extra operating week which we estimate contributed approximately $460,000.The average menu price increase for the quarter
ended December 31, 2019 over the same prior-year quarter was approximately 5.7%. Franchise revenues increased $5,000 for the quarter
ended December 31, 2019, compared to the same prior year period. Franchise revenues for the current and prior year quarters include
franchisee advertising contributions of $55,000 and $63,000, respectively.
Restaurant Operating Costs
Food and Packaging Costs.
Food and packaging costs for the quarter ended December 31, 2019 increased $1,509,000 to $9,032,000 (29.5% of restaurant sales)
from $7,523,000 (29.9% of restaurant sales) for the quarter ended December 25, 2018.
Bad Daddy’s food and packaging costs
were $6,618,000 (29.0% of restaurant sales) for the quarter ended December 31, 2019, up from $5,269,000 (28.9% of restaurant sales)
for the quarter ended December 25, 2018. This increase is primarily due to a greater number of operating restaurants during the
current quarter versus the same quarter in the prior year. The increase as a percent of sales is due to purchase price increases
in all of our primary proteins, mostly offset by year-over-year increases in menu prices.
Good Times food and packaging costs were
$2,414,000 (31.0% of restaurant sales) for the quarter ended December 31, 2019, up from $2,254,000 (32.7% of restaurant sales)
for the quarter ended December 25, 2018. This decrease as a percent of sales is due primarily to the impact of higher menu pricing
and menu engineering, which offset purchase price increases on our primary ingredients.
Payroll and Other Employee Benefit
Costs. Payroll and other employee benefit costs for the quarter ended December 31, 2019 increased $2,266,000 to $11,819,000
(38.6% of restaurant sales) from $9,553,000 (38.0% of restaurant sales) for the quarter ended December 25, 2018.
Bad Daddy’s payroll and other employee
benefit costs were $8,841,000 (38.8% of restaurant sales) for the quarter ended December 31, 2019 up from $6,982,000 (38.3% of
restaurant sales) in the same prior year period. The $1,859,000 increase was primarily attributable to the four new restaurants
opened in fiscal 2019 and two new restaurants opened in the quarter ended December 31, 2019. As a percent of sales, payroll and
employee benefits costs increased by 0.5%, as increased wages, particularly for kitchen workers, increased in all states due to
a competitive market for workers, and due to statutory wage increases for front-of-house employees in Colorado, all of which combined
exceeded the impact of our year-over-year menu price increases.
Good Times payroll and other employee benefit
costs were $2,978,000 (38.3% of restaurant sales) in the quarter ended December 31, 2019, up from $2,571,000 (37.3% of restaurant
sales) in the same prior-year period. The $407,000 increase was partially attributable to the increase in same store sales as well
as an increase to the average wage paid to our employees. As a percent of sales, payroll and employee benefits costs increased
by 1.0%, primarily related to the average wage paid to our employees, which increased approximately 9.5% in the quarter ended December
31, 2019 compared to the same prior year period. This average wage increase is attributable to a very competitive labor market
in Colorado and statutory increases in the minimum wage rate.
Occupancy Costs. Occupancy
costs for the quarter ended December 31, 2019 increased $473,000 to $2,438,000 (8.0% of restaurant sales) from $1,965,000 (7.8%
of restaurant sales) for the quarter ended December 25, 2018.
Bad Daddy’s occupancy costs were
$1,644,000 (7.2% of restaurant sales) for the quarter ended December 31, 2019 up from $1,277,000 (7.0% of restaurant sales) in
the same prior year period. The $367,000 increase was primarily attributable to the four new restaurants opened in fiscal 2019
and two new restaurants opened in the quarter ended December 31, 2019. The increase as a percentage of sales was due to general
increases in our operating lease costs.
Good Times occupancy costs were $794,000
(10.2% of restaurant sales) in the quarter ended December 31, 2019, up from $688,000 (10.0% of restaurant sales) in the same prior
year period. The $106,000 increase was primarily attributable to an $84,000 increase in our operating lease costs.
Other Operating Costs. Other
operating costs for the quarter ended December 31, 2019, increased $606,000 to $3,276,000 (10.7% of restaurant sales) from $2,670,000
(10.6% of restaurant sales) for the quarter ended December 25, 2018.
Bad Daddy’s other operating costs
were $2,565,000 (11.2% of restaurant sales) for the quarter ended December 31, 2019 up from $2,041,000 (11.2% of restaurant sales)
in the same prior year period. The $524,000 increase was primarily attributable to the four new restaurants opened in fiscal 2019
and two new restaurants opened in the quarter ended December 31, 2019. The percentage increase was primarily attributable to approximately
$131,000 of increased commissions paid to delivery service providers in the current year compared to the prior year, offset by
decreases in other general restaurant supplies and expenses.
Good Times other operating costs were $711,000
(9.1% of restaurant sales) in the quarter ended December 31, 2019, up from $629,000 (9.1% of restaurant sales) in the same prior
year period. The increase was primarily attributable to an approximate $40,000 increase in commissions paid to delivery service
providers offset by decreases in other general restaurant supplies and expenses.
New Store Preopening Costs.
In the quarter ended December 31, 2019, we incurred $802,000 of preopening costs compared to $627,000 for the quarter ended December
25, 2018. All of the preopening costs are related to our Bad Daddy’s restaurants.
Preopening costs in the current quarter
are primarily attributable to four restaurants: two that opened late during the fourth quarter of fiscal 2019, and two restaurants
that opened during the current quarter. In the prior-year period, pre-opening costs are related to the one Bad Daddy’s restaurant
opened during the first fiscal quarter of 2019, one that opened during the second quarter of fiscal 2019 and two that opened during
the fourth quarter of fiscal 2019. Preopening costs typically occur over a period of approximately five months. Although the exact
timing varies by location, we typically spend approximately $275,000 to $350,000 per location.
Depreciation and Amortization Costs.
Depreciation and amortization costs for the quarter ended December 31, 2019, increased $45,000 from $1,034,000 in the quarter ended
December 25, 2018 to $1,079,000.
Bad Daddy’s depreciation costs increased
$51,000 from $816,000 in the quarter ended December 25, 2018 to $867,000 in the quarter ended December 31, 2019. This increase
was primarily attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the quarter ended
December 31, 2019, partially offset by the reduced depreciation resulting from asset impairment charges recorded in the fourth
quarter of fiscal 2019. There were five more Bad Daddy’s restaurants open at the end of the current fiscal quarter compared
to the prior year fiscal quarter.
Good Times depreciation costs decreased
$6,000 from $218,000 in the quarter ended December 25, 2018 to $212,000 in the quarter ended December 31, 2019.
General and Administrative Costs.
General and administrative costs for the quarter ended December 31, 2019, increased $239,000 to $2,213,000 (7.2% of total revenue)
from $$1,974,000 (7.8%) of total revenues) for the quarter ended December 25, 2018.
The $239,000 increase in general and administrative
expenses in the quarter ended December 31, 2019 is primarily attributable to:
|
·
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Increase in training and recruiting costs of $55,000
|
|
·
|
Increase in expected employee medical claims costs of $50,000
|
|
·
|
Increase in costs associated with district management of $72,000, of which approximately $20,000
is related to the extra operating week in the current quarter and the remainder is primarily related to additional district management
for our east coast Bad Daddy’s markets,
|
|
·
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Increase in professional fees of $139,000
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|
·
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Decrease of $37,000 in incentive stock compensation costs
|
|
·
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Net decreases in all other expenses of $40,000
|
For the balance of the fiscal year, we
expect general and administrative costs to continue to be stable or decline slightly from fiscal 2019 to fiscal 2020 as we focus
on reducing turnover and associated training costs.
Advertising Costs. Advertising
costs for the quarter ended December 31, 2019, decreased $77,000 to $546,000 (1.8% of total revenue) from $623,000 (2.5% of total
revenue) for the quarter ended December 25, 2018.
Bad Daddy’s advertising costs were
$235,000 (1.0% of total revenue) in the quarter ended December 31, 2019 compared to $251,000 (1.4% of total revenue) in the same
prior year period. The $16,000 decrease was primarily attributable to rolling over a media buy in the prior year quarter ending
December 25, 2018 in the Colorado market that was incurred by those restaurants, partially offset by an increase in advertising
fund contributions related to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the quarter ended
December 31, 2019. The current and prior year quarters include advertising costs of $4,000 of costs associated with franchise advertising
contributions.
Bad Daddy’s advertising costs consist
primarily of contributions made to the advertising materials fund based on a percentage of restaurant sales as well as local store
marketing efforts.
Good Times advertising costs were $311,000
(3.9% of total revenue) in the quarter ended December 31, 2019 compared to $372,000 (5.3% of total revenue) in the same prior year
period. This $61,000 decline is due primarily to reduced contributions made to the regional advertising cooperative. The current
and prior year quarters include advertising costs of $55,000 and $63,000, respectively, of costs associated with franchise advertising
contributions.
Good Times advertising costs consists primarily
of contributions made to the advertising materials fund and a regional advertising cooperative based on a percentage of restaurant
sales which are used to provide television and radio advertising, social media and on-site and point-of-purchase. The percentage
contribution paid to the regional advertising cooperative was reduced at the start of the current fiscal year associated with a
change in expected media mix. Advertising costs are presented gross, with franchisee contributions to the fund being recognized
as a component of franchise revenues. As a percentage of total revenue, we expect advertising costs to remain relatively stable
at approximately 3.9% of total revenue for the Good Times segment.
Franchise Costs. Franchise
costs were $0 and $7,000 for the quarters ended December 31, 2019 and December 25, 2018, respectively. The costs are primarily
related to the Good Times franchised restaurants. We currently have minimal direct costs associated with maintaining our franchise
systems as those employees overseeing franchisee relations primarily perform responsibilities associated with company operations
Gain on Restaurant Asset Disposals.
The gain on restaurant asset disposals for the quarter ended December 31, 2019 was $19,000 compared to a gain of $30,000 in the
quarter ended December 25, 2018.
$9,000 of the gain in the current and prior
years is related to deferred gains on previous sale lease-back transactions on two Good Times restaurants. The additional gain
of $10,000 in the current year is related to the sale of miscellaneous restaurant equipment. The additional gain of $21,000 in
the prior year is related to insurance claim reimbursements where assets were destroyed.
Loss from Operations. The
loss from operations was $372,000 in the quarter ended December 31, 2019 compared to a loss of $581,000 in the quarter ended December
25, 2018.
The change in the loss from operations
for the quarter ended December 31, 2019 is due primarily due to matters discussed in the "Net Revenues,” "Restaurant
Operating Costs," "General and Administrative Costs," and “Advertising Costs” sections above.
Net Loss. The net loss was
$599,000 for the quarter ended December 31, 2019 compared to a net loss of $742,000 in the quarter ended December 25, 2018.
The change from the quarter ended December
31, 2019 to the quarter ended December 25, 2018 was primarily attributable to the matters discussed in the "Net Revenues,"
"Restaurant Operating Costs," "General and Administrative Costs," and “Advertising Costs” sections
above as well as an increase in net interest expense of $67,000 for the quarter ended December 31, 2019 compared to the same prior
year period.
Income Attributable to Non-Controlling
Interests. The non-controlling interest represents the limited partners’ or members’ share of income in the
Good Times and Bad Daddy’s joint-venture restaurants.
For the quarter ended December 31, 2019,
the income attributable to non-controlling interests was $212,000 compared to $309,000 for the quarter ended December 25, 2018.
$133,000 of the current quarter’s
income is attributable to the BDI joint-venture restaurants, compared to $250,000 in the same prior year period. This $117,000
decrease is primarily due to the elimination of non-controlling interests beginning in the second fiscal quarter of 2019 associated
with the repurchase of interests in the three Raleigh area restaurants. $79,000 of the current quarter’s income is attributable
to the Good Times joint-venture restaurants, compared to $59,000 in the same prior year period.
Adjusted EBITDA
EBITDA is defined as net income (loss) before interest, income
taxes and depreciation and amortization.
Adjusted EBITDA is defined as EBITDA plus
non-cash stock-based compensation expense, preopening expense, non-recurring acquisition costs, GAAP rent in excess of cash rent,
and non-cash disposal of assets. Adjusted EBITDA is intended as a supplemental measure of our performance that is not required
by or presented in accordance with GAAP. We believe that EBITDA and Adjusted EBITDA provide useful information to management and
investors regarding certain financial and business trends relating to our financial condition and operating results. Our management
uses EBITDA and Adjusted EBITDA (i) as a factor in evaluating management's performance when determining incentive compensation
and (ii) to evaluate the effectiveness of our business strategies.
We believe that the use of EBITDA and Adjusted
EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the
Company's financial measures with other fast casual restaurants, which may present similar non-GAAP financial measures to investors.
In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to
those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that
our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable
to other similarly titled measures computed by other companies, because all companies do not calculate Adjusted EBITDA in the same
fashion.
Our management does not consider EBITDA
or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation
of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in
the Company's financial statements. Some of these limitations are:
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·
|
Adjusted EBITDA does not reflect our cash expenditures, or future requirements,
for capital expenditures or contractual commitments;
|
|
·
|
Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
|
|
·
|
Adjusted EBITDA does not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments, on our debts;
|
|
·
|
although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements
for such replacements;
|
|
·
|
stock based compensation expense is and will remain a key element of our
overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing performance
for a particular period;
|
|
·
|
Adjusted EBITDA does not reflect the impact of certain cash charges resulting
from matters we consider not to be indicative of our ongoing operations; and
|
|
·
|
other companies in our industry may calculate Adjusted EBITDA differently
than we do, limiting its usefulness as a comparative measure.
|
Because of these limitations, Adjusted
EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We
compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as a supplemental measure.
You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure
to evaluate our business.
The following table reconciles net loss
to EBITDA and Adjusted EBITDA (in thousands) for the fiscal third quarters:
|
|
Quarter Ended
|
|
|
|
December 31, 2019
|
|
|
December 25, 2018
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
Net loss, as reported
|
|
$
|
(811
|
)
|
|
$
|
(1,051
|
)
|
Depreciation and amortization1
|
|
|
1,069
|
|
|
|
993
|
|
Interest expense, net
|
|
|
227
|
|
|
|
160
|
|
EBITDA
|
|
|
485
|
|
|
|
102
|
|
Preopening expense
|
|
|
801
|
|
|
|
605
|
|
Non-cash stock-based compensation
|
|
|
75
|
|
|
|
112
|
|
Non-recurring severance cost
|
|
|
41
|
|
|
|
-
|
|
GAAP rent-cash cash difference
|
|
|
121
|
|
|
|
(43
|
)
|
Non-cash gain on disposal of asset
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Adjusted EBITDA
|
|
$
|
1,514
|
|
|
$
|
767
|
|
Liquidity and Capital Resources
Cash and Working Capital
As of December 31, 2019, we had a working
capital deficit of $7,753,000. 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 a few days of the related sale, and we typically
have two to four weeks to pay our vendors. The working capital deficit may increase when new Bad Daddy’s and Good Times restaurants
are opened. We believe that with our ability to access the Cadence Bank credit facility in addition to cash flow generated from
our existing restaurants, that we will have sufficient capital to meet our working capital, long term debt obligations and recurring
capital expenditure needs in fiscal 2020. As of December 31, 2019, we had no commitments outstanding related to construction contracts
for Bad Daddy’s restaurants currently under development.
Consistent with many other restaurant and
retail store operations, we typically use operating lease arrangements for our restaurants. We believe that our operating lease
arrangements provide appropriate leverage of our capital structure in a financially efficient manner. Effective September 25, 2019,
the first day of fiscal year 2020, our existing lease obligations are reflected in our consolidated balance sheets as operating
lease assets and lease liabilities in accordance with Accounting Standards Update ("ASU") 2016-02, "Leases (Topic
842)". See Note 2, Updates to Significant Accounting Policies and Note 11, Leases, in the notes to our unaudited condensed
consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for more information.
Financing
The Company maintains a credit agreement
with Cadence Bank (“Cadence”) pursuant to which, as amended, Cadence agreed to loan the Company up to $17,000,000 with
a maturity date of December 31, 2021 (the “Cadence Credit Facility”). On February 21, 2019 the Cadence Credit Facility
was amended, in connection with the RGWP Repurchase (see Note 8 to the financial statements), to retroactively attribute EBITDA
previously attributed to non-controlling interests to the Company for purposes of certain financial covenants. On December 9, 2019
the Cadence Credit Facility was amended in connection with the separation of the Company’s former CEO, to amend the definition
of “Consolidated EBITDA” for the purposes of financial covenants, to require certain installment payments, and to permit
the company to make “Restricted Payments” (as defined in the Cadence Credit Facility). In the form of repurchases or
redemptions of certain equity interests of the Company from former directors and officers of the Company in an aggregate amount
not to exceed $100,000. As amended by the various amendments, the Cadence Credit Facility accrues commitment fees on the daily
unused balance of the facility at a rate of 0.25%. All borrowings under the Cadence Credit Facility, as amended, bear interest
at a variable rate based upon the Company’s election of (i) 2.5% plus the base rate, which is the highest of the (a) Federal
Funds Rate plus 0.5%, (b) the Cadence bank publicly-announced prime rate, and (c) LIBOR plus 1.0%, or (ii) LIBOR, with a 0.250%
floor, plus 3.5%. Interest is due at the end of each calendar quarter if the Company selects to pay interest based on the base
rate and at the end of each LIBOR period if it selects to pay interest based on LIBOR. As of December 31, 2019, the weighted average
interest rate applicable to borrowings under the Cadence Credit Facility was 5.275%.
The Cadence Credit Facility, as amended,
contains certain affirmative and negative covenants and events of default that the Company considers customary for an agreement
of this type, including covenants setting a maximum leverage ratio of 5.35:1, a minimum fixed charge coverage ratio of 1.25:1 and
minimum liquidity of $2,000,000. As of December 31, 2019, the Company was in compliance with the covenants under the Cadence Credit
Facility.
As a result of entering into the Cadence
Credit Facility and various amendments, the Company has paid loan origination costs including professional fees of approximately
$292,000 since the inception of the credit facility and is amortizing these costs over the term of the credit agreement.
The obligations under the Cadence Credit
Facility are collateralized by a first-priority lien on substantially all of the Company’s assets.
As of December 31, 2019, the outstanding
balance on borrowings against the facility was $14,350,000. Availability of the Cadence Credit Facility for borrowings is reduced
by the outstanding face value of any letters of credit issued under the facility. As of December 31, 2019, the outstanding face
value of such letters of credit was $157,500.
Principal payments on the Cadence Credit
Facility are required beginning on March 31, 2020 in $250,000 installments on the last business day each of March, June, September,
and December in each calendar year. The total loan commitment is permanently reduced by the corresponding amount of each such repayment
on such date. New borrowings are permitted up to the amount of the loan commitment. The note matures and is due in
its entirety on December 31, 2021.
Capital Expenditures
Planned capital expenditures for the balance
of fiscal 2020 primarily include normal recurring capital expenditures for existing Good Times and Bad Daddy’s restaurants.
Cash Flows
Net cash provided by operating activities
was $999,000 for the quarter ended December 31, 2019. The net cash provided by operating activities for the quarter ended December
31, 2019 was the result of a net loss of $599,000 as well as cash and non-cash reconciling items totaling $1,598,000 (these reconciling
items are comprised of 1) depreciation and amortization of general assets of $1,126,000, 2) amortization of operating lease assets
of $1,097,000, 3) stock-based compensation expense of $74,000, 4) a increase in receivables and other assets of $610,000, 5) a
decrease in deferred liabilities and accrued expenses of $632,000 , 6) a decrease in accounts payable of $99,000 and 7) a net increase
in amounts related to our operating leases of $613,000.
Net cash used in operating activities was
$386,000 for the quarter ended December 25, 2018. The net cash used in operating activities for the quarter ended December 25,
2018 was the result of a net loss of $742,000 as well as cash and non-cash reconciling items totaling $356,000 (these reconciling
items are comprised of 1) depreciation and amortization of $1,094,000, 2) accretion of deferred rent of $126,000, 3) amortization
of lease incentive obligations of $121,000, 4) stock-based compensation expense of $112,000, 5) a decrease in receivables and other
assets of $165,000, 6) an increase in deferred liabilities related to tenant allowances of $147,000, 7) an increase in accounts
payable of $43,000, 8) an decrease in accrued liabilities of $1,154,000 and 9) a net decrease in other operating assets and liabilities
of $56,000).
Net cash used in investing activities for
the quarter ended December 31, 2019 was $1,683,000 which primarily reflects the purchases of property and equipment of $1,613,000
and the purchase of treasury stock of $75,000. Purchases of property and equipment is comprised of the following:
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$1,508,000 in costs for the development of Bad Daddy’s locations
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$69,000 for miscellaneous capital expenditures related to our Bad Daddy’s restaurants
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$15,000 for miscellaneous capital expenditures related to our Good Times restaurants
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$21,000 for miscellaneous capital expenditures related to our corporate office
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Net cash used in investing activities for
the quarter ended December 25, 2018 was $2,915,000 which primarily reflects the purchases of property and equipment of $2,918,000.
Purchases of property and equipment is comprised of the following:
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$2,374,000 in costs for the development of Bad Daddy’s locations
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$111,000 for miscellaneous capital expenditures related to our Bad Daddy’s restaurants
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$388,000 for reimaging, remodeling and miscellaneous capital expenditures related to our Good Times
restaurants
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$45,000 for miscellaneous capital expenditures related to assets used by our Colorado maintenance
team that provides services for both concepts
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Net cash provided by financing activities
for the quarter ended December 31, 2019 was $1,231,000, which includes principal payments on notes payable and long-term debt of
$500,000, borrowings on notes payable and long-term debt of $2,000,000, contributions from non-controlling interests of $22,000
and distributions to non-controlling interests of $291,000.
Net cash provided by financing activities
for the quarter ended December 25, 2018 was $2,271,000, which includes principal payments on notes payable, long-term debt of $4,000,
borrowings on notes payable and long-term debt of $2,750,000, proceeds from the exercise of stock options of $3,000 and net distributions
to non-controlling interests of $478,000.
Contingencies
We remain contingently liable on various
leases underlying restaurants that were previously sold to franchisees. We have never experienced any losses related to these contingent
lease liabilities, however if a franchisee defaults on the payments under the leases, we would be liable for the lease payments
as the assignor or sublessor of the lease. Currently we have not been notified nor are we aware of any leases in default under
which we are contingently liable, however there can be no assurance that there will not be in the future, which could have a material
effect on our future operating results.
Additionally, in the normal course of business,
there may be various claims in process, matters in litigation, and other contingencies brought against the company by employees,
vendors, customers, franchisees, or other parties. Evaluating these contingencies is a complex process that may involve substantial
judgment on the potential outcome of such matters, and the ultimate outcome of such contingencies may differ from our current analysis.
We review the adequacy of accruals and disclosures related to such contingent liabilities in consultation with legal counsel. While
it is not possible to predict the outcome of these claims with certainty, it is management’s opinion that potential losses
associated with such contingencies would be immaterial to our financial statements.
Impact of Inflation
The total menu price increases at our Good
Times restaurants during fiscal 2019 were approximately 4.4%, and we raised menu prices approximately 4.0% during the first quarter
of fiscal 2020. The total menu increases taken at our Bad Daddy’s restaurants during fiscal 2019 were approximately 1.5%
on average. We raised menu prices during the first quarter of fiscal 2019 approximately 2.4%. Commodity prices have increased since
the end of fiscal 2019 and have been elevated in the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019.
When combined with anticipated menu price increases, we expect Good Times’ and Bad Daddy’s’ food and packaging
costs to be relatively consistent or slightly elevated compared with the current quarter, as a percentage of sales during the remainder
of fiscal 2020.
Seasonality
Revenues of the Company are subject to
seasonal fluctuations based primarily on weather conditions adversely affecting Colorado restaurant sales in December, January,
February and March.
Recent
Accounting Pronouncements
On September 25, 2019, the first day of fiscal year 2020, the
Company adopted the FASB ASU 2016-02, Leases (Topic 842). See notes 2, 3 and 11 to the condensed consolidated financial statements
above.