GTIM Good Times Restaurants Inc

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:

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.

COVID-19

The global crisis resulting from the spread of COVID-19 had a substantial impact on our restaurant operations for the 13-week and 27-week periods ended March 31, 2020. During portions of the month of March 2020, all of the Company’s Bad Daddy’s Burger Bar restaurants were open only for delivery and carry-out service, with dining rooms closed by government orders. Additionally, our Good Times Burgers and Frozen Custard restaurants experienced reduced volumes during the month of March 2020.

Our operating results substantially depend upon our ability to drive traffic to our restaurants, and for our Bad Daddy’s Burger Bar restaurants, to serve guests in our dining rooms. We cannot currently estimate the duration of the impact of the COVID-19 pandemic on our business, however we expect that the impact to our results from operations for the 13-week period ended June 30, 2020 will be more significant than the impact for the 13-week period ended March 31, 2020. Additionally, in connection with spread of COVID-19, there have been disruptions in various food supply chains in the United States. Our operating results substantially depend upon our ability to obtain sufficient quantities of products such as beef, bacon, and other products used in the production of items served and sold to our guests. Ongoing impacts of the COVID-19 pandemic could result in product shortages and in-turn could require us to serve a limited menu, restrict number of items purchased per guest, or close some or all of our restaurants for an indeterminate period of time. Ongoing material adverse impacts from the COVID-19 pandemic could result in reduced revenue and cash flow and could affect our assessments of impairment of intangible assets, long-lived assets, or goodwill.

In addition, while we have taken actions to manage our liquidity position in response to COVID-19, such as temporary reductions in management pay, temporary reductions in work force, extended vendor payment terms and applying for Paycheck Protection Program loans, we may need to seek additional sources of liquidity. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be available on favorable terms, or at all, especially the longer the COVID-19 pandemic lasts or if it were to reoccur.

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:

Restaurant locations.

As of March 31, 2020, 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 second fiscal quarters of 2020 and 2019.

Results of Operations

Fiscal quarter ended March 31, 2020 compared to fiscal quarter ended March 26, 2019:

Net Revenues. Net revenues for the quarter ended March 31, 2020 decreased $985,000 or 3.6% to $26,182,000 from $27,167,000 for the quarter ended March 26, 2019. Bad Daddy’s concept revenues decreased $1,105,000 while our Good Times concept revenues increased $120,000.

Bad Daddy’s restaurant sales decreased $1,085,000 to $19,300,000 for the quarter ended March 31, 2020 from $20,384,000 for the quarter ended March 26, 2019. Sales were positively impacted by four new restaurants opened in fiscal 2019 and two new restaurants opened in the two quarters ended March 31, 2020, offset by the negative impact of our dining room closures due to the COVID-19 pandemic. Bad Daddy’s same store restaurant sales decreased 15.7% during the quarter ended March 31, 2020 compared to the same prior-year quarter, substantially driven by decreases during the last three weeks of the quarter when dining rooms were closed. 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 March 31, 2020 over the same prior-year quarter was approximately 3.1%. There were twenty-nine restaurants included in the same store sales base at the end of the quarter. Additionally, net revenues were reduced by $20,000 in lower franchise royalties and license fees compared to the prior-year quarter. Franchise revenues in the current and prior year quarters include franchisee advertising contributions of $3,000 and $4,000, respectively.

Good Times restaurant sales increased $128,000 to $6,698,000 for the quarter ended March 31, 2020 from $6,570,000 for the quarter ended March 26, 2019. Good Times same store restaurant sales increased 3.0% during the quarter ended March 31, 2020 compared to the same prior-year quarter. One restaurant that was closed for remodeling in the prior year quarter was not included in the same store sales group. The average menu price increase for the quarter ended March 31, 2020 over the same prior-year quarter was approximately 6.6%. Franchise revenues increased $6,000 for the quarter ended March 31, 2020, compared to the same prior year period. Franchise revenues for the current and prior year quarters include franchisee advertising contributions of $47,000 and $61,000, respectively.

Restaurant Operating Costs

Food and Packaging Costs. Food and packaging costs for the quarter ended March 31, 2020 decreased $283,000 to $7,620,000 (29.3% of restaurant sales) from $7,903,000 (29.3% of restaurant sales) for the quarter ended March 26, 2019.

Bad Daddy’s food and packaging costs were $5,559,000 (28.8% of restaurant sales) for the quarter ended March 31, 2020, down from $5,804,000 (28.5% of restaurant sales) for the quarter ended March 26, 2019. This decrease is primarily attributable to lower restaurant sales 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 $2,061,000 (30.8% of restaurant sales) for the quarter ended March 31, 2020, up from $2,099,000 (31.9% of restaurant sales) for the quarter ended March 26, 2019. 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 March 31, 2020 decreased $354,000 to $9,874,000 (38.0% of restaurant sales) from $10,228,000 (37.9% of restaurant sales) for the quarter ended March 26, 2019.

Bad Daddy’s payroll and other employee benefit costs were $7,351,000 (38.1% of restaurant sales) for the quarter ended March 31, 2020 down from $7,669,000 (37.6% of restaurant sales) in the same prior year period. The $244,000 decrease is primarily attributable to lower restaurant sales during the current quarter versus the same quarter in the prior year. As a percent of sales, payroll and employee benefits costs increased by 0.5%, as for most of the quarter, 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. These factors combined with the deleveraging impacts of the significant sales reductions that accompanied dining room closures during the last three weeks of the quarter exceeded the impact of our year-over-year menu price increases.

Good Times payroll and other employee benefit costs were $2,523,000 (37.7% of restaurant sales) in the quarter ended March 31, 2020, down from $2,559,000 (39.0% of restaurant sales) in the same prior-year period. The $36,000 decrease was partially attributable to labor saving initiatives implemented during the current fiscal quarter as well as labor efficiencies gained though higher average menu pricing. As a percent of sales, payroll and employee benefits costs decreased by 1.3% in the quarter ended March 31, 2020 compared to the same prior year period. The average wage paid to our employees increased approximately 7.1% in the quarter ended March 31, 2020 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 March 31, 2020 increased $47,000 to $2,212,000 (8.5% of restaurant sales) from $2,165,000 (8.0% of restaurant sales) for the quarter ended March 26, 2019.

Bad Daddy’s occupancy costs were $1,471,000 (7.6% of restaurant sales) for the quarter ended March 31, 2020 up from $1,354,000 (6.6% of restaurant sales) in the same prior year period. The $177,000 increase was primarily attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the quarter ended March 31, 2020. The increase as a percentage of sales was due to general increases in our operating lease costs as well as the deleveraging effect of lower restaurant sales.

Good Times occupancy costs were $741,000 (11.1% of restaurant sales) in the quarter ended March 31, 2020, down from $811,000 (12.3% of restaurant sales) in the same prior year period. The $70,000 decrease was primarily attributable to decreases in our operating lease costs and property taxes.

Other Operating Costs. Other operating costs for the quarter ended March 31, 2020, increased $265,000 to $3,233,000 (12.4% of restaurant sales) from $2,968,000 (11.0% of restaurant sales) for the quarter ended March 26, 2019.

Bad Daddy’s other operating costs were $2,565,000 (13.3% of restaurant sales) for the quarter ended March 31, 2020 up from $2,333,000 (11.4% of restaurant sales) in the same prior year period. The $232,000 increase was partially attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the quarter ended March 31, 2020 as well as a $143,000 increase in commissions paid to delivery service providers in the current year compared to the prior year. The percentage increase was primarily attributable to the 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 $668,000 (10.0% of restaurant sales) in the quarter ended March 31, 2020, up from $635,000 (9.7% of restaurant sales) in the same prior year period. The increase was primarily attributable to an approximate $54,000 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 March 31, 2020, we incurred $159,000 of preopening costs compared to $193,000 for the quarter ended March 26, 2019. All of the preopening costs are related to our Bad Daddy’s restaurants.

Preopening costs in the current quarter are primarily attributable to $100,000 of non-cash operating lease costs associated with two future Bad Daddy’s restaurants, as well as costs associated with two restaurants that opened in the first fiscal quarter of 2020. In the prior-year period, pre-opening costs are related to the one Bad Daddy’s restaurant opened during the second fiscal quarter of 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 March 31, 2020, increased $24,000 to $1,113,000 from $1,089,000 in the quarter ended March 26, 2019.

Bad Daddy’s depreciation and amortization costs for the quarter ended March 31, 2020, increased $35,000 to $898,000 from $863,000 in the quarter ended March 26, 2019. This increase was primarily attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the first fiscal quarter 2020, partially offset by the reduced depreciation resulting from asset impairment charges recorded in the fourth quarter of fiscal 2019. There were four more Bad Daddy’s restaurants open at the end of the current fiscal quarter compared to the prior year fiscal quarter.

Good Times depreciation and amortization costs for the quarter ended March 31, 2020, decreased $11,000 to $215,000 from $226,000 in the quarter ended March 26, 2019.

General and Administrative Costs. General and administrative costs for the quarter ended March 31, 2020, decreased $418,000 to $1,636,000 (6.3% of total revenue) from $2,054,000 (7.6%) of total revenues) for the quarter ended March 26, 2019.

The $418,000 decrease in general and administrative expenses in the quarter ended March 31, 2020 is primarily attributable to:

For the balance of the fiscal year, we expect general and administrative costs to continue to decline from fiscal 2019 to fiscal 2020 as we focus on reducing turnover and associated training costs.

Advertising Costs. Advertising costs for the quarter ended March 31, 2020, decreased $32,000 to $510,000 (1.9% of total revenue) from $542,000 (2.0% of total revenue) for the quarter ended March 26, 2019.

Bad Daddy’s advertising costs were $240,000 (1.2% of total revenue) in the quarter ended March 31, 2020 compared to $191,000 (0.9% of total revenue) in the same prior year period. The increase was primarily attributable to $52,000 in costs incurred in the current quarter related to a local radio advertising campaign in the Charlotte, North Carolina area. The current and prior year quarters include advertising costs of $3,000 and $4,000, respectively, 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 $270,000 (4.0% of total revenue) in the quarter ended March 31, 2020 compared to $351,000 (5.3% of total revenue) in the same prior year period. This $81,000 decline is due primarily to reduced contributions made to the regional advertising cooperative. The current and prior year quarters include advertising costs of $48,000 and $62,000, 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 4.0% of total revenue for the Good Times segment.

Franchise Costs. Franchise costs were $8,000 and $16,000 for the quarters ended March 31, 2020 and March 26, 2019, 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 both quarters ended March 31, 2020 and March 26, 2019 was $9,000.

The gain in the current and prior years is related to deferred gains on previous sale lease-back transactions on two Good Times restaurants.

Impairment Costs: Impairment costs were $14,359,000 and $0 for the quarters ended March 31, 2020 and March 26, 2019, respectively. $4,359,000 of the costs in the current quarter are related to five Bad Daddy’s restaurants’ assets that were impaired and $10,000,000 is attributable to an impairment of goodwill related to our Bad Daddy’s reporting unit.

Income/Loss from Operations. The loss from operations was $14,533,000 in the quarter ended March 31, 2020 compared to income from operations of $18,000 in the quarter ended March 26, 2019.

The change in the income/loss from operations for the quarter ended March 31, 2020 is due primarily due to matters discussed in the "Net Revenues,” "Restaurant Operating Costs," "General and Administrative Costs," “Advertising Costs” and “Asset Impairment Costs” sections above.

Net Loss. The net loss was $14,742,000 for the quarter ended March 31, 2020 compared to a net loss of $180,000 in the quarter ended March 26, 2019.

The change from the quarter ended March 31, 2020 to the quarter ended March 26, 2019 was primarily attributable to the matters discussed in the "Net Revenues," "Restaurant Operating Costs," "General and Administrative Costs," “Advertising Costs” and “Asset Impairment Costs” sections above as well as an increase in net interest expense of $10,000 for the quarter ended March 31, 2020 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 March 31, 2020, the income attributable to non-controlling interests was $174,000 compared to $270,000 for the quarter ended March 26, 2019.

$112,000 of the current quarter’s income is attributable to the BDI joint-venture restaurants, compared to $234,000 in the same prior year period. This $121,000 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 as well as reduced restaurant level profitability in the current fiscal quarter. $62,000 of the current quarter’s income is attributable to the Good Times joint-venture restaurants, compared to $36,000 in the same prior year period.

Fiscal two quarters ended March 31, 2020 compared to fiscal quarter ended March 26, 2019:

Net Revenues. Net revenues for the two quarters ended March 31, 2020 increased $4,464,000 or 8.5% to $56,996,000 from $52,532,000 for the two quarters ended March 26, 2019. Bad Daddy’s concept revenues increased $3,456,000 while our Good Times concept revenues increased $1,008,000.

Bad Daddy’s restaurant sales increased $3,479,000 to $42,113,000 for the two quarters ended March 31, 2020 from $38,634,000 for the two quarters ended March 26, 2019, primarily attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the first fiscal quarter of 2020, and the impact of the 53^rd 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 9.7% during the two quarters ended March 31, 2020 compared to the same prior-year two quarters, substantially driven by decreases during the last three weeks of the quarter when dining rooms were closed. 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 two quarters ended March 31, 2020 over the same prior-year two quarters was approximately 2.8%. There were twenty-nine restaurants included in the same store sales base at the end of the quarter. Additionally, net revenues were reduced by $22,000 in lower franchise royalties and license fees compared to the prior-year two quarters primarily related to the Charlotte Airport licensee. Franchise revenues in the current and prior year quarters include franchisee advertising contributions of $7,000 and $8,000, respectively.

Good Times restaurant sales increased $1,011,000 to $14,478,000 for the two quarters ended March 31, 2020 from $13,467,000 for the two quarters ended March 26, 2019. Good Times same store restaurant sales increased 4.5% during the two quarters ended March 31, 2020 compared to the same prior-year two quarters and benefitted from an extra operating week in the first fiscal quarter of 2020 which we estimate contributed approximately $460,000.The average menu price increase for the two quarters ended March 31, 2020 over the same prior-year two quarters was approximately 6.2%. Franchise revenues increased $19,000 for the two quarters ended March 31, 2020, compared to the same prior year period. Franchise revenues for the current and prior year quarters include franchisee advertising contributions of $102,000 and $125,000, respectively.

Restaurant Operating Costs

Food and Packaging Costs. Food and packaging costs for the two quarters ended March 31, 2020 increased $1,226,000 to $16,652,000 (29.4% of restaurant sales) from $15,426,000 (29.6% of restaurant sales) for the two quarters ended March 26, 2019.

Bad Daddy’s food and packaging costs were $12,177,000 (28.9% of restaurant sales) for the two quarters ended March 31, 2020, up from $11,073,000 (28.7% of restaurant sales) for the two quarters ended March 26, 2019. This increase is primarily due to a greater number of operating restaurants during the current two quarters versus the same two quarters 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 $4,475,000 (30.9% of restaurant sales) for the two quarters ended March 31, 2020, up from $4,353,000 (32.3% of restaurant sales) for the two quarters ended March 26, 2019. 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 two quarters ended March 31, 2020 increased $1,912,000 to $21,693,000 (38.3% of restaurant sales) from $19,781,000 (38.0% of restaurant sales) for the two quarters ended March 26, 2019.

Bad Daddy’s payroll and other employee benefit costs were $16,192,000 (38.4% of restaurant sales) for the two quarters ended March 31, 2020 up from $14,651,000 (37.9% of restaurant sales) in the same prior year period. The $1,541,000 increase was primarily attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the first fiscal quarter of 2020. 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 $5,501,000 (38.0% of restaurant sales) in the two quarters ended March 31, 2020, up from $5,130,000 (38.1% of restaurant sales) in the same prior-year period. The $371,000 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 decreased by 0.1%, compared to the same prior year period. The average wage paid to our employees increased approximately 8.4% in the two quarters ended March 31, 2020 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 two quarters ended March 31, 2020 increased $520,000 to $4,650,000 (8.2% of restaurant sales) from $4,130,000 (7.9% of restaurant sales) for the two quarters ended March 26, 2019.

Bad Daddy’s occupancy costs were $3,115,000 (7.4% of restaurant sales) for the two quarters ended March 31, 2020 up from $2,632,000 (6.8% of restaurant sales) in the same prior year period. The $483,000 increase was primarily attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the first fiscal quarter of 2020. The increase as a percentage of sales was due to general increases in our operating lease costs.

Good Times occupancy costs were $1,535,000 (10.6% of restaurant sales) in the two quarters ended March 31, 2020, up from $1,498,000 (11.1% of restaurant sales) in the same prior year period. The $37,000 decrease was primarily attributable to decreases in our operating lease costs and property taxes.

Other Operating Costs. Other operating costs for the two quarters ended March 31, 2020, increased $871,000 to $6,509,000 (11.5% of restaurant sales) from $5,638,000 (10.8% of restaurant sales) for the two quarters ended March 26, 2019.

Bad Daddy’s other operating costs were $5,130,000 (12.2% of restaurant sales) for the two quarters ended March 31, 2020 up from $4,374,000 (11.3% of restaurant sales) in the same prior year period. The $756,000 increase was primarily attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the first fiscal quarter of 2020 as well as an increase of $268,000 in commissions paid to delivery service providers. The percentage increase was primarily attributable to the 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 $1,379,000 (9.5% of restaurant sales) in the two quarters ended March 31, 2020, up from $1,264,000 (9.4% of restaurant sales) in the same prior year period. The increase was primarily attributable to an approximate $94,000 increase in commissions paid to delivery service providers.

New Store Preopening Costs. In the two quarters ended March 31, 2020, we incurred $961,000 of preopening costs compared to $820,000 for the two quarters ended March 26, 2019. All of the preopening costs are related to our Bad Daddy’s restaurants.

Preopening costs in the current two quarters are primarily attributable to four restaurants: two that opened late during the fourth quarter of fiscal 2019, and two restaurants that opened during the first fiscal quarter of 2020. In addition, the current two quarters includes $100,000 of non-cash operating lease costs associated with two future Bad Daddy’s restaurants, In the prior-year period, pre-opening costs are related to the one Bad Daddy’s restaurant opened during the second fiscal quarter of 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 two quarters ended March 31, 2020, increased $69,000 to $2,192,000 from $2,123,000 in the two quarters ended March 26, 2019.

Bad Daddy’s depreciation and amortization costs for the two quarters ended March 31, 2020, increased $86,000 to $1,765,000 from $1,679,000 in the two quarters ended March 26, 2019. This increase was primarily attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the first fiscal quarter of 2020, partially offset by the reduced depreciation resulting from asset impairment charges recorded in the fourth quarter of fiscal 2019. There were four more Bad Daddy’s restaurants open at the end of the current fiscal quarter compared to the prior year fiscal quarter.

Good Times depreciation and amortization costs for the two quarters ended March 31, 2020, decreased $17,000 to $427,000 from $444,000 in the two quarters ended March 26, 2019.

General and Administrative Costs. General and administrative costs for the two quarters ended March 31, 2020, decreased $179,000 to $3,849,000 (6.8% of total revenue) from $4,028,000 (7.7%) of total revenues) for the two quarters ended March 26, 2019.

The $179,000 decrease in general and administrative expenses in the two quarters ended March 31, 2020 is primarily attributable to:

For the balance of the fiscal year, we expect general and administrative costs to continue to decline slightly from fiscal 2019 to fiscal 2020 as we focus on reducing turnover and associated training costs.

Advertising Costs. Advertising costs for the two quarters ended March 31, 2020, decreased $109,000 to $1,056,000 (1.9% of total revenue) from $1,165,000 (2.2% of total revenue) for the two quarters ended March 26, 2019.

Bad Daddy’s advertising costs were $475,000 (1.1% of total revenue) in the two quarters ended March 31, 2020 compared to $442,000 (1.4% of total revenue) in the same prior year period. The increase was primarily attributable to $52,000 in costs incurred in the current fiscal quarter related to a local radio advertising campaign in the Charlotte, North Carolina area as well as an increase in advertising fund contributions related to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the first fiscal quarter of 2020. These increases were offset by a decrease attributable to rolling over a media buy in the first fiscal quarter of 2019 in the Colorado market that was incurred by those restaurants. The current and prior year two quarters include advertising costs of $7,000 and $8,000, respectively, 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 $581,000 (3.9% of total revenue) in the two quarters ended March 31, 2020 compared to $723,000 (5.3% of total revenue) in the same prior year period. This $142,000 decline is due primarily to reduced contributions made to the regional advertising cooperative. The current and prior year quarters include advertising costs of $102,000 and $125,000, 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 $8,000 and $23,000 for the two quarters ended March 31, 2020 and March 26, 2019, 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 two quarters ended March 31, 2020 was $28,000 compared to a gain of $39,000 in the two quarters ended March 26, 2019.

$18,000 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.

Impairment Costs: Impairment costs were $14,359,000 and $0 for the two quarters ended March 31, 2020 and March 26, 2019, respectively. $4,359,000 of the costs in the current two quarters are related to five Bad Daddy’s restaurants’ assets that were impaired and $10,000,000 is attributable to an impairment of goodwill related to our Bad Daddy’s reporting unit.

Loss from Operations. The loss from operations was $14,905,000 in the two quarters ended March 31, 2020 compared to a loss of $563,000 in the two quarters ended March 26, 2019.

The change in the loss from operations for the two quarters ended March 31, 2020 is due primarily due to matters discussed in the "Net Revenues,” "Restaurant Operating Costs," "General and Administrative Costs," “Advertising Costs” and “Asset Impairment Costs” sections above.

Net Loss. The net loss was $15,341,000 for the two quarters ended March 31, 2020 compared to a net loss of $922,000 in the two quarters ended March 26, 2019.

The change from the two quarters ended March 31, 2020 to the two quarters ended March 26, 2019 was primarily attributable to the matters discussed in the "Net Revenues," "Restaurant Operating Costs," "General and Administrative Costs," “Advertising Costs” and “Asset Impairment Costs” sections above as well as an increase in net interest expense of $67,000 for the two quarters ended March 31, 2020 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 two quarters ended March 31, 2020, the income attributable to non-controlling interests was $386,000 compared to $579,000 for the two quarters ended March 26, 2019.

$245,000 of the current two quarters’ income is attributable to the BDI joint-venture restaurants, compared to $484,000 in the same prior year period. This $239,000 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. $141,000 of the current two quarters’ income is attributable to the Good Times joint-venture restaurants, compared to $95,000 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:

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 second fiscal quarter and year-to-date:

Liquidity and Capital Resources

Cash and Working Capital

As of March 31, 2020, we had a working capital deficit of $21,526,000, which includes $16,750,000 of long-term debt that is classified as current. Our working capital position additionally 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. We have minimal availability on the Cadence Credit Facility, however, believe that other sources of liquidity provided under the CARES Act will be available to us, such as loans under Paycheck Protection Program and, as such, believe that we will have sufficient capital to meet our working capital, long term debt obligations and recurring capital expenditure needs for the remainder of fiscal 2020. As of March 31, 2020, we had $357,000 in commitments outstanding related to construction contracts for a Bad Daddy’s restaurant 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 repurchase of minority interests related to three Bad Daddy’s restaurants, 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 March 31, 2020, the weighted average interest rate applicable to borrowings under the Cadence Credit Facility was 4.531%.

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 March 31, 2020, the outstanding balance on borrowings against the facility was $16,750,000. 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 March 31, 2020, 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.

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 March 31, 2020, the Company was in compliance with the minimum fixed charge coverage ratio and liquidity covenants under the Cadence Credit Facility but was not in compliance with the maximum leverage ratio covenant.

On April 14, 2020, Good Times Restaurants Inc. (the “Borrower”) and each of its wholly-owned subsidiaries, as guarantors, entered into a Consent and Forbearance Agreement effective March 31, 2020 (the “Forbearance Agreement”) with respect to the Cadence Credit Facility. The Borrower informed Cadence that certain events of default may occur as a result of Borrower’s failure to comply with certain financial covenants for the fiscal quarter ended on or about March 31, 2020 (collectively, the “Potential Events of Default”). Pursuant to the terms of the Forbearance Agreement, during the Forbearance Period (as defined below), Cadence agreed to forbear from exercising any available rights and remedies under the Cadence Credit Faciliy to the extent such rights and remedies arise exclusively as a result of the Potential Events of Default. Further, Cadence agreed that it will consent to the Borrower’s request to defer the principal payment (the “Payment Deferral”) on the loans due on March 31, 2020 until the Maturity Date (as defined in the Cadence Credit Facility).

The forbearance period (the “Forbearance Period”) will expire on the earliest to occur of (a) any default or event of default other than the Potential Events of Default, (b) the breach by the Borrower or any guarantor of any covenant or provisions of the Forbearance Agreement; and (c) 11:59 p.m. (Eastern time) on June 30, 2020.

Although Cadence is forbearing from exercising certain remedies and rights through June 30, 2020 pursuant to the Forbearance Agreement, the Company expects further forbearance will be required at the expiration of the Forbearance Period due to the negative financial impacts of COVID-19. The Company believes that it will be able to successfully negotiate new waivers with Cadence at that time, although no assurances can be made. As such, consistent with ASC 470, the Company has classified the entire outstanding balance on the Cadence Credit Facility as current.

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 used in operating activities was $204,000 for the two quarters ended March 31, 2020. The net cash provided by operating activities for the two quarters ended March 31, 2020 was the result of a net loss of $15,341,000 as well as cash and non-cash reconciling items totaling $15,137,000 (these reconciling items are comprised of 1) depreciation and amortization of general assets of $2,287,000, 2) amortization of operating lease assets of $2,054,000, 3) stock-based compensation expense of $149,000, 4) impairment costs of 14,359,000 5) an increase in receivables and other assets of $258,000, 6) a decrease in deferred liabilities and accrued expenses of $2,002,000 , 7) a decrease in accounts payable of $144,000 and 8) a net increase in amounts related to our operating leases of $1,308,000.

Net cash provided by operating activities was $2,487,000 for the two quarters ended March 26, 2019. The net cash provided by operating activities for the two quarters ended March 26, 2019 was the result of a net loss of $922,000 as well as cash and non-cash reconciling items totaling $3,409,000 (these reconciling items are comprised of 1) depreciation and amortization of $2,248,000, 2) accretion of deferred rent of $273,000, 3) amortization of lease incentive obligations of $242,000, 4) stock-based compensation expense of $221,000, 5) a decrease in receivables and other assets of $1,138,000, 6) an increase in deferred liabilities related to tenant allowances of $368,000, 7) a decrease in accounts payable of $32,000, 8) an increase in prepaid expenses of $507,000 and 9) a net decrease in other operating assets and liabilities of $58,000).

Net cash used in investing activities for the two quarters ended March 31, 2020 was $2,021,000 which primarily reflects the purchases of property and equipment of $1,954,000 and the purchase of treasury stock of $75,000. Purchases of property and equipment is comprised of the following:

Net cash used in investing activities for the two quarters ended March 26, 2019 was $6,502,000 which primarily reflects the purchases of property and equipment of $3,793,000 and the purchase of non-controlling interests of $2,724,000. Purchases of property and equipment is comprised primarily of the following:

Net cash provided by financing activities for the two quarters ended March 31, 2020 was $3,536,000, which includes principal payments on notes payable and long-term debt of $1,400,000, borrowings on notes payable and long-term debt of $5,300,000, contributions from non-controlling interests of $22,000 and distributions to non-controlling interests of $386,000.

Net cash provided by financing activities for the two quarters ended March 26, 2019 was $3,937,000, which includes principal payments on notes payable and long-term debt of $1,330,000, borrowings on notes payable and long-term debt of $6,150,000, proceeds from the exercise of stock options of $3,000 and distributions to non-controlling interests of $886,000.

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 second 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 second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. Due to the impact of the COVID-19 pandemic, availability of ground beef and bacon has been limited and prices for those commodities have been more volatile than in recent history. Due to these factors, we are not able to predict the impact of inflation on our food and packaging costs for the balance of the year.

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.