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 25, 2018. 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 25, 2018.
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 developing the Bad Daddy’s
concept with company-owned restaurants in major markets of the U.S., while continuing to improve the profitability of Good Times,
redeploying profits generated from Good Times into the Bad Daddy’s concept.
We believe there are significant opportunities
to develop new units, grow customer traffic and increase awareness of our brands. The following sets for the key elements of our
growth strategy:
As of June 25, 2019, we operated, franchised
or licensed a total of thirty-five Bad Daddy’s restaurants and thirty-four Good Times restaurants. The following table presents
the number of restaurants operating at the end of the first three fiscal quarters of 2019 and 2018.
Franchise/License:
State
|
|
Good Times Burgers
& Frozen Custard
|
|
|
Bad Daddy's
Burger Bar
|
|
|
Total
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Colorado
|
|
|
6
|
|
|
|
8
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6
|
|
|
|
8
|
|
North Carolina
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
South Carolina
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Wyoming
|
|
|
2
|
|
|
|
2
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
2
|
|
Total:
|
|
|
8
|
|
|
|
10
|
|
|
|
2
|
|
|
|
2
|
|
|
|
10
|
|
|
|
12
|
|
Results of Operations
Fiscal quarter ended June 25, 2019
compared to fiscal quarter ended June 26, 2018:
Net Revenues.
Net revenues
for the quarter ended June 25, 2019 increased $3,194,000 or 12.2% to $29,457,000 from $26,263,000 for the quarter ended June 26,
2018. Bad Daddy’s concept revenues increased $3,319,000 while our Good Times concept revenues decreased $125,000.
Bad Daddy’s restaurant sales increased
$3,315,000 to $21,080,000 for the quarter ended June 25, 2019 from $17,765,000 for the quarter ended June 26, 2018, primarily attributable
to the six new restaurants opened subsequent to the third fiscal quarter of 2018. Bad Daddy’s same store restaurant sales
decreased 0.7% during the quarter ended June 25, 2019 compared to the same prior-year quarter. Bad Daddy’s restaurants are
included in same store sales after they have been open a full eighteen months. Comparable sales are calculated excluding weeks
during which restaurants are closed for major remodels. The average menu price increase for the quarter ended June 25, 2019 over
the same prior-year quarter was approximately 1.4%. There were twenty-four restaurants included in the same store sales base at
the end of the quarter. Additionally, net revenues increased by $4,000 due to higher franchise revenues compared to the same prior-year
quarter. The current and prior year quarters include franchise advertising contributions of $4,000.
Good Times restaurant sales decreased $125,000
to $8,100,000 for the quarter ended June 25, 2019 from $8,225,000 for the quarter ended June 26, 2018. Good Times same store restaurant
sales increased 2.8% during the quarter ended June 25, 2019 compared to the same prior-year quarter. To align Good Times’
same store sales calculations with same store sales calculations for Bad Daddy’s, beginning in fiscal 2018 Good Times restaurants
are included in the same store sales calculation after they have been open a full eighteen months. The same store sales increase
was offset by a decrease in restaurant sales of $344,000 due to one restaurant that closed in April of 2018 and one that was closed
for most of the current fiscal quarter for a remodel. The average menu price increase for the quarter ended June 25, 2019 over
the same prior-year quarter was approximately 3.9%. Total franchise revenues were unchanged for the quarter ended June 25, 2019
at $176,000, compared to the same prior year quarter. The current and prior year quarters include franchise advertising contributions
of $93,000 and $84,000, respectively.
Food and Packaging Costs.
Food and packaging costs for the quarter ended June 25, 2019 increased $696,000 to $8,529,000 (29.2% of restaurant sales) from
$7,833,000 (30.1% of restaurant sales) for the quarter ended June 26, 2018.
Bad Daddy’s food and packaging costs
were $6,063,000 (28.8% of restaurant sales) for the quarter ended June 25, 2019, up from $5,179,000 (29.2% of restaurant sales)
for the quarter ended June 26, 2018. This increase is primarily due to a greater number of operating restaurants during the current
quarter versus the same quarter in the prior year. The decline as a percent of sales is primarily due to a combination of higher
menu prices, combined with lower costs of proteins, primarily beef.
Good Times food and packaging costs were
$2,466,000 (30.4% of restaurant sales) for the quarter ended June 25, 2019, down from $2,654,000 (32.3% of restaurant sales) for
the quarter ended June 26, 2018. The decrease as a percent of sales is due primarily to increased menu prices, coupled with reduced
beef prices, and targeted product changes.
Payroll and Other Employee Benefit
Costs.
Payroll and other employee benefit costs for the quarter ended June 25, 2019 increased $1,522,000 to $10,677,000
(36.6% of restaurant sales) from $9,155,000 (35.2% of restaurant sales) for the quarter ended June 26, 2018.
Bad Daddy’s payroll and other employee
benefit costs were $7,851,000 (37.2% of restaurant sales) for the quarter ended June 25, 2019 up from $6,439,000 (36.2% of restaurant
sales) in the same prior year period. The $1,412,000 increase was primarily attributable to the eight new restaurants opened in
the last three quarters of fiscal 2018 and two new restaurants opened in the first three quarters of fiscal 2019. As a percent
of sales, payroll and employee benefits costs increased by 1.0%, the result of increased wages for back of house staff in all states
due to a competitive market for workers and statutory wage increases for front-of-house employees in Colorado, which in total exceeded
the impact of our year-over-year menu price increases.
Good Times payroll and other employee benefit
costs were $2,826,000 (34.9% of restaurant sales) in the quarter ended June 25, 2019, up from $2,716,000 (33.0% of restaurant sales)
in the same prior year period. Payroll and other employee benefit costs increased $187,000 for the restaurants that were open in
both quarters in 2018 and 2019. The increase was due to higher average weekly sales and a higher average wage paid to our employees.
The average wage increased approximately 10.8% in the quarter ended June 25, 2019 compared to the same prior year period attributable
to a very competitive labor market in Colorado and statutory increases in the minimum wage rate. The increase was offset by a decrease
in payroll and other employee benefit costs of $77,000 from the same prior-year quarter due to one store that closed in April of
2018 and one store that was closed for most of the current fiscal quarter for a remodel.
Occupancy Costs.
Occupancy
costs for the quarter ended June 25, 2019 increased $241,000 to $2,091,000 (7.2% of restaurant sales) from $1,850,000 (7.2% of
restaurant sales) for the quarter ended June 26, 2018.
Bad Daddy’s occupancy costs were
$1,391,000 (6.6% of restaurant sales) for the quarter ended June 25, 2019 up from $1,156,000 (6.5% of restaurant sales) in the
same prior year period. The $235,000 increase was primarily attributable to the six new restaurants opened subsequent to the end
of the third quarter of 2018.
Good Times occupancy costs were $700,000
(8.6% of restaurant sales) in the quarter ended June 25, 2019, up from $694,000 (8.4% of restaurant sales) in the same prior year
period. The $6,000 increase was primarily attributable to an increase in property taxes and common area costs compared to the same
prior year period.
Other Operating Costs.
Other
operating costs for the quarter ended June 25, 2019, increased $616,000 to $2,989,000 (10.2% of restaurant sales) from $2,373,000
(9.1% of restaurant sales) for the quarter ended June 26, 2018.
Bad Daddy’s other operating costs
were $2,339,000 (11.1% of restaurant sales) for the quarter ended June 25, 2019 up from $1,725,000 (9.7% of restaurant sales) in
the same prior year period. The $614,000 increase was primarily attributable to the eight new restaurants opened in the last two
quarters of fiscal 2018 and two new restaurants opened in the first two quarters of fiscal 2019. The percentage increase was primarily
attributable to higher costs of general restaurant supplies and approximately $183,000 of increased commissions paid to delivery
service providers in the current quarter which were not incurred in the prior year quarter.
Good Times other operating costs were $650,000
(8.0% of restaurant sales) in the quarter ended June 25, 2019, up from $648,000 (7.9% of restaurant sales) in the same prior year
period. The percentage increase was primarily attributable to higher costs of general restaurant supplies and approximately $25,000
of commissions paid to delivery service providers in the current quarter which were not incurred in the prior year quarter. The
increase in commissions in the current quarter was offset by a $19,000 decrease in costs due to one restaurant that closed in April
2018 and one that was closed for most of the current fiscal quarter for a remodel.
New Store Preopening Costs.
In the quarter ended June 25, 2019, we incurred $129,000 of preopening costs compared to $610,000 for the quarter ended June 26,
2018. All of the preopening costs are related to our Bad Daddy’s restaurants.
Preopening costs in the current quarter
are primarily attributable to two restaurants that will open in August and September of 2019. In the prior-year period, pre-opening
costs are related to the one Bad Daddy’s restaurant opened during the second fiscal quarter of 2018 and four that opened
during the third and fourth quarters of fiscal 2018.
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 June 25, 2019, increased $167,000 to $1,104,000 from $937,000 in the
quarter ended June 26, 2018.
Bad Daddy’s depreciation and amortization
costs were $863,000 for the quarter ended June 25, 2019 up from $698,000 in the same prior year period. This increase was mainly
attributable to the six new restaurants opened subsequent to the third quarter of fiscal 2018.
Good Times depreciation and amortization
costs were $241,000 for the quarter ended June 25, 2019 up from $239,000 in the same prior year period.
General and Administrative Costs.
General and administrative costs for the quarter ended June 25, 2019, increased $75,000 to $2,144,000 (7.3% of total revenue) from
$2,069,000 (7.8% of total revenues) for the quarter ended June 26, 2018.
The $75,000 increase in general and administrative
expenses in the quarter ended June 25, 2019 is primarily attributable to:
|
·
|
Increase in salaries, wages, and employee benefit costs associated with manager training of $30,000
|
|
·
|
Decrease in shared services salaries, wages, and employee benefit costs of $9,000
|
|
·
|
Increase in stock compensation expense of $21,000
|
|
·
|
Increase in costs associated with district management of $75,000, primarily related to additional
district management for our east coast Bad Daddy’s markets, partially offset by reductions in the Colorado market costs for
both Bad Daddy’s and Good Times
|
|
·
|
Increase in training and recruiting costs of $15,000
|
|
·
|
Decrease in professional fees, director’s fees and financial relations of $121,000 primarily
attributable to costs in the prior year quarter for legal expenses related to the Company’s response to SEC filings by shareholders
affiliated with two former directors, payments to departing directors pursuant to a settlement agreement with shareholders affiliated
with two directors, and professional services associated with a one-time option exchange and the establishment of a new equity
compensation plan to replace the former plan which had expired
|
|
·
|
Increase in preliminary site costs of $26,000
|
|
·
|
Net increases in all other expenses of $38,000
|
We expect total general and administrative
costs will increase in support of additional Bad Daddy’s restaurants, particularly related to district management and manager
training expenses, however we anticipate such costs will decrease as a percentage of revenue.
Advertising Costs.
Advertising
costs for the quarter ended June 25, 2019, increased $13,000 to $666,000 (2.3% of total revenue) from $653,000 (2.5% of total revenue)
for the quarter ended June 26, 2018. The decline as a percentage of revenues is primarily due to the growth of the Bad Daddy’s
segment, which has lower advertising costs as a percentage of revenue compared to the Good Times segment.
Bad Daddy’s advertising costs were
$212,000 (1.0% of total revenue) in the quarter ended June 25, 2019 compared to $197,000 (1.1% of total revenue) in the same prior
year period. The $15,000 increase was primarily attributable to the six new restaurants opened subsequent to the end of the third
quarter of 2018, partially offset by a reduction in local store marketing. The current and prior year quarters include advertising
costs of $4,000 of costs associated with franchise advertising contributions.
Good Times advertising costs were $454,000
(5.5% of total revenue) in the quarter ended June 25, 2019 compared to $456,000 (5.6% of total revenue) in the same prior year
period. This $2,000 decline is due primarily to reduced contributions to the advertising fund due to the restaurant that closed
in April 2018 and the restaurant that was closed for most of the current quarter for a remodel. The current and prior year quarters
include advertising costs of $93,000 and $84,000, 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 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 5.5% of total revenue for the Good Times
segment.
Franchise Costs.
Franchise
costs were $8,000 and $11,000 for the quarters ended June 25, 2019 and June 26, 2018, respectively. The costs are primarily related
to the Good Times franchised restaurants.
Loss (gain) on Restaurant Asset Disposals.
The loss on restaurant asset disposals for the quarter ended June 25, 2019 was $44,000 compared to a gain of $9,000 for the quarter
ended June 26, 2018. The loss in the current quarter is primarily associated with the write down of assets no longer in use, offset
by deferred gains on previous sale lease-back transactions on two Good Times restaurants. The gain in the prior period is related
to deferred gains on previous sale lease-back transactions on two Good Times restaurants.
Income from Operations
.
Income
from operations was $1,076,000 in the quarter ended June 25, 2019 compared to income from operations of $781,000 in the quarter
ended June 26, 2018.
The change in income from operations for
the quarter was due primarily to matters discussed in the "Net Revenues”, "Restaurant Operating Costs", “Asset
Impairment Costs” and "General and Administrative Costs" sections above.
Net Income
.
Net income was
$873,000 for the quarter ended June 25, 2019 compared to net income of $685,000 in the quarter ended June 26, 2018.
The change in net income for the quarter
was primarily attributable to the matters discussed in the "Net Revenues", "Restaurant Operating Costs", “Asset
Impairment Costs” and "General and Administrative Costs", as well as an increase in net interest expense of $106,000
for the current quarter, 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 June 25, 2019, the
income attributable to non-controlling interests was $333,000 compared to $381,000 for the quarter ended June 26, 2018.
Current quarter income of $186,000 is attributable
to non-controlling partners in the BDI joint-venture restaurants, compared to $238,000 in the same prior year period. This decrease
is due to the elimination of non-controlling interest beginning in the second fiscal quarter associated with the repurchase of
interests in the three Raleigh area restaurants offset by an increase in joint venture store operating weeks due to two new joint
venture restaurants opened during the final quarter of fiscal 2018. Current quarter income of $147,000 is attributable to non-controlling
partners in the Good Times joint-venture restaurants, compared to $143,000 in the same prior year period.
Fiscal three quarters ended June
25, 2019 compared to fiscal three quarters ended June 26, 2018:
Net Revenues.
Net revenues
for the three quarters ended June 25, 2019 increased $9,292,000 or 12.8% to $81,999,000 from $72,707,000 for the quarter ended
June 26, 2018. Bad Daddy’s concept revenues increased $11,011,000 while our Good Times concept revenues decreased $1,719,000.
Bad Daddy’s restaurant sales increased
$11,008,000 to $59,714,000 for the three quarters ended June 25, 2019 from $48,706,000 for the three quarters ended June 26, 2018,
primarily attributable to the nine new restaurants opened in fiscal 2018 and two new restaurant opened in the three quarters ended
June 25, 2019. Bad Daddy’s same store restaurant sales increased 0.2% during the three quarters ended June 25, 2019 compared
to the same prior-year period. Bad Daddy’s restaurants are included in same store sales after they have been open a full
eighteen months. Comparable sales are calculated excluding weeks during which restaurants are closed for major remodels. The average
menu price increase for the three quarters ended June 25, 2019 over the same prior-year period was approximately 2.2%. There were
twenty-four restaurants included in the same store sales base at the end of the quarter. Franchise revenues increased $3,000 for
the three quarters ended June 25, 2019 compared to the same prior-year period. The current and prior year periods include franchise
advertising contributions of $11,000 and $12,000, respectively.
Good Times restaurant sales decreased $1,656,000
to $21,567,000 for the three quarters ended June 25, 2019 from $23,223,000 for the three quarters ended June 26, 2018. Good Times
same store restaurant sales decreased 3.1% during the three quarters ended June 25, 2019 compared to the same prior-year period.
Good Times sales were negatively affected in the first two fiscal quarters of 2019 by abnormally cold and wet weather in Colorado.
To align Good Times’ same store sales calculations with same store sales calculations for Bad Daddy’s, beginning in
fiscal 2018 Good Times restaurants are included in the same store sales calculation after they have been open a full eighteen months.
Restaurant sales decreased $636,000 due to two restaurants that were closed in January and April of 2018, restaurant sales also
decreased $287,000 due to one restaurant that was closed for most of the third fiscal quarter for a remodel. The average menu price
increase for the three quarters ended June 25, 2019 over the same prior-year period was approximately 3.5%. Franchise revenues
decreased $41,000 for the three quarters ended June 25, 2019, compared to the same prior year period, primarily due to one franchise
location that closed in September 2018 and one location that was temporarily closed due to a fire that occurred in April 2018,
the restaurant subsequently reopened in March 2019. The current and prior year quarters include franchise advertising contributions
of $228,000 and $251,000, respectively.
Food and Packaging Costs.
Food and packaging costs for the three quarters ended June 25, 2019 increased $1,801,000 to $23,955,000 (29.5% of restaurant sales)
from $22,154,000 (30.8% of restaurant sales) for the three quarters ended June 26, 2018. This increase is primarily due to a greater
number of operating restaurants during the current period versus the same period in the prior year.
Bad Daddy’s food and packaging costs
were $17,136,000 (28.7% of restaurant sales) for the three quarters ended June 25, 2019, up from $14,539,000 (29.9% of restaurant
sales) for the three quarters ended June 26, 2018. This increase is primarily due to a greater number of operating restaurants
during the current period versus the same period in the prior year. The decline as a percent of sales is primarily due to a combination
of higher menu prices, combined with lower costs of proteins, primarily beef.
Good Times food and packaging costs were
$6,819,000 (31.6% of restaurant sales) for the three quarters ended June 25, 2019, down from $7,615,000 (32.8% of restaurant sales)
for the three quarters ended June 26, 2018. In addition to the factors affecting the quarter ending June 25, 2019, current year
food and packaging costs at Good Times were favorably affected by the increased discounting of kid’s meals that was in place
during the first quarter of fiscal 2018.
Payroll and Other Employee Benefit
Costs.
Payroll and other employee benefit costs for the three quarters ended June 25, 2019 increased $4,382,000 to $30,458,000
(37.5% of restaurant sales) from $26,076,000 (36.3% of restaurant sales) for the three quarters ended June 26, 2018.
Bad Daddy’s payroll and other employee
benefit costs were $22,502,000 (37.7% of restaurant sales) for the three quarters ended June 25, 2019 up from $18,002,000 (37.0%
of restaurant sales) in the same prior year period. The $4,500,000 increase was primarily attributable to the nine new restaurants
opened during fiscal 2018 and two new restaurants opened during the three quarters ended June 25, 2019. As a percent of sales,
payroll and employee benefits costs increased by 0.7%, the result of increased wages for back of house staff in all states due
to a competitive market for workers and statutory wage increases for front-of-house employees in Colorado, which in total exceeded
the impact of our year-over-year menu price increases.
Good Times payroll and other employee benefit
costs were $7,956,000 (36.9% of restaurant sales) in the three quarters ended June 25, 2019, down from $8,074,000 (34.8% of restaurant
sales) in the same prior year period. Payroll and other employee benefit costs decreased $335,000 from the same prior-year quarters
due two stores that were closed in January and April of 2018 and one store that was closed for most of the third fiscal quarter
for a remodel. The decrease was offset by an increase in payroll and other employee benefit costs of $217,000 primarily due to
the average wage paid to our employees. The average wage increased approximately 10.5% in the three quarters ended June 25, 2019
compared to the same prior year period. This average wage increase is attributable to a very competitive labor market in Colorado
and statutory increases in the minimum wage rate.
Occupancy Costs.
Occupancy
costs for the three quarters ended June 25, 2019 increased $943,000 to $6,221,000 (7.7% of restaurant sales) from $5,278,000 (7.3%
of restaurant sales) for the three quarters ended June 26, 2018.
Bad Daddy’s occupancy costs were
$4,022,000 (6.7% of restaurant sales) for the three quarters ended June 25, 2019 up from $3,114,000 (6.4% of restaurant sales)
in the same prior year period. The $908,000 increase was primarily attributable to the nine new restaurants opened in fiscal 2018
and two new restaurants opened in the three quarters ended June 25, 2019.
Good Times occupancy costs were $2,199,000
(10.2% of restaurant sales) in the three quarters ended June 25, 2019, up from $2,164,000 (9.3% of restaurant sales) in the same
prior year period. The $35,000 increase was primarily attributable to an increase in property taxes and common area costs compared
to the same prior year period, and the increase as a percentage of sales is due to the deleveraging impact of lower average unit
volumes.
Other Operating Costs.
Other
operating costs for the three quarters ended June 25, 2019, increased $1,775,000 to $8,401,000 (10.3% of restaurant sales) from
$6,626,000 (9.2% of restaurant sales) for the three quarters ended June 26, 2018.
Bad Daddy’s other operating costs
were $6,560,000 (11.0% of restaurant sales) for the three quarters ended June 25, 2019 up from $4,735,000 (9.7% of restaurant sales)
in the same prior year period. The $1,825,000 increase was primarily attributable to the nine new restaurants opened in fiscal
2018 and two new restaurants opened in the three quarters ended June 25, 2019. The percentage increase was primarily attributable
to higher costs of general restaurant supplies and approximately $484,000 of increased commissions paid to delivery service providers
in the current year which were not incurred in the prior year.
Good Times other operating costs were $1,841,000
(8.5% of restaurant sales) in the three quarters ended June 25, 2019, down from $1,891,000 (8.2% of restaurant sales) in the same
prior year period. The decrease was primarily attributable to the two restaurants that closed in 2018. The increase as a percentage
of sales is due to the deleveraging impact of lower average unit volumes.
New Store Preopening Costs.
In the three quarters ended June 25, 2019, we incurred $949,000 of preopening costs compared to $1,683,000 for the three quarters
ended June 26, 2018. All of the preopening costs are related to our Bad Daddy’s restaurants.
Preopening costs in the three quarters
ended June 25, 2019 are primarily attributable to four restaurants that opened between the final fiscal quarter of 2018 and third
fiscal quarter of 2019 as well as to two restaurants that will open later in fiscal 2019. In the prior-year period, pre-opening
costs are related to the seven Bad Daddy’s restaurants opened between the first and fourth fiscal quarters of 2018.
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 three quarters ended June 25, 2019, increased $562,000 to $3,227,000 from $2,665,000
in the three quarters ended June 26, 2018.
Bad Daddy’s depreciation and amortization
costs were $2,542,000 for the three quarters ended June 25, 2019 up from $1,973,000 in the same prior year period. This increase
was mainly attributable to the nine new restaurants opened in fiscal 2018 and two new restaurants opened in the three quarters
ended June 25, 2019.
Good Times depreciation and amortization
costs were $685,000 for the three quarters ended June 25, 2019 down from $692,000 in the same prior year period.
General and Administrative Costs.
General and administrative costs for the three quarters ended June 25, 2019, increased $514,000 to $6,398,000 (7.8% of total revenue)
from $5,884,000 (8.1% of total revenues) for the three quarters ended June 26, 2018.
The $514,000 increase in general and administrative
expenses in the three quarters ended June 25, 2019 is primarily attributable to:
|
·
|
Increase in salaries, wages, and employee benefit costs associated with manager training of $305,000
|
|
·
|
Decrease in shared services salaries, wages, and employee benefit costs of $106,000
|
|
·
|
Increase in costs associated with district management of $183,000, primarily related to additional
district management for our east coast Bad Daddy’s markets, partially offset by a reduction in the Colorado market costs
for our Good Times locations
|
|
·
|
Increase in training and recruiting costs of $85,000
|
|
·
|
Decrease in professional fees, director’s fees and financial relations of $111,000 primarily
attributable to costs in the prior year quarter for legal expenses related to the Company’s response to SEC filings by shareholders
affiliated with two former directors, payments to departing directors pursuant to a settlement agreement with shareholders affiliated
with two directors, and professional services associated with a one-time option exchange and the establishment of a new equity
compensation plan to replace the former plan which had expired
|
|
·
|
Increase in preliminary site costs of $37,000
|
|
·
|
Increase in dues and subscriptions of $39,000 primarily due to a commodity contract management
tool
|
|
·
|
Net increases in all other expenses of $82,000
|
We expect total general and administrative
costs will increase in support of additional Bad Daddy’s restaurants, particularly related to district management and manager
training expenses, however we anticipate such costs will decrease as a percentage of revenue.
Advertising Costs.
Advertising
costs for the three quarters ended June 25, 2019, decreased $9,000 to $1,841,000 (2.2% of total revenue) from $1,850,000 (2.5%
of total revenue) for the three quarters ended June 26, 2018. The decline as a percentage of revenues is primarily due to the growth
of the Bad Daddy’s segment, which has lower advertising costs as a percentage of revenue compared to the Good Times segment.
Bad Daddy’s advertising costs were
$654,000 (1.1% of total revenue) in the three quarters ended June 25, 2019 compared to $538,000 (1.1% of total revenue) in the
same prior year period. The $116,000 increase was primarily attributable to the nine new restaurants opened during the final three
quarters of fiscal 2018 and first two fiscal quarters of 2019, as well as a media buy during the first quarter of fiscal 2019 in
Colorado that was not covered by the ad fund contributions. The current and prior year quarters include advertising costs of $11,000
and $12,000, respectively, of costs associated with franchise advertising contributions.
Good Times advertising costs were $1,187,000
(5.4% of total revenue) in the three quarters ended June 25, 2019 compared to $1,312,000 (5.5% of total revenue) in the same prior
year period. This $125,000 decline is due primarily to reduced contributions to the advertising fund due to the two restaurants
that closed during fiscal 2018 and lower sales among existing company- and franchisee-owned restaurants. The current and prior
year quarters include advertising costs of $228,000 and $251,000, 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 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 5.5% of total revenue for the Good Times
segment.
Franchise Costs.
Franchise
costs were $31,000 and $32,000 for the three quarters ended June 25, 2019 and June 26, 2018, respectively. The costs are primarily
related to the Good Times franchised restaurants.
Asset impairment costs.
There
were no asset impairment costs for the three quarters ended June 25, 2019 and asset impairment costs were $72,000 for the three
quarters ended June 26, 2018. The costs are related to a Good Times restaurant that was closed and subleased in April 2018, as
described in Note 9 to the financial statements.
Loss (gain) on Restaurant Asset Disposals.
The loss on restaurant asset disposals for the three quarters ended June 25, 2019 was $5,000 compared to a gain of $26,000 in the
three quarters ended June 26, 2018. The loss of $5,000 in the current period is comprised of: 1) a $27,000 deferred gain related
to previous sale lease-back transactions on two Good Times restaurants, 2) a gain of $21,000 related to insurance claim reimbursements
where assets were destroyed, offset by 3) a $53,000 loss associated with the write down of assets no longer in use. The gain of
$26,000 in the prior year period is related to deferred gains on previous sale lease-back transactions on two Good Times restaurants.
Income from Operations
.
Income
from operations was $513,000 in the three quarters ended June 25, 2019 compared to income from operations of $413,000 in the three
quarters ended June 26, 2018.
The change in income from operations for
the quarter and year-to-date was due primarily to matters discussed in the "Net Revenues”, "Restaurant Operating
Costs", “Asset Impairment Costs” and "General and Administrative Costs" sections above.
Net Income (loss)
.
The net
loss was $49,000 for the three quarters ended June 25, 2019 compared to net income of $143,000 in the three quarters ended June
26, 2018.
The change in net income (loss) for the
three quarters was primarily attributable to the matters discussed in the "Net Revenues", "Restaurant Operating
Costs", “Asset Impairment Costs” and "General and Administrative Costs", as well as an increase in net
interest expense $291,000 for the three quarters ended June 26, 2018, 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 three quarters ended June 25, 2019,
the income attributable to non-controlling interests was $912,000 compared to $853,000 for the three quarters ended June 26, 2018.
Income for the current three quarters of
$671,000 is attributable to non-controlling partners in the BDI joint-venture restaurants, compared to $556,000 in the same prior
year period. This $115,000 increase is due to an increase in joint venture store operating weeks due to two new joint venture restaurants
opened during the final quarter of fiscal 2018, offset by the elimination of non-controlling interest beginning in the second fiscal
quarter associated with the repurchase of interests associated with the three Raleigh area restaurants. Income for the current
three quarters of $241,000 is attributable to the non-controlling partners in the Good Times joint-venture restaurants, compared
to $297,000 in the same prior year period. This decline is due to the reduction in profitability of the seven co-developed Good
Times restaurants.
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 loss
to EBITDA and Adjusted EBITDA for the fiscal second quarter and year-to-date periods:
|
|
Quarter Ended
|
|
|
Year-to-Date
|
|
|
|
June 25,
2019
|
|
|
June 26,
2018
|
|
|
June 25,
2019
|
|
|
June 26,
2018
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported
|
|
$
|
540
|
|
|
$
|
304
|
|
|
$
|
(961
|
)
|
|
$
|
(710
|
)
|
Depreciation and amortization
|
|
|
1,096
|
|
|
|
897
|
|
|
|
3,157
|
|
|
|
2,550
|
|
Interest expense, net
|
|
|
202
|
|
|
|
97
|
|
|
|
561
|
|
|
|
272
|
|
EBITDA
|
|
|
1,838
|
|
|
|
1,298
|
|
|
|
2,757
|
|
|
|
2,112
|
|
Preopening expense
|
|
|
128
|
|
|
|
565
|
|
|
|
928
|
|
|
|
1,541
|
|
Non-cash stock-based compensation
|
|
|
110
|
|
|
|
88
|
|
|
|
331
|
|
|
|
303
|
|
GAAP rent-cash rent difference
|
|
|
(44
|
)
|
|
|
(35
|
)
|
|
|
(50
|
)
|
|
|
(51
|
)
|
Gain on disposal of assets
|
|
|
44
|
|
|
|
(9
|
)
|
|
|
5
|
|
|
|
(26
|
)
|
Asset impairment charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72
|
|
Adjusted EBITDA
|
|
$
|
2,076
|
|
|
$
|
1,907
|
|
|
$
|
3,971
|
|
|
$
|
3,951
|
|
Liquidity and Capital Resources
Cash and Working Capital
As of June 25, 2019, we had a working capital
deficit of $3,241,000. Our working capital position benefits from the fact that we generally collect cash from sales to customers
the same day, or in the case of credit or debit card transactions, within a few days of the related sale, and we typically have
two to four weeks to pay our vendors. The working capital deficit may increase when new Bad Daddy’s and Good Times restaurants
are opened. We believe that with our ability to access the Cadence Bank credit facility in addition to cash flow generated from
our existing restaurants, that we will have sufficient capital to meet our working capital, long term debt obligations and capital
expenditure needs in fiscal 2019. As of June 25, 2019, we had $1,487,000 of commitments outstanding related to construction contracts
for four Bad Daddy’s restaurants currently under development.
Financing
The Company maintains a credit agreement
with Cadence Bank (“Cadence”) pursuant to which, as amended, Cadence agreed to loan the Company up to $17,000,000 with
a maturity date of December 31, 2021 (the “Cadence Credit Facility”). On February 21, 2019 the Cadence Credit Facility
was amended, in connection with the RGWP Repurchase, to retroactively attribute EBITDA previously attributed to non-controlling
interests to the Company for purposes of certain financial covenants. 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 June 25, 2019, the weighted average interest rate applicable to borrowings under the Cadence Credit Facility was 5.9228%.
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 June 25, 2019, the Company was in compliance with the covenants under the Cadence Credit
Facility.
As a result of entering into the Cadence
Credit Facility and the various amendments, the Company paid loan origination costs including professional fees of approximately
$232,000 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 June 25, 2019, the outstanding balance
on borrowings against the facility was $11,150,000. 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 June 25, 2019, the outstanding face value of such
letters of credit was $157,500.
Capital Expenditures
Planned capital expenditures for the balance
of fiscal 2019 include normal recurring capital expenditures for existing Good Times and Bad Daddy’s restaurants and new
Bad Daddy’s restaurants.
Assets Held for Sale
None.
Cash Flows
Net cash provided by operating activities
was $4,402,000 for the three quarters ended June 25, 2019. The net cash provided by operating activities for the three quarters
ended June 25, 2019 was the result of a net loss of $49,000 as well as cash and non-cash reconciling items totaling $4,451,000
(these reconciling items are comprised of 1) depreciation and amortization of $3,417,000, 2) accretion of deferred rent of $429,000,
3) amortization of lease incentive obligations of $374,000, 4) stock-based compensation expense of $331,000, 5) a decrease in receivables
and other assets of $1,381,000, 6) an increase in deferred liabilities related to tenant allowances of $368,000, 7) an increase
in accounts payable of $367,000, 8) an increase in prepaids and other assets of $356,000, 9) a decrease in accrued liabilities
of $1,023,000 and 10) a net decrease in other operating assets and liabilities of $89,000).
Net cash provided by operating activities
was $4,627,000 for the three quarters ended June 26, 2018. The net cash provided by operating activities for the three quarters
ended June 27, 2017 was the result of net income of $143,000 as well as cash and non-cash reconciling items totaling $4,484,000
(comprised of 1) depreciation and amortization of $2,849,000, 2) accretion of deferred rent of $414,000, 3) amortization of lease
incentive obligations of $313,000, 4) stock-based compensation expense of $303,000, 5) Non-cash asset impairment costs of $72,000,
6) an increase in receivables of $128,000, 7) an increase in deferred liabilities related to tenant allowances of $1,258,000, 8)
an increase in accounts payable of $194,000, 8) an decrease in accrued liabilities of $21,000 and 9) a net decrease in other operating
assets and liabilities of $144,000).
Net cash used in investing activities for
the three quarters ended June 25, 2019 was $7,700,000 which primarily reflects the purchases of property and equipment of $4,716,000
and the purchase of non-controlling interests of $3,009,000. Purchases of property and equipment is comprised primarily of the
following:
|
·
|
$3,438,000 in costs for the development of Bad Daddy’s locations
|
|
·
|
$290,000 for miscellaneous capital expenditures related to our Bad Daddy’s restaurants
|
|
·
|
$705,000 for remodel and reimaging related to our Good Times restaurants
|
|
·
|
$226,000 for miscellaneous capital expenditures related to our Good Times restaurants
|
|
·
|
$57,000 for miscellaneous capital expenditures for our corporate office
|
Net cash used in investing activities for
the three quarters ended June 26, 2018 was $5,153,000 which primarily reflects the purchases of property and equipment of $6,560,000
and sale leaseback proceeds of $1,397,000. Purchases of property and equipment is comprised primarily of the following:
|
·
|
$5,952,000 in costs for the development of Bad Daddy’s locations
|
|
·
|
$307,000 for miscellaneous capital expenditures related to our Bad Daddy’s restaurants
|
|
·
|
$301,000 for miscellaneous capital expenditures related to our Good Times restaurants
|
Net cash provided by financing activities
for the three quarters ended June 25, 2019 was $2,440,000, which includes principal payments on notes payable and long-term debt
of $2,480,000, borrowings on notes payable and long-term debt of $6,150,000, proceeds from the exercise of stock options of $3,000
and net distributions to non-controlling interests of $1,233,000.
Net cash used in financing activities for
the three quarters ended June 26, 2018 was $625,000, which includes principal payments on notes payable, long-term debt and capital
leases of $1,613,000, borrowings on notes payable and long-term debt of $1,400,000 and net distributions to non-controlling interests
of $412,000.
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 increases taken at our Bad
Daddy’s restaurants during fiscal 2018 were approximately 3.2%. We have raised menu prices during the first three quarters
of fiscal 2019 by approximately 1.6%. The total menu price increases at our Good Times restaurants during fiscal 2018 were approximately
2.8%, and we have raised menu prices approximately 4.4% during the first three quarters of fiscal 2019. Commodity costs began to
decline during the first half of fiscal 2018 and continued to decline into the first quarter of fiscal 2019, with relative stability
during the second and third quarters. We do not anticipate future price increases during the remainder of fiscal 2019 but expect
Good Times’ and Bad Daddy’s’ food and packaging costs as a percentage of sales for the remainder of fiscal 2019
to be relatively consistent with or slightly elevated compared to the current quarter.
Seasonality
Revenues of the Company are subject to
seasonal fluctuations based primarily on weather conditions adversely affecting Colorado restaurant sales between December through
March.