|
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
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 Section
21E of the Securities Exchange Act of 1934, as amended, and the disclosure of risk factors in the Company’s Form 10-K for
the fiscal year ended September 29, 2020. 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:
|
(I)
|
The disruption to our business from the novel coronavirus (COVID-19) pandemic
and the impact of the pandemic on our results of operations, financial condition and prospects. The disruption and effect on our
business may vary depending on the duration and extent of the COVID-19 pandemic and the impact of federal, state and local governmental
actions and customer behavior in response to the pandemic.
|
|
(II)
|
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.
|
|
(II)
|
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.
|
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 29, 2020.
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 quarter ended December 29, 2020. During portions of the
month of November 2020 through early January 2021, all of the Company’s Bad Daddy’s Burger Bar restaurants in Colorado
were open only for limited outdoor dining, delivery and carry-out service, with indoor dining rooms closed by government orders.
Beginning in early January 2021, we began to re-open Colorado dining rooms at Bad Daddy’s, with limited occupancy, as local
regulations allowed. Our dining rooms in all other states in which Bad Daddy’s has operations were open during this time.
Although certain dining rooms were open, all were operating at some reduction of capacity, whether driven by explicit capacity
reductions under government orders, or due to social distancing protocols that are either mandated by the same government orders,
or which we abide by as under our own internal protocols designed to maintain a safe foodservice environment, both for our employees
and for our customers. Furthermore, although the development of certain vaccines that are currently being administered may reduce
the risk of further government restrictions, there is no guarantee that the vaccine will be effective in eradicating the virus,
additional mutations of the virus may be resistant to any vaccine, and the length of the ongoing pandemic may change consumer behavior
such that potential customers may still choose to reduce or eliminate in-restaurant dining.
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.
Growth Strategies and Outlook.
We believe there are significant opportunities
to grow customer traffic and increase awareness of our brands. Prior to the COVID-19 pandemic, we reduced our development profile
as we sought to improve our financial position, and while we believe there are unit growth opportunities for both of our concepts,
we are evaluating that in-line with the impact of the pandemic on the restaurant industry. We expect to open two Bad Daddy’s
restaurants during fiscal 2021.
Restaurant locations.
As of December 29, 2020, we operated, franchised
or licensed a total of thirty-nine Bad Daddy’s restaurants and thirty-two Good Times restaurants. The following table presents
the number of restaurants operating at the end of the first fiscal quarters of 2021 and 2020.
Company-Owned/Co-Developed/Joint-Venture:
|
|
Bad Daddy’s
Burger Bar
|
|
|
Good Times Burgers
& Frozen Custard
|
|
|
Total
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Alabama
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Colorado
|
|
|
12
|
|
|
|
12
|
|
|
|
24
|
|
|
|
25
|
|
|
|
36
|
|
|
|
37
|
|
Georgia
|
|
|
4
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
4
|
|
North Carolina
|
|
|
14
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
14
|
|
Oklahoma
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
South Carolina
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
Tennessee
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Total
|
|
|
37
|
|
|
|
37
|
|
|
|
24
|
|
|
|
25
|
|
|
|
61
|
|
|
|
62
|
|
Franchise/License:
|
|
Bad Daddy’s
Burger Bar
|
|
|
Good Times Burgers
& Frozen Custard
|
|
|
Total
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Colorado
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
North Carolina
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
South Carolina
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Wyoming
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Total
|
|
|
2
|
|
|
|
2
|
|
|
|
8
|
|
|
|
8
|
|
|
|
10
|
|
|
|
10
|
|
Results of Operations
Fiscal quarter ended December 29,
2020 (13 weeks) compared to fiscal quarter ended December 31, 2019 (14 weeks):
Net Revenues. Net revenues
for the quarter ended December 29, 2020 decreased $3,518,000 or 11.4% to $27,296,000 from $30,814,000 for the quarter ended December
31, 2019. Bad Daddy’s concept revenues decreased $4,149,000 while our Good Times concept revenues increased $631,000.
Bad Daddy’s restaurant sales decreased
$4,122,000 to $18,691,000 for the quarter ended December 29, 2020 from $22,813,000 for the quarter ended December 31, 2019. Sales
were positively impacted by two new restaurants opened in the first fiscal quarter of 2020, offset by the negative impact of our
dining room closures and reduced capacity due to the COVID-19 pandemic, as well as the negative effect of the additional week of
sales in the prior year, which we estimate to be approximately $1,570,000. The average menu price increase for the quarter ended
December 29, 2020 over the same prior-year quarter was approximately 2.2%.
Additionally, net revenues were reduced
by $26,000 in lower franchise royalties and license fees compared to the prior-year quarter primarily due to COVID-19 related capacity
restrictions at our franchise and licensee locations. Franchise revenues in the current and prior year quarters each include franchisee
advertising contributions of $4,000.
Good Times restaurant sales increased $610,000
to $8,390,000 for the quarter ended December 29, 2020 from $7,780,000 for the quarter ended December 31, 2019, despite the negative
effect of the additional week of sales in the prior year, which we estimate to be approximately $609,000. The average menu price
increase for the quarter ended December 29, 2020 over the same prior-year quarter was approximately 4.5%. Franchise revenues increased
$21,000 for the quarter ended December 29, 2020, compared to the same prior year period. Franchise revenues for the current and
prior year quarters include franchisee advertising contributions of $63,000 and $55,000, respectively.
Same Store Sales
Sales store sales is a metric used in evaluating
the performance of established restaurants and is a commonly used metric in the restaurant industry. Same store sales for our brands
are calculated using all units open for at least eighteen full fiscal months, and use the comparable operating weeks from the prior
year to the current year quarter’s operating weeks.
Bad Daddy’s same store restaurant
sales decreased 11.8% during the quarter ended December 29, 2020 compared to the same thirteen-week period ended December 31, 2019
in the prior-year quarter, substantially driven by COVID-19 related capacity restrictions and dining room closures throughout Colorado.
There were thirty-three restaurants included in the same store sales base at the end of the quarter.
Good Times same store restaurant sales
increased 22.1% during the quarter ended December 29, 2020 compared to the same thirteen-week period ended December 31, 2019 in
the prior-year quarter, primarily due to improved customer traffic in November and December as a result of increased preference
for drive-thru service during COVID-19 related restrictions. One restaurant closed during the first fiscal quarter of 2021 and
was excluded from same store sales. There were twenty-four restaurants included in the same store sales base at the end of the
quarter.
Restaurant Operating Costs
Food and Packaging Costs.
Food and packaging costs for the quarter ended December 29, 2020 decreased $1,465,000 to $7,841,000 (29.0% of restaurant sales)
from $9,306,000 (30.4% of restaurant sales) for the quarter ended December 31, 2019.
Bad Daddy’s food and packaging costs
were $5,356,000 (28.7% of restaurant sales) for the quarter ended December 29, 2020, down from $6,892,000 (30.2% of restaurant
sales) for the quarter ended December 31, 2019. This decrease is primarily attributable to lower restaurant sales during the current
quarter versus the same quarter in the prior year. The decrease as a percent of sales is attributable to menu mix shift from a
limited menu during the ongoing COVID-19 pandemic, improved cost on soft beverage because refills are not available on off-premise
sales, reduced discounting due to the reduction in on-premises sales, and increased pricing charged on sales through third-party
delivery services, typically at a 10% to 20% premium to purchases made in-store or through our online ordering system. Purchase
prices generally increased on bacon but generally decreased on beef and chicken, on a year-over-year basis.
Good Times food and packaging costs were
$2,485,000 (29.6% of restaurant sales) for the quarter ended December 29, 2020, up from $2,414,000 (31.0% of restaurant sales)
for the quarter ended December 31, 2019. This increase is primarily attributable to increased restaurant sales. The 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 29, 2020 decreased $3,098,000 to $8,881,000
(32.8% of restaurant sales) from $11,979,000 (39.2% of restaurant sales) for the quarter ended December 31, 2019.
Bad Daddy’s payroll and other employee
benefit costs were $6,267,000 (33.5% of restaurant sales) for the quarter ended December 29, 2020 down from $9,003,000 (39.5% of
restaurant sales) in the same prior year period. The $2,736,000 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 decreased
by 6.0% primarily attributable to staffing reductions associated with the closure of our dining rooms for much of the quarter as
well as reductions in management staffing.
Good Times payroll and other employee benefit
costs were $2,614,000 (31.2% of restaurant sales) in the quarter ended December 29, 2020, down from $2,976,000 (38.3% of restaurant
sales) in the same prior-year period. The $362,000 decrease was partially attributable to labor saving initiatives implemented
during the prior fiscal year as well as labor efficiencies gained though higher average menu pricing. As a percent of sales, payroll
and employee benefits costs decreased by 7.1% in the quarter ended December 29, 2020 compared to the same prior year period. This
decrease is primarily attributable to the leveraging impact of the significant sales increases. The average wage paid to our employees
increased approximately 1.2% in the quarter ended December 29, 2020 compared to the same prior year period.
Occupancy Costs. Occupancy
costs for the quarter ended December 29, 2020 decreased $243,000 to $2,195,000 (8.1% of restaurant sales) from $2,438,000 (8.0%
of restaurant sales) for the quarter ended December 31, 2019.
Bad Daddy’s occupancy costs were
$1,454,000 (7.8% of restaurant sales) for the quarter ended December 29, 2020, down from $1,644,000 (7.2% of restaurant sales)
in the same prior year period. The $189,000 decrease was primarily attributable to decreases in our operating lease costs and property
taxes. The increase as a percentage of sales was primarily due to the deleveraging effect of lower restaurant sales.
Good Times occupancy costs were $741,000
(8.8% of restaurant sales) in the quarter ended December 29, 2020, down from $794,000 (10.2% of restaurant sales) in the same prior
year period. The $53,000 decrease was primarily attributable to decreases in our operating lease costs offset by increases in property
taxes.
Other Operating Costs. Other
operating costs for the quarter ended December 29, 2020, increased $467,000 to $3,469,000 (12.8% of restaurant sales) from $3,002,000
(9.8% of restaurant sales) for the quarter ended December 31, 2019.
Bad Daddy’s other operating costs
were $2,648,000 (14.1% of restaurant sales) for the quarter ended December 29, 2020 up from $2,291,000 (10.0% of restaurant sales)
in the same prior year period. The $357,000 increase was partially attributable to the two new restaurants opened in the first
fiscal quarter of 2020. Other restaurant operating costs were generally reduced due to the decrease in sales compared to the prior
year quarter, however, the decrease was offset by a $572,000 increase in commissions paid to delivery service providers in the
quarter ended December 29, 2020 compared to the quarter ended December 31, 2019. The percentage increase was primarily attributable
to the deleveraging impact of lower overall sales and a significant shift in delivery sales as a percentage of overall sales, as
customers migrated to delivery during the pandemic and dining rooms were generally closed.
Good Times other operating costs were $821,000
(9.8% of restaurant sales) in the quarter ended December 29, 2020, up from $711,000 (9.1% of restaurant sales) in the same prior
year period. The increase was primarily attributable to an approximate $64,000 increase in commissions paid to delivery service
providers.
New Store Preopening Costs.
In the quarter ended December 29, 2020, we incurred $39,000 of preopening costs compared to $802,000 for the quarter ended December
31, 2019. All of the preopening costs are related to our Bad Daddy’s restaurants.
Preopening costs in the current quarter
are primarily attributable to $33,000 of non-cash operating lease costs associated with two Bad Daddy’s restaurants where
leases have been previously executed. In the prior-year period, pre-opening costs were related to four restaurants; two that opened
late during the fourth quarter of fiscal 2019 and two that opened during the first fiscal quarter of 2020. Preopening costs typically
occur over a period of approximately five months although as a result of the pandemic we expect to incur pre-opening costs for
an extended period of time associated with these two future Bad Daddy’s restaurants. Although the exact timing varies by
location, we typically spend approximately $275,000 to $350,000 per location, though these amounts may not accurately reflect preopening
costs to be incurred with these two locations.
Depreciation and Amortization Costs.
Depreciation and amortization costs for the quarter ended December 29, 2020, decreased $150,000 to $929,000 from $1,079,000 in
the quarter ended December 31, 2019.
Bad Daddy’s depreciation and amortization
costs for the quarter ended December 29, 2020 decreased $130,000 to $737,000 from $867,000 in the quarter ended December 31, 2019.
This decrease was primarily attributable to reduced depreciation resulting from asset impairment charges recorded in fiscal 2020,
partially offset by increases due to the two new restaurants opened in first quarter of fiscal 2020.
Good Times depreciation and amortization
costs for the quarter ended December 29, 2020 decreased $20,000 to $192,000 from $212,000 in the quarter ended December 31, 2019.
General and Administrative Costs.
General and administrative costs for the quarter ended December 29, 2020, increased $121,000 to $2,174,000 (8.0% of total revenue)
from $2,053,000 (6.7% of total revenues) for the quarter ended December 31, 2019.
The $121,000 increase in general and administrative
expenses in the quarter ended December 29, 2020 is primarily attributable to:
|
·
|
Increase in administrative related payroll
and benefit costs of $299,000 primarily related to a one-time bonus awarded to the CEO during the quarter ended December 29, 2020
in connection with the amendment of his employment agreement, and additionally due to overall increased health insurance costs.
|
|
·
|
Decrease in training and recruiting costs
of $99,000
|
|
·
|
Decrease in costs associated with district
management of $99,000 primarily related to reduced district management for our east coast Bad Daddy’s markets and reduced
travel
|
|
·
|
Increase in professional services of $45,000
|
|
·
|
Decrease of $13,000 in incentive stock
compensation costs
|
|
·
|
Decrease of $19,000 related to travel
and entertainment costs
|
|
·
|
Net increases in all other expenses of
$7,000
|
For the balance of the fiscal year, we
expect general and administrative costs to continue to increase from fiscal 2020 due to increased insurance and health costs, and
as we make investments in new human resource and financial management systems, and as we compare against temporary salary reductions
made during fiscal 2020 in connection with actions taken amid the initial COVID-19 dining room closures.
Advertising Costs. Advertising
costs for the quarter ended December 29, 2020, decreased $37,000 to $509,000 (1.9% of total revenue) from $546,000 (1.8% of total
revenue) for the quarter ended December 31, 2019.
Bad Daddy’s advertising costs were
$168,000 (0.9% of total revenue) in the quarter ended December 29, 2020 compared to $235,000 (1.0% of total revenue) in the same
prior year period. The decrease is primarily due to lower sales in the current quarter versus the same prior year quarter. The
current and prior year quarters each include advertising costs of $4,000 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 $341,000
(4.0% of total revenue) in the quarter ended December 29, 2020 compared to $311,000 (3.9% of total revenue) in the same prior year
period. The increase is primarily due to increased sales in the current quarter versus the same prior year quarter. The current
and prior year quarters include advertising costs of $67,000 and $58,000, 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. 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 $5,000 and $0 for the quarters ended December 29, 2020 and December 31, 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/Loss on Restaurant Asset Disposals.
The gain on restaurant asset disposals for the quarter ended December 29, 2020 was $9,000 compared to $19,000 for the quarter ended
December 31, 2019.
The gain in the current year is related
to deferred gains on previous sale lease-back transactions on two Good Times restaurants. The gain in the prior year quarter consists
of $10,000 related to the sale of miscellaneous restaurant equipment combined with $9,000 of deferred gains on previous sale lease-back
transactions.
Income (loss) from Operations.
Income from operations was $1,263,000 in the quarter ended December 29, 2020 compared to a loss from operations of $372,000 in
the quarter ended December 31, 2019.
The change in the income (loss) from operations
for the quarter ended December 29, 2020 is due primarily due to matters discussed in the "Net Revenues,” "Restaurant
Operating Costs," "General and Administrative Costs” and “Advertising Costs” sections above.
Net Income (Loss). Net income
was $1,165,000 for the quarter ended December 29, 2020 compared to a net loss of $599,000 in the quarter ended December 31, 2019.
The change from the quarter ended December
29, 2020 to the quarter ended December 31, 2019 was primarily attributable to the matters discussed in the "Net Revenues,"
"Restaurant Operating Costs," "General and Administrative Costs" and “Advertising Costs” sections
above.
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 29, 2020,
the income attributable to non-controlling interests was $363,000 compared to $212,000 for the quarter ended December 31, 2019.
$180,000 of the current quarter’s
income is attributable to the BDI joint-venture restaurants, compared to $133,000 in the same prior year period. This $48,000 decrease
is primarily due to reduced restaurant level profitability in the current fiscal quarter. $183,000 of the current quarter’s
income is attributable to the Good Times joint-venture restaurants, compared to $79,000 in the same prior year period. This $104,000
increase is primarily due to increased restaurant level profitability in the current fiscal quarter.
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:
|
·
|
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 income/loss
to EBITDA and Adjusted EBITDA (in thousands) for the third fiscal quarter and year-to-date:
|
|
Quarter Ended
|
|
|
|
December 29, 2020
(13 Weeks)
|
|
|
December 31, 2019
(14 Weeks)
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
Net income (loss), as reported
|
|
$
|
802
|
|
|
$
|
(811
|
)
|
Depreciation and amortization
|
|
|
909
|
|
|
|
1,069
|
|
Interest expense, net
|
|
|
98
|
|
|
|
227
|
|
EBITDA
|
|
|
1,809
|
|
|
|
485
|
|
Preopening expense
|
|
|
39
|
|
|
|
801
|
|
Non-cash stock-based compensation
|
|
|
61
|
|
|
|
75
|
|
Non-recurring severance costs
|
|
|
-
|
|
|
|
41
|
|
GAAP rent-cash cash difference
|
|
|
(107
|
)
|
|
|
121
|
|
Non-cash gain on disposal of assets
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Adjusted EBITDA
|
|
$
|
1,793
|
|
|
$
|
1,514
|
|
Depreciation and amortization expense have
been reduced by amounts attributable to non-controlling interests of $41,000 for each respective quarter.
Liquidity and Capital Resources
Cash and Working Capital
We took extraordinary actions to increase
our liquidity in response to COVID-19 during fiscal 2020, including temporarily reducing employee pay, reductions in workforce,
and obtaining Paycheck Protection Program (the “PPP”) loans. The PPP is sponsored by the Small Business Administration
(the “SBA”). We have since significantly increased employment levels and restored pay to employees. Although we currently
have a meaningful cash balance and generated significant cash flow from operations during this quarter, should business decline
significantly as a result of the pandemic we would not likely be able to take some of the same actions without negatively impacting
the long-term viability of the business. 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.
As of December 29, 2020, we had a working
capital deficit of $6,135,000. 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. This benefit
may increase when new Bad Daddy’s and Good Times restaurants are opened. Although we have two to four weeks to pay many of
our vendors, in the first quarter of fiscal 2021 we chose to start paying our primary foodservice vendors on 1-3 day payment terms
to take advantage of early pay discounts. We believe that we will have sufficient capital to meet our working capital, long term
debt obligations and recurring capital expenditure needs throughout fiscal 2021. As of December 29, 2020, we had total commitments
outstanding of $353,000 related to construction contracts for Bad Daddy’s restaurants currently under development. Additionally,
as discussed in the Financing section below, there is uncertainty surrounding the forgiveness of our PPP loans which could significantly
affect future cash commitments. We anticipate these commitments will be funded out of existing cash or future borrowings against
the Cadence Credit Facility.
Financing
Cadence Credit Facility
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 certain “Restricted Payments” (as defined in the Cadence Credit Facility).
Subsequent to December 29, 2020, on January 8, 2021, the Cadence Credit Facility was amended to eliminate certain installment payments;
reduce the commitment immediately to $11.0 million with reductions to $10.0 million and $8.0 million on March 31, 2021, and July
1, 2021, respectively; revise certain financial covenants; provide a mechanism for a transition from LIBOR to an alternate benchmark
rate; and extend the maturity date to January 31, 2023. 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%. As of December 29, 2020, 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 29, 2020, the weighted average interest rate applicable to borrowings under the Cadence Credit Facility
was 3.75%.
Principal payments on the Cadence Credit
Facility were 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 was permanently reduced by the corresponding amount of each such
repayment on such date. New borrowings were permitted up to the amount of the loan commitment. The note was set to mature on December
31, 2021. Subsequent to December 29, 2020 per the January 8, 2021 amendment, the quarterly principal payment requirement and associated
commitment reduction was eliminated, and the maturity date was extended to January 31, 2023.
As of December 29, 2020, 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 pre-distribution fixed
charge coverage ratio of 1.25:1, a minimum post-distribution fixed charge coverage ratio of 1.10:1 and minimum liquidity of $2.0
million. As of December 29, 2020, the Company was in compliance with all covenants under the Cadence Credit Facility. Subsequent
to December 29, 2020 per the January 8, 2021 amendment, certain financial covenants were amended.
As a result of entering into the Cadence
Credit Facility and the various amendments, the Company paid loan origination costs including professional fees of approximately
$292,000 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 29, 2020, the outstanding
balance on borrowings against the facility was $4,000,000. 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 29, 2020, the outstanding face
value of such letters of credit was $157,500.
Paycheck Protection Program Loans
On May 7, 2020, Good Times and three of
its wholly-owned subsidiaries, BDI, Drive Thru, and BD Colo (each a “Borrower”), entered into unsecured loans in the
aggregate principal amount of $11,645,000 (the “Loans”) with Cadence Bank, N.A. (the “Lender”) pursuant
to the PPP.
The Loans are evidenced by individual promissory
notes of each of the Borrowers dated April 29, 2020 executed by each Borrower on May 7, 2020 (together, the “Notes”)
in favor of the Lender which Notes bear interest at the rate of 1.00% per annum. All or a portion of the Loans may be forgiven
by the SBA upon application by the Borrowers accompanied by documentation of expenditures in accordance with SBA requirements under
the PPP, which includes employees being kept on the payroll for twenty-four weeks after the date of the Loans and the proceeds
of such Loans being used for payroll, rent, mortgage interest or utilities. Congress subsequently passed the PPP Flexibility Act
which modified certain provisions of the PPP program, including expanding the original eight-week covered period to a period of
twenty-four weeks (the “Covered Period”). The SBA and the Treasury continue to develop and issue new and updated guidance
regarding the PPP loan application process, including guidance regarding required borrower certifications and requirements for
forgiveness of loans made under the PPP. The Company continues to track the guidance as it is released and assess and re-assess
various aspects of its application as necessary based on the guidance. The Company believes it qualifies for the PPP and is compliant
in all aspects with its use of PPP funds, and expects to apply for forgiveness during 2021. However, in the absence of definitive
guidance or regulations the Company cannot give any assurance that the Loans will be forgivable in whole or in part.
In the event that any portion of the Loans
are not forgiven in accordance with the PPP, the Company will be required to pay the Lender monthly payments of principal and interest
in an aggregate amount of $489,000 to repay the PPP Loans in full on or before April 29, 2022. The SBA has deferred loan payments
to either (1) the date the SBA remits our forgiveness to the lender, or (2) 10 months after the end of the Covered Period, which
would be in August 2021. However, as of the date of this report we have not yet received a decision from the SBA regarding forgiveness
of our PPP loans or communication regarding the official end date of our deferral period. The Loans may be prepaid by the Company
at any time prior to maturity with no prepayment penalties. The Notes contain certifications and agreements related to the PPP,
as well as customary default and other provisions. We reflect the full principal amount of the PPP loans as debt, accounting for
such loans under ASC 470, with current maturities of approximately $6.7 million pursuant to the current payment amortization schedule.
We intend to account for the forgiveness of such loans at the time such forgiveness is granted.
Cash Flows
Net cash provided by operating activities
was $847,000 for the quarter ended December 29, 2020. The net cash provided by operating activities for the quarter ended December
29, 2020 was the result of net income of $1,165,000 as well as cash and non-cash reconciling items totaling $318,000. These reconciling
items are primarily comprised of 1) depreciation and amortization of general assets of $967,000, 2) amortization of operating lease
assets of $1,055,000, 3) stock-based compensation expense of $61,000, 4) an increase in receivables and other assets of $659,000,
5) an increase in deferred liabilities and accrued expenses of $743,000, 6) a decrease in accounts payable of $1,340,000 and 7)
a net decrease in amounts related to our operating leases of $1,136,000.
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 primarily 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) an increase in receivables and other assets of $610,000,
5) an increase 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 investing activities for
the quarter ended December 29, 2020 was $480,000 which primarily reflects the purchases of property and equipment of $483,000.
Purchases of property and equipment is comprised of the following:
|
·
|
$102,000 in costs for the development
of Bad Daddy’s locations
|
|
·
|
$220,000 for miscellaneous capital expenditures
related to our Bad Daddy’s restaurants
|
|
·
|
$113,000 for miscellaneous capital expenditures
related to our Good Times restaurants
|
|
·
|
$48,000 for miscellaneous capital expenditures
related to our corporate office
|
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:
|
·
|
$1,508,000 in costs for the development
of Bad Daddy’s locations
|
|
·
|
$69,000 for miscellaneous capital expenditures
related to our Bad Daddy’s restaurants
|
|
·
|
$15,000 for miscellaneous capital expenditures
related to our Good Times restaurants
|
|
·
|
$21,000 for miscellaneous capital expenditures
related to our corporate office
|
Net cash used in financing activities for
the quarter ended December 29, 2020 was $1,806,000, which includes principal payments on notes payable and long-term debt of $1,500,000,
proceeds from stock option exercises of $13,000 and distributions to non-controlling interests of $319,000.
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.
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 2020 were approximately 4.0%, and we raised menu prices approximately 4.5% during the first quarter
of fiscal 2021. The total menu increases taken at our Bad Daddy’s restaurants during fiscal 2020 were approximately 4.0%
on average. We raised menu prices during the first quarter of fiscal 2020 approximately 0.7%. Commodity prices have been slightly
elevated since the end of fiscal 2020 compared to the first quarter of fiscal 2020. Due to the impact of the COVID-19 pandemic,
availability of certain commodities could be constrained and prices for those commodities could be substantially 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.