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ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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This Form 10-Q contains or incorporates
by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and the disclosure
of risk factors in the Company’s form 10-K for the fiscal year ended September 24, 2019. Also, documents subsequently filed
by us with the SEC and incorporated herein by reference may contain forward-looking statements. We caution investors that any forward-looking
statements made by us are not guarantees of future performance and actual results could differ materially from those in the forward-looking
statements as a result of various factors, including but not limited to the following:
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(I)
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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.
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(II)
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We compete with numerous well-established competitors who have substantially
greater financial resources and longer operating histories than we do. Competitors have increasingly offered selected food items
and combination meals, including hamburgers, at discounted prices, and continued discounting by competitors may adversely affect
revenues and profitability of Company restaurants.
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(II)
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We may be negatively impacted if we experience same store sales declines.
Same store sales comparisons will be dependent, among other things, on the success of our advertising and promotion of new and
existing menu items. No assurances can be given that such advertising and promotions will in fact be successful.
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We may also be negatively impacted by other
factors common to the restaurant industry such as: changes in consumer tastes away from red meat and fried foods; increases in
the cost of food, paper, labor, health care, workers' compensation or energy; inadequate number of hourly paid employees; and/or
decreases in the availability of affordable capital resources. We caution the reader that such risk factors are not exhaustive,
particularly with respect to future filings. For further discussion of our exposure to market risk, refer to Part I, Item 1A, “Risk
Factors” in our Annual Report on Form 10-K for the fiscal year ended September 24, 2019.
Overview.
Good Times Restaurant Inc., through its
subsidiaries (collectively, the “Company” or “we”, “us” or “our”) operates and
franchises/licenses full-service hamburger-oriented restaurants under the name Bad Daddy’s Burger Bar (Bad Daddy’s)
and operates and franchises hamburger-oriented drive-through restaurants under the name Good Times Burgers & Frozen Custard
(Good Times).
We are focused on targeted unit growth
of the Bad Daddy’s concept while at the same time growing same store sales and improving the profitability of both the Bad
Daddy’s and the Good Times concepts.
COVID-19
The global crisis resulting from the spread
of COVID-19 had a substantial impact on our restaurant operations for the 13-week and 40-week periods ended June 30, 2020. During
portions of the month of March 2020 through late May 2020, all of the Company’s Bad Daddy’s Burger Bar restaurants
were open only for delivery and carry-out service, with dining rooms closed by government orders. Beginning in late May 2020, we
began to re-open dining rooms at Bad Daddy’s as local regulations allowed. By early June, we had re-opened all the dining
rooms at Bad Daddy’s, which currently remain open. Although our dining rooms are open, all operate 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.
Our operating results substantially depend
upon our ability to drive traffic to our restaurants, and for our Bad Daddy’s Burger Bar restaurants, to serve guests in
our dining rooms. We cannot currently estimate the duration of the impact of the COVID-19 pandemic on our business; neither are
we are unable to predict how the pandemic will evolve nor how various government entities will respond to its evolution. Should
governments choose to reverse course and re-close dining rooms, our business would be adversely affected. Even without government
orders, customers may choose to reduce or eliminate in-restaurant dining because of increasing numbers of COVID-19 cases, hospitalizations,
or deaths.
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.
We took extraordinary actions to manage
our liquidity position in response to COVID-19, including temporarily reducing employee pay, reductions in force, and obtaining
PPP loans under the CARES Act. 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 or if it were to reoccur.
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.
Restaurant locations.
As of June 30, 2020, we operated, franchised
or licensed a total of thirty-nine Bad Daddy’s restaurants and thirty-three Good Times restaurants. The following table presents
the number of restaurants operating at the end of the third fiscal quarters of 2020 and 2019.
Company-Owned/Co-Developed/Joint-Venture:
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Bad Daddy’s
Burger Bar
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Good Times Burgers
& Frozen Custard
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Total
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2020
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2019
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|
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2020
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|
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2019
|
|
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2020
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|
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2019
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Alabama
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|
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1
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|
|
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-
|
|
|
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-
|
|
|
|
-
|
|
|
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1
|
|
|
|
-
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Colorado
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|
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12
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|
|
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12
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|
|
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25
|
|
|
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26
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|
|
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37
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|
|
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38
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Georgia
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|
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4
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|
|
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4
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|
|
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-
|
|
|
|
-
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|
|
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4
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|
|
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4
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North Carolina
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|
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14
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|
|
|
14
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|
|
|
-
|
|
|
|
-
|
|
|
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14
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|
|
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14
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Oklahoma
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|
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1
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|
|
|
1
|
|
|
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-
|
|
|
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-
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|
|
|
1
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|
|
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1
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South Carolina
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|
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3
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|
|
|
1
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|
|
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-
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|
|
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-
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3
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|
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1
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Tennessee
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|
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2
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|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
1
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Total
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37
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|
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33
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25
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|
|
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26
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62
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59
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Franchise/License:
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Bad Daddy’s
Burger Bar
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Good Times Burgers
& Frozen Custard
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Total
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2020
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|
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2019
|
|
|
2020
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|
|
2019
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|
|
2020
|
|
|
2019
|
|
Colorado
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
7
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|
|
|
6
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|
|
|
7
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North Carolina
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|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
South Carolina
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
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|
|
|
1
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Wyoming
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|
|
-
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|
|
|
-
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|
|
|
2
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|
|
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2
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|
|
|
2
|
|
|
|
2
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Total
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|
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2
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|
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|
2
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|
|
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8
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|
|
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9
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|
|
|
10
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|
|
|
11
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Results of Operations
Fiscal quarter ended June 30, 2020
compared to fiscal quarter ended June 25, 2019:
Net Revenues. Net revenues
for the quarter ended June 30, 2020 decreased $5,093,000 or 17.3% to $24,357,000 from $29,450,000 for the quarter ended June 25,
2019. Bad Daddy’s concept revenues decreased $6,253,000 while our Good Times concept revenues increased $1,160,000.
Bad Daddy’s restaurant sales decreased
$6,165,000 to $14,915,000 for the quarter ended June 30, 2020 from $21,080,000 for the quarter ended June 25, 2019. Sales were
positively impacted by four new restaurants opened in fiscal 2019 and two new restaurants opened in the first fiscal quarter of
2020, offset by the negative impact of our dining room closures due to the COVID-19 pandemic. Bad Daddy’s same store restaurant
sales decreased 36.7% during the quarter ended June 30, 2020 compared to the same prior-year quarter, substantially driven by decreases
during April and May, when dining rooms were closed, and to a lesser amount when dining rooms were opened, but with capacity restrictions.
Bad Daddy’s restaurants are included in same store sales after they have been open a full eighteen months. The average menu
price increase for the quarter ended June 30, 2020 over the same prior-year quarter was approximately 2.9%. There were thirty-two
restaurants included in the same store sales base at the end of the quarter. Additionally, net revenues were reduced by $88,000
in lower franchise royalties and license fees compared to the prior-year quarter primarily due to the temporary closure of the
Charlotte Airport licensee. Franchise revenues in the current and prior year quarters include franchisee advertising contributions
of $3,000 and $4,000, respectively.
Good Times restaurant sales increased $1,175,000
to $9,275,000 for the quarter ended June 30, 2020 from $8,100,000 for the quarter ended June 25, 2019. Good Times same store restaurant
sales increased 11.9% during the quarter ended June 30, 2020 compared to the same prior-year quarter, due to improved customer
traffic in May and June as a result of increased preference for drive-thru service. One restaurant that was closed for remodeling
in the prior year quarter was not included in the same store sales group. The average menu price increase for the quarter ended
June 30, 2020 over the same prior-year quarter was approximately 4.9%. Franchise revenues decreased $14,000 for the quarter ended
June 30, 2020, compared to the same prior year period. Franchise revenues for the current and prior year quarters include franchisee
advertising contributions of $64,000 and $87,000, respectively.
Restaurant Operating Costs
Food and Packaging Costs.
Food and packaging costs for the quarter ended June 30, 2020 decreased $1,805,000 to $6,724,000 (27.8% of restaurant sales) from
$8,529,000 (29.2% of restaurant sales) for the quarter ended June 25, 2019.
Bad Daddy’s food and packaging costs
were $3,932,000 (26.4% of restaurant sales) for the quarter ended June 30, 2020, down from $6,063,000 (28.8% of restaurant sales)
for the quarter ended June 25, 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 beef and bacon but generally decreased on chicken, on a year-over-year basis.
Good Times food and packaging costs were
$2,792,000 (30.1% of restaurant sales) for the quarter ended June 30, 2020, up from $2,466,000 (30.4% of restaurant sales) for
the quarter ended June 25, 2019. This decrease as a percent of sales is due primarily to the impact of higher menu pricing and
menu engineering, which offset purchase price increases on our primary ingredients.
Payroll and Other Employee Benefit
Costs. Payroll and other employee benefit costs for the quarter ended June 30, 2020 decreased $3,288,000 to $7,389,000
(30.5% of restaurant sales) from $10,677,000 (36.6% of restaurant sales) for the quarter ended June 25, 2019.
Bad Daddy’s payroll and other employee
benefit costs were $4,780,000 (32.1% of restaurant sales) for the quarter ended June 30, 2020 down from $7,851,000 (37.2% of restaurant
sales) in the same prior year period. The $3,071,000 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 5.1%
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 $2,609,000 (28.1% of restaurant sales) in the quarter ended June 30, 2020, down from $2,826,000 (34.9% of restaurant
sales) in the same prior-year period. The $216,000 decrease was partially attributable to labor saving initiatives implemented
during the current fiscal quarter as well as labor efficiencies gained though higher average menu pricing. As a percent of sales,
payroll and employee benefits costs decreased by 6.8% in the quarter ended June 30, 2020 compared to the same prior year period.
This decrease is primarily attributable to the leveraging impact of the significant sales increases as well as staffing reductions
in late March and early April of 2020 as we entered the pandemic. The average wage paid to our employees increased approximately
1.1% in the quarter ended June 30, 2020 compared to the same prior year period.
Occupancy Costs. Occupancy
costs for the quarter ended June 30, 2020 decreased $2,000 to $2,089,000 (8.6% of restaurant sales) from $2,091,000 (7.2% of restaurant
sales) for the quarter ended June 25, 2019.
Bad Daddy’s occupancy costs were
$1,486,000 (10.0% of restaurant sales) for the quarter ended June 30, 2020 up from $1,391,000 (6.6% of restaurant sales) in the
same prior year period. The $95,000 increase was primarily attributable to the four new restaurants opened in fiscal 2019 and two
new restaurants opened in the first fiscal quarter of 2020, offset by rent abatements of approximately $85,000 granted by various
landlords due to the COVID-19 pandemic. The increase as a percentage of sales was due to general increases in our operating lease
costs as well as the deleveraging effect of lower restaurant sales.
Good Times occupancy costs were $603,000
(6.5% of restaurant sales) in the quarter ended June 30, 2020, down from $700,000 (8.6% of restaurant sales) in the same prior
year period. The $97,000 decrease was primarily attributable to cash rent abatements of approximately $69,000 granted by various
landlords due to the COVID-19 pandemic, as well as other decreases in our operating lease costs and property taxes.
Other Operating Costs. Other
operating costs for the quarter ended June 30, 2020, increased $94,000 to $3,164,000 (13.1% of restaurant sales) from $3,070,000
(10.5% of restaurant sales) for the quarter ended June 25, 2019.
Bad Daddy’s other operating costs
were $2,419,000 (16.2% of restaurant sales) for the quarter ended June 30, 2020 up from $2,396,000 (11.4% of restaurant sales)
in the same prior year period. The $23,000 increase was partially attributable to the four new restaurants opened in fiscal 2019
and two new restaurants opened in the first fiscal quarter of 2020. Other restaurant operating costs were significantly reduced
due to the large decrease in sales compared to the prior year quarter, however, the decrease was mostly offset by a $558,000 increase
in commissions paid to delivery service providers in the current year compared to the prior year. The percentage increase was primarily
attributable to the 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 $745,000
(8.0% of restaurant sales) in the quarter ended June 30, 2020, up from $674,000 (8.3% of restaurant sales) in the same prior year
period. The increase was primarily attributable to an approximate $87,000 increase in commissions paid to delivery service providers
offset by decreases in other general restaurant supplies and expenses.
New Store Preopening Costs.
In the quarter ended June 30, 2020, we incurred $31,000 of preopening costs compared to $129,000 for the quarter ended June 25,
2019. All of the preopening costs are related to our Bad Daddy’s restaurants.
Preopening costs in the current quarter
are primarily attributable to $24,000 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 are related to the one Bad Daddy’s restaurant
opened during the second fiscal quarter of 2019 and two that opened during the fourth quarter of fiscal 2019. Preopening costs
typically occur over a period of approximately five months although 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 June 30, 2020, decreased $121,000 to $983,000 from $1,104,000 in the
quarter ended June 25, 2019.
Bad Daddy’s depreciation and amortization
costs for the quarter ended June 30, 2020, decreased $93,000 to $770,000 from $863,000 in the quarter ended June 25, 2019. This
decrease was primarily attributable to reduced depreciation resulting from asset impairment charges recorded in the fourth quarter
of fiscal 2019 and the second quarter of fiscal 2020, partially offset by increases due to the four new restaurants opened in fiscal
2019 and two new restaurants opened in the first fiscal quarter of 2020.There were four more Bad Daddy’s restaurants open
at the end of the current fiscal quarter compared to the prior year fiscal quarter.
Good Times depreciation and amortization
costs for the quarter ended June 30, 2020, decreased $28,000 to $213,000 from $241,000 in the quarter ended June 25, 2019.
General and Administrative Costs.
General and administrative costs for the quarter ended June 30, 2020, decreased $374,000 to $1,689,000 (6.9% of total revenue)
from $2,063,000 (7.0%) of total revenues) for the quarter ended June 25, 2019.
The $374,000 decrease in general and administrative
expenses in the quarter ended June 30, 2020 is primarily attributable to:
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Decrease in training and recruiting costs
of $161,000
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Increase in administrative related payroll
and benefit costs of $15,000
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Decrease in costs associated with district
management of $144,000 primarily related to reduced district management for our east coast Bad Daddy’s markets
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Decrease of $36,000 in incentive stock
compensation costs
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Decrease of $20,000 related to travel
and entertainment costs
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Net decreases in all other expenses of
$28,000
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For the balance of the fiscal year, we
expect general and administrative costs to continue to decline from fiscal 2019 to fiscal 2020 as we focus on reducing turnover
and associated training costs.
Advertising Costs. Advertising
costs for the quarter ended June 30, 2020, decreased $253,000 to $515,000 (2.1% of total revenue) from $659,000 (2.2% of total
revenue) for the quarter ended June 25, 2019.
Bad Daddy’s advertising costs were
$142,000 (1.1% of total revenue) in the quarter ended June 30, 2020 compared to $212,000 (1.1% 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 include advertising costs of $3,000 and $4,000, respectively, of costs associated with franchise advertising
contributions.
Bad Daddy’s advertising costs consist
primarily of contributions made to the advertising materials fund based on a percentage of restaurant sales as well as local store
marketing efforts.
Good Times advertising costs were $373,000
(4.0% of total revenue) in the quarter ended June 30, 2020 compared to $447,000 (5.5% of total revenue) in the same prior year
period. This $74,000 decline is due primarily to reduced contributions made to the regional advertising cooperative. The current
and prior year quarters include advertising costs of $64,000 and $87,000, respectively, of costs associated with franchise advertising
contributions.
Good Times advertising costs consists primarily
of contributions made to the advertising materials fund and a regional advertising cooperative based on a percentage of restaurant
sales which are used to provide television and radio advertising, social media and on-site and point-of-purchase. The percentage
contribution paid to the regional advertising cooperative was reduced at the start of the current fiscal year associated with a
change in expected media mix. Advertising costs are presented gross, with franchisee contributions to the fund being recognized
as a component of franchise revenues. As a percentage of total revenue, we expect advertising costs to remain relatively stable
at approximately 4.0% of total revenue for the Good Times segment.
Franchise Costs. Franchise
costs were $6,000 and $8,000 for the quarters ended June 30, 2020 and June 25, 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 June 30, 2020 was $8,000 compared to a loss on restaurant asset disposals
of $44,000 for the quarter ended June 25, 2019.
The gain in the current year is related
to deferred gains on previous sale lease-back transactions on two Good Times restaurants. The loss in the prior year 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.
Impairment Costs: Impairment
costs were $932,000 and $0 for the quarters ended June 30, 2020 and June 25, 2019, respectively. The costs in the current quarter
are related to one Bad Daddy’s restaurants’ assets that were impaired.
Income from Operations. The
income from operations was $843,000 in the quarter ended June 30, 2020 compared to $1,076,000 in the quarter ended June 25, 2019.
The change in the income/loss from operations
for the quarter ended June 30, 2020 is due primarily due to matters discussed in the "Net Revenues,” "Restaurant
Operating Costs," "General and Administrative Costs," “Advertising Costs” and “Asset Impairment
Costs” sections above.
Net Income. Net income was
$641,000 for the quarter ended June 30, 2020 compared to $873,000 in the quarter ended June 25, 2019.
The change from the quarter ended June
30, 2020 to the quarter ended June 25, 2019 was primarily attributable to the matters discussed in the "Net Revenues,"
"Restaurant Operating Costs," "General and Administrative Costs," “Advertising Costs” and “Asset
Impairment Costs” sections above.
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 30, 2020, the
income attributable to non-controlling interests was $352,000 compared to $333,000 for the quarter ended June 25, 2019.
$74,000 of the current quarter’s
income is attributable to the BDI joint-venture restaurants, compared to $186,000 in the same prior year period. This $112,000
decrease is primarily due to reduced restaurant level profitability in the current fiscal quarter. $278,000 of the current quarter’s
income is attributable to the Good Times joint-venture restaurants, compared to $147,000 in the same prior year period.
Fiscal three quarters ended June
30, 2020 compared to the fiscal three quarters ended June 25, 2019:
Net Revenues. Net revenues
for the three quarters ended June 30, 2020 decreased $629,000 or 0.8% to $81,353,000 from $81,982,000 for the three quarters ended
June 25, 2019. Bad Daddy’s concept revenues decreased $2,797,000 while our Good Times concept revenues increased $2,168,000.
Bad Daddy’s restaurant sales decreased
$2,686,000 to $57,028,000 for the three quarters ended June 30, 2020 from $59,714,000 for the three quarters ended June 25, 2019.
Sales were positively impacted by four new restaurants opened in fiscal 2019 and two new restaurants opened in the first fiscal
quarter of 2020 and the impact of the 53rd week of the fiscal year, offset by the negative impact of our dining room
closures due to the COVID-19 pandemic. We estimate the impact of the extra week of sales in the first fiscal quarter of 2020 to
be approximately $2,015,000. Bad Daddy’s same store restaurant sales decreased 19.6% during the three quarters ended June
30, 2020 compared to the same prior-year three quarters, substantially driven by decreases between March and May when dining rooms
were closed, and to a lesser extend in June when dining rooms were open but at reduced capacity. Bad Daddy’s restaurants
are included in same store sales after they have been open a full eighteen months. The average menu price increase for the three
quarters ended June 30, 2020 over the same prior-year three quarters was approximately 2.9%. There were thirty-two restaurants
included in the same store sales base at the end of the quarter. Additionally, net revenues were reduced by $110,000 in lower franchise
royalties and license fees compared to the prior-year three quarters, primarily related to the Charlotte Airport licensee. Franchise
revenues in the current and prior year quarters include franchisee advertising contributions of $9,000 and $11,000, respectively.
Good Times restaurant sales increased $2,186,000
to $23,753,000 for the three quarters ended June 30, 2020 from $21,567,000 for the three quarters ended June 25, 2019. Good Times
same store restaurant sales increased 7.2% during the three quarters ended June 30, 2020 compared to the same prior-year three
quarters and benefitted from an extra operating week in the first fiscal quarter of 2020 which we estimate contributed approximately
$460,000. The average menu price increase for the three quarters ended June 30, 2020 over the same prior-year three quarters was
approximately 5.8%. Franchise revenues decreased $18,000 for the three quarters ended June 30, 2020, compared to the same prior
year period. Franchise revenues for the current and prior year quarters include franchisee advertising contributions of $167,000
and $212,000, respectively.
Restaurant Operating Costs
Food and Packaging Costs.
Food and packaging costs for the three quarters ended June 30, 2020 decreased $579,000 to $23,376,000 (28.9% of restaurant sales)
from $23,955,000 (29.5% of restaurant sales) for the three quarters ended June 25, 2019.
Bad Daddy’s food and packaging costs
were $16,108,000 (28.2% of restaurant sales) for the three quarters ended June 30, 2020, down from $17,136,000 (28.7% of restaurant
sales) for the three quarters ended June 25, 2019. This decrease is primarily attributable to lower restaurant sales during the
current three quarters versus the same three quarters 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 beef and bacon throughout the three quarters, but generally decreased on
chicken, on a year-over-year basis.
Good Times food and packaging costs were
$7,268,000 (30.6% of restaurant sales) for the three quarters ended June 30, 2020, up from $6,819,000 (31.6% of restaurant sales)
for the three quarters ended June 25, 2019, the result of increased sales. This decrease as a percent of sales is due primarily
to the impact of higher menu pricing and menu engineering, which offset purchase price increases on our primary ingredients.
Payroll and Other Employee Benefit
Costs. Payroll and other employee benefit costs for the three quarters ended June 30, 2020 decreased $1,376,000 to $29,082,000
(36.0% of restaurant sales) from $30,458,000 (37.5% of restaurant sales) for the three quarters ended June 25, 2019.
Bad Daddy’s payroll and other employee
benefit costs were $20,973,000 (36.8% of restaurant sales) for the three quarters ended June 30, 2020 down from $22,502,000 (37.7%
of restaurant sales) in the same prior year period. The $1,529,000 decrease is the result of lower restaurant sales during the
current three quarters versus the same three quarters in the prior year, primarily attributable to staffing reductions associated
with the closure of our dining rooms for much of the third quarter as well as reductions in management staffing. As a percent of
sales, payroll and employee benefits costs decreased by 0.9%, compared to the same prior year period, primarily driven by reduced
overall staffing during the third fiscal quarter of 2020.
Good Times payroll and other employee benefit
costs were $8,109,000 (34.1% of restaurant sales) in the three quarters ended June 30, 2020, up from $7,956,000 (36.9% of restaurant
sales) in the same prior-year period. The $153,000 increase was primarily attributable to the increase in same store sales as well
as an increase to the average wage paid to our employees. As a percent of sales, payroll and employee benefits costs decreased
by 2.8%, compared to the same prior year period, primarily attributable to the leveraging impact of the significant sales increases
in the third fiscal quarter of 2020. The average wage paid to our employees increased approximately 6.7% in the three quarters
ended June 30, 2020 compared to the same prior year period. This average wage increase is attributable to a very competitive labor
market in Colorado and statutory increases in the minimum wage rate, particularly during the first two quarters of the year.
Occupancy Costs. Occupancy
costs for the three quarters ended June 30, 2020 increased $518,000 to $6,739,000 (8.3% of restaurant sales) from $6,221,000 (7.7%
of restaurant sales) for the three quarters ended June 25, 2019.
Bad Daddy’s occupancy costs were
$4,600,000 (8.1% of restaurant sales) for the three quarters ended June 30, 2020 up from $4,022,000 (6.7% of restaurant sales)
in the same prior year period. The $578,000 increase was primarily attributable to the four new restaurants opened in fiscal 2019
and two new restaurants opened in the first fiscal quarter of 2020, offset by rent abatements of approximately $85,000 granted
by various landlords in the third fiscal quarter of 2020 due to the COVID-19 pandemic The increase as a percentage of sales was
due to general increases in our operating lease costs as well as the deleveraging effect of lower restaurant sales.
Good Times occupancy costs were $2,139,000
(9.0% of restaurant sales) in the three quarters ended June 30, 2020, down from $2,199,000 (10.2% of restaurant sales) in the same
prior year period. The decrease was primarily attributable to rent abatements of approximately $69,000 granted by various landlords
in the third fiscal quarter of 2020 due to the COVID-19 pandemic, as well as other decreases in our operating lease costs and property
taxes.
Other Operating Costs. Other
operating costs for the three quarters ended June 30, 2020, increased $965,000 to $9,673,000 (12.0% of restaurant sales) from $8,738,000
(10.7% of restaurant sales) for the three quarters ended June 25, 2019.
Bad Daddy’s other operating costs
were $7,549,000 (13.2% of restaurant sales) for the three quarters ended June 30, 2020 up from $6,770,000 (11.3% of restaurant
sales) in the same prior year period. The $779,000 increase was partially attributable to the four new restaurants opened in fiscal
2019 and two new restaurants opened in the first fiscal quarter of 2020 as well as an increase of $826,000 in commissions paid
to delivery service providers. The percentage increase was primarily attributable to the deleveraging impact of lower overall sales
and the a significant shift in delivery sales as a percentage of overall sales, as customers migrated to delivery during the first
two months of the COVID-19 pandemic and dining rooms were generally closed.
Good Times other operating costs were $2,124,000
(8.9% of restaurant sales) in the three quarters ended June 30, 2020, up from $1,938,000 (9.0% of restaurant sales) in the same
prior year period. The increase was primarily attributable to an approximate $182,000 increase in commissions paid to delivery
service providers.
New Store Preopening Costs.
In the three quarters ended June 30, 2020, we incurred $992,000 of preopening costs compared to $949,000 for the three quarters
ended June 25, 2019. All of the preopening costs are related to our Bad Daddy’s restaurants.
Preopening costs in the current three quarters
are primarily attributable to four restaurants: two that opened late during the fourth quarter of fiscal 2019, and two restaurants
that opened during the first fiscal quarter of 2020. In addition, the current three quarters includes approximately $132,000 of
non-cash operating lease costs associated with two future Bad Daddy’s restaurants, In the prior-year period, pre-opening
costs are related to the one Bad Daddy’s restaurant opened during the second fiscal quarter of 2019, and two that opened
during the fourth quarter of fiscal 2019. Preopening costs typically occur over a period of approximately five months. Although
the exact timing varies by location, we typically spend approximately $275,000 to $350,000 per location.
Depreciation and Amortization Costs.
Depreciation and amortization costs for the three quarters ended June 30, 2020, decreased $52,000 to $3,175,000 from $3,227,000
in the three quarters ended June 25, 2019.
Bad Daddy’s depreciation and amortization
costs for the three quarters ended June 30, 2020, decreased $7,000 to $2,535,000 from $2,542,000 in the three quarters ended June
25, 2019. This decrease was attributable to reduced depreciation resulting from asset impairment charges recorded in the fourth
quarter of fiscal 2019 and the second quarter of fiscal 2020, offset by the four new restaurants opened in fiscal 2019 and two
new restaurants opened in the first fiscal quarter of 2020.. There were four more Bad Daddy’s restaurants open at the end
of the current fiscal quarter compared to the prior year fiscal quarter.
Good Times depreciation and amortization
costs for the three quarters ended June 30, 2020, decreased $45,000 to $640,000 from $685,000 in the three quarters ended June
25, 2019.
General and Administrative Costs.
General and administrative costs for the three quarters ended June 30, 2020, decreased $553,000 to $5,538,000 (6.8% of total revenue)
from $6,091,000 (7.4%) of total revenues) for the three quarters ended June 25, 2019.
The $553,000 decrease in general and administrative
expenses in the three quarters ended June 30, 2020 is primarily attributable to:
|
·
|
Decrease in training and recruiting costs
of $219,000
|
|
·
|
Decrease in administrative related payroll
and benefit costs of $144,000
|
|
·
|
Decrease in costs associated with district
management of $183,000 primarily related to reduced district management for our east coast Bad Daddy’s markets
|
|
·
|
Increase in professional fees of $142,000
|
|
·
|
Decrease of $108,000 in incentive stock
compensation costs
|
|
·
|
Net decreases in all other expenses of
$41,000
|
For the balance of the fiscal year, we
expect general and administrative costs to continue to decline slightly from fiscal 2019 to fiscal 2020 as we focus on reducing
turnover and associated training costs.
Advertising Costs. Advertising
costs for the three quarters ended June 30, 2020, decreased $253,000 to $1,571,000 (1.9% of total revenue) from $1,824,000 (2.2%
of total revenue) for the three quarters ended June 25, 2019.
Bad Daddy’s advertising costs were
$617,000 (1.1% of total revenue) in the three quarters ended June 30, 2020 compared to $654,000 (1.1% of total revenue) in the
same prior year period. The decrease is primarily due to lower sales in the current three quarters versus the same prior year period,
the decrease was offset by $52,000 in costs incurred in the second fiscal quarter related to a local radio advertising campaign
in the Charlotte, North Carolina area The current and prior year three quarters include advertising costs of $9,000 and $11,000,
respectively, of costs associated with franchise advertising contributions.
Bad Daddy’s advertising costs consist
primarily of contributions made to the advertising materials fund based on a percentage of restaurant sales as well as local store
marketing efforts.
Good Times advertising costs were $954,000
(3.9% of total revenue) in the three quarters ended June 30, 2020 compared to $1,170,000 (5.3% of total revenue) in the same prior
year period. This $216,000 decline is due primarily to reduced contributions made to the regional advertising cooperative. The
current and prior year quarters include advertising costs of $167,000 and $212,000, respectively, of costs associated with franchise
advertising contributions.
Good Times advertising costs consists primarily
of contributions made to the advertising materials fund and a regional advertising cooperative based on a percentage of restaurant
sales which are used to provide television and radio advertising, social media and on-site and point-of-purchase. The percentage
contribution paid to the regional advertising cooperative was reduced at the start of the current fiscal year associated with a
change in expected media mix. Advertising costs are presented gross, with franchisee contributions to the fund being recognized
as a component of franchise revenues. As a percentage of total revenue, we expect advertising costs to remain relatively stable
at approximately 3.9% of total revenue for the Good Times segment.
Franchise Costs. Franchise
costs were $14,000 and $31,000 for the three quarters ended June 30, 2020 and June 25, 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 three quarters ended June 30, 2020 was $36,000 compared to a loss of $5,000 in the
three quarters ended June 25, 2019.
$28,000 of the gain in the current year
is related to deferred gains on previous sale lease-back transactions on two Good Times restaurants. The additional gain of $8,000
in the current year is related to the sale of miscellaneous restaurant equipment. The loss in the prior year 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.
Impairment Costs: Impairment
costs were $15,291,000 and $0 for the three quarters ended June 30, 2020 and June 25, 2019, respectively. $5,291,000 of the costs
in the current three quarters are related to six Bad Daddy’s restaurants’ assets that were impaired and $10,000,000
is attributable to an impairment of goodwill related to our Bad Daddy’s reporting unit.
Loss from Operations. The
loss from operations was $14,062,000 in the three quarters ended June 30, 2020 compared to a loss of $513,000 in the three quarters
ended June 25, 2019.
The change in the loss from operations
for the three quarters ended June 30, 2020 is due primarily due to matters discussed in the "Net Revenues,” "Restaurant
Operating Costs," "General and Administrative Costs," “Advertising Costs” and “Asset Impairment
Costs” sections above.
Net Loss. The net loss was
$14,700,000 for the three quarters ended June 30, 2020 compared to a net loss of $49,000 in the three quarters ended June 25, 2019.
The change from the three quarters ended
June 30, 2020 to the three quarters ended June 25, 2019 was primarily attributable to the matters discussed in the "Net Revenues,"
"Restaurant Operating Costs," "General and Administrative Costs," “Advertising Costs” and “Asset
Impairment Costs” sections above as well as an increase in net interest expense of $77,000 for the three quarters ended June
30, 2020 compared to the same prior year period.
Income Attributable to Non-Controlling
Interests. The non-controlling interest represents the limited partners’ or members’ share of income in the
Good Times and Bad Daddy’s joint-venture restaurants.
For the three quarters ended June 30, 2020,
the income attributable to non-controlling interests was $738,000 compared to $912,000 for the three quarters ended June 25, 2019.
$319,000 of the current three quarters’
income is attributable to the BDI joint-venture restaurants, compared to $671,000 in the same prior year period. This $352,000
decrease is primarily due to the elimination of non-controlling interests beginning in the second fiscal quarter of 2019 associated
with the repurchase of interests in the three Raleigh area restaurants as well as reduced restaurant level profitability in the
third fiscal quarter of 2020. $419,000 of the current three quarters’ income is attributable to the Good Times joint-venture
restaurants, compared to $241,000 in the same prior year period. This $178,000 increase is primarily due to increased restaurant
level profitability in the third fiscal quarter of 2020.
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
|
|
|
Year-to-Date
|
|
|
|
June 30, 2020
(13 Weeks)
|
|
|
June 25, 2019
(13 Weeks)
|
|
|
June 30, 2020
(40 Weeks)
|
|
|
June 25, 2019
(39 Weeks)
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported
|
|
$
|
289
|
|
|
$
|
540
|
|
|
$
|
(15,438
|
)
|
|
$
|
(961
|
)
|
Depreciation and amortization
|
|
|
968
|
|
|
|
1,096
|
|
|
|
3,140
|
|
|
|
3,157
|
|
Interest expense, net
|
|
|
202
|
|
|
|
202
|
|
|
|
638
|
|
|
|
561
|
|
EBITDA
|
|
|
1,459
|
|
|
|
1,838
|
|
|
|
(11,660
|
)
|
|
|
2,757
|
|
Preopening expense
|
|
|
31
|
|
|
|
128
|
|
|
|
992
|
|
|
|
928
|
|
Non-cash stock-based compensation
|
|
|
74
|
|
|
|
110
|
|
|
|
223
|
|
|
|
331
|
|
Non-recurring severance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
41
|
|
|
|
-
|
|
GAAP rent-cash cash difference
|
|
|
(95
|
)
|
|
|
(44
|
)
|
|
|
(118
|
)
|
|
|
(50
|
)
|
Gain (loss) on disposal of assets
|
|
|
(8
|
)
|
|
|
44
|
|
|
|
(36
|
)
|
|
|
5
|
|
Asset impairment charge
|
|
|
932
|
|
|
|
-
|
|
|
|
15,291
|
|
|
|
-
|
|
Adjusted EBITDA
|
|
$
|
2,393
|
|
|
$
|
2,076
|
|
|
$
|
4,733
|
|
|
$
|
3,971
|
|
Liquidity and Capital Resources
Cash and Working Capital
As of June 30, 2020, we had a working capital
deficit of $1,738,000, Our working capital position additionally benefits from the fact that we generally collect cash from sales
to customers the same day, or in the case of credit or debit card transactions, within a few days of the related sale, and we typically
have two to four weeks to pay our vendors. We believe that we will have sufficient capital to meet our working capital, long term
debt obligations and recurring capital expenditure needs for the remainder of fiscal 2020 and 2021, although if we are required
to shut down dining rooms or full restaurants due to COVID-19-driven government restrictions, we may need to seek additional sources
of liquidity. As of June 30, 2020, we had $354,000 in commitments outstanding related to construction contracts for a Bad Daddy’s
restaurant that was under construction at the outset of the pandemic, but which has been halted due to the uncertainty created
by COVID-19.
Consistent with many other restaurant and
retail store operations, we typically use operating lease arrangements for our restaurants. We believe that our operating lease
arrangements provide appropriate leverage of our capital structure in a financially efficient manner. Effective September 25, 2019,
the first day of fiscal year 2020, our existing lease obligations are reflected in our consolidated balance sheets as operating
lease assets and lease liabilities in accordance with Accounting Standards Update ("ASU") 2016-02, "Leases (Topic
842)". See Note 2, Updates to Significant Accounting Policies and Note 11, Leases, in the notes to our unaudited condensed
consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for more information.
Financing
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 “Restricted Payments” (as defined in the Cadence Credit Facility) in the
form of repurchases or redemptions of certain equity interests of the Company from former directors and officers of the Company
in an aggregate amount not to exceed $100,000. As amended by the various amendments, the Cadence Credit Facility accrues commitment
fees on the daily unused balance of the facility at a rate of 0.25%. All borrowings under the Cadence Credit Facility, as amended,
bear interest at a variable rate based upon the Company’s election of (i) 2.5% plus the base rate, which is the highest of
the (a) Federal Funds Rate plus 0.5%, (b) the Cadence bank publicly-announced prime rate, and (c) LIBOR plus 1.0%, or (ii) LIBOR,
with a 0.250% floor, plus 3.5%. Interest is due at the end of each calendar quarter if the Company selects to pay interest based
on the base rate and at the end of each LIBOR period if it selects to pay interest based on LIBOR. As of June 30, 2020, the weighted
average interest rate applicable to borrowings under the Cadence Credit Facility was 3.73%.
As a result of entering into the Cadence
Credit Facility and various amendments, the Company has paid loan origination costs including professional fees of approximately
$292,000 since the inception of the credit facility and is amortizing these costs over the term of the credit agreement.
The obligations under the Cadence Credit
Facility are collateralized by a first-priority lien on substantially all of the Company’s assets.
As of June 30, 2020, the outstanding balance
on borrowings against the facility was $9,900,000. 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 30, 2020, the outstanding face value of such
letters of credit was $157,500.
Principal payments on the Cadence Credit
Facility are required beginning on June 30, 2020 in $250,000 installments on the last business day each of March, June, September,
and December in each calendar year. The total loan commitment is permanently reduced by the corresponding amount of each such repayment
on such date. New borrowings are permitted up to the amount of the loan commitment. The note matures and is due in its entirety
on December 31, 2021.
The Cadence Credit Facility, as amended,
contains certain affirmative and negative covenants and events of default that the Company considers customary for an agreement
of this type, including covenants setting a maximum leverage ratio of 5.35:1, a minimum fixed charge coverage ratio of 1.25:1 and
minimum liquidity of $2,000,000. As of June 30, 2020, the Company was in compliance with all covenants under the Cadence Credit
Facility.
On April 14, 2020, the Company entered
into a Consent and Forbearance Agreement effective March 31, 2020 (the “Forbearance Agreement”) with respect to the
Cadence Credit Facility. The Company informed Cadence that certain events of default may occur as a result of Company’s failure
to comply with certain financial covenants for the fiscal quarter ended on or about March 31, 2020 (collectively, the “Potential
Events of Default”). Pursuant to the terms of the Forbearance Agreement, during the Forbearance Period (as defined below),
Cadence agreed to forbear from exercising any available rights and remedies under the Cadence Credit Facility to the extent such
rights and remedies arise exclusively as a result of the Potential Events of Default. Further, Cadence agreed to consent to the
Company’s request to defer the principal payment (the “Payment Deferral”) on the loans due on June 30, 2020 until
the maturity date. The forbearance period (the “Forbearance Period”) expired at 11:59 p.m. (Eastern time) on June 30,
2020 and the Company is currently in compliance with all of its financial covenants.
Paycheck Protection Program Loans
On May 7, 2020, Good Times Restaurants
Inc., and three of its wholly-owned subsidiaries, BDI, Drive Thru, and BDC (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 Paycheck Protection Program (the “PPP”), which is sponsored by the Small Business Administration (the
“SBA”). The PPP is part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).
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 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. However, in the absence of final 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, following a deferral period that ends November 2, 2020, 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 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
$3.8 million. We intend to account for the forgiveness of such loans at the time such forgiveness is granted.
Capital Expenditures
Planned capital expenditures for the balance
of fiscal 2020 primarily include normal recurring capital expenditures for existing Good Times and Bad Daddy’s restaurants.
Cash Flows
Net cash provided by operating activities
was $4,388,000 for the three quarters ended June 30, 2020. The net cash provided by operating activities for the three quarters
ended June 30, 2020 was the result of a net loss of $14,700,000 as well as cash and non-cash reconciling items totaling $19,088,000
(these reconciling items are comprised of 1) depreciation and amortization of general assets of $3,311,000, 2) amortization of
operating lease assets of $3,100,000, 3) stock-based compensation expense of $223,000, 4) impairment costs of 15,291,000 5) an
increase in receivables and other assets of $840,000, 6) an increase in deferred liabilities and accrued expenses of $346,000 ,
7) an increase in accounts payable of $47,000 and 8) a net increase in amounts related to our operating leases of $2,392,000.
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 used in investing activities for the three quarters
ended June 30, 2020 was $2,305,000 which primarily reflects the purchases of property and equipment of $2,294,000, proceeds from
the sale of fixed assets of $55,000 and the purchase of treasury stock of $75,000. Purchases of property and equipment is comprised
of the following:
|
·
|
$2,065,000 in costs for the development
of Bad Daddy’s locations
|
|
·
|
$106,000 for miscellaneous capital expenditures
related to our Bad Daddy’s restaurants
|
|
·
|
$90,000 for miscellaneous capital expenditures
related to our Good Times restaurants
|
|
·
|
$33,000 for miscellaneous capital expenditures
related to our corporate office
|
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 provided by financing activities
for the three quarters ended June 30, 2020 was $7,837,000, which includes principal payments on notes payable and long-term debt
of $8,250,000, borrowings on notes payable and long-term debt of $16,945,000, contributions from non-controlling interests of $22,000
and distributions to non-controlling interests of $880,000.
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.
Contingencies
We remain contingently liable on various
leases underlying restaurants that were previously sold to franchisees. We have never experienced any losses related to these contingent
lease liabilities, however if a franchisee defaults on the payments under the leases, we would be liable for the lease payments
as the assignor or sublessor of the lease. Currently we have not been notified nor are we aware of any leases in default under
which we are contingently liable, however there can be no assurance that there will not be in the future, which could have a material
effect on our future operating results.
Additionally, in the normal course of business,
there may be various claims in process, matters in litigation, and other contingencies brought against the company by employees,
vendors, customers, franchisees, or other parties. Evaluating these contingencies is a complex process that may involve substantial
judgment on the potential outcome of such matters, and the ultimate outcome of such contingencies may differ from our current analysis.
We review the adequacy of accruals and disclosures related to such contingent liabilities in consultation with legal counsel. While
it is not possible to predict the outcome of these claims with certainty, it is management’s opinion that potential losses
associated with such contingencies would be immaterial to our financial statements.
Impact of Inflation
The total menu price increases at our Good
Times restaurants during fiscal 2019 were approximately 4.4%, and we raised menu prices approximately 4.0% during the first three
quarters of fiscal 2020. The total menu increases taken at our Bad Daddy’s restaurants during fiscal 2019 were approximately
1.5% on average. We raised menu prices during the first three quarters of fiscal 2020 approximately 2.4%. Commodity prices have
been elevated during fiscal 2020, including significantly higher-than-normal pricing during June and July 2020. Due to the impact
of the COVID-19 pandemic, availability of ground beef and bacon has been constrained and prices for those commodities have been
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.
Recent Accounting Pronouncements
On September 25, 2019, the first day of
fiscal year 2020, the Company adopted the FASB ASU 2016-02, Leases (Topic 842). See notes 2, 3 and 11 to the condensed consolidated
financial statements above.