| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Form 10-Q contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the disclosure of risk factors in the Company’s Form 10-K for the fiscal year ended September 28, 2021. 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:
| (II) | The disruption to our business from the novel coronavirus (COVID-19) pandemic and the impact of the pandemic on our results of operations, financial condition and prospects. The disruption and effect on our business may vary depending on the duration and extent of the COVID-19 pandemic and the impact of federal, state and local governmental actions and customer behavior in response to the pandemic. |
| (II) | We compete with numerous well-established competitors who have substantially greater financial resources and longer operating histories than we do. Competitors have increasingly offered selected food items and combination meals, including hamburgers, at discounted prices, and continued discounting by competitors may adversely affect revenues and profitability of Company restaurants. |
| (II) | We may be negatively impacted if we experience same store sales declines. Same store sales comparisons will be dependent, among other things, on the success of our advertising and promotion of new and existing menu items. No assurances can be given that such advertising and promotions will in fact be successful. |
| (II) | We may be negatively impacted if we are unable to pass on to customers through menu price increases the increased costs that we incur through inflation experienced in our input costs including both the cost of food and the cost of labor. Recent metrics have indicated that increased levels of price inflation are prevalent throughout the economy and the impacts of such inflation, including the impact of related governmental response, cannot be accurately predicted. |
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 28, 2021.
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, including second- and third-order effects of the pandemic, continues to have a substantial impact on our restaurant operations. During portions of the month of November 2020 through early January 2021, all of the Company’s Bad Daddy’s Burger Bar restaurants in Colorado were open only for limited outdoor dining, delivery and carry-out service, with indoor dining rooms closed by government orders. Beginning in early January 2021, we began to re-open Colorado dining rooms at Bad Daddy’s, with limited occupancy, as local regulations allowed. Our dining rooms in all other states in which Bad Daddy’s has operations were open during this time. Although all of our dining rooms at Bad Daddy’s were open, our Good Times restaurants with dining rooms continued to operate without opening dining rooms. Further, periodically we have closed individual dining rooms, whether driven by explicit capacity reductions under government orders or which we abide by 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, including the impact of mutations of the virus and additional variants including but not limited to the recent delta and omicron variants; neither are we able to predict how the pandemic will evolve nor how various government entities will respond to its evolution. Should additional dining room closures occur, 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. Furthermore, although the development of certain vaccines that are currently being administered may reduce the risk of further government restrictions, there is no guarantee that the vaccine will be effective in eradicating the virus, additional mutations or variants of the virus may be resistant to any vaccine, and the length of the ongoing pandemic may change consumer behavior such that potential customers may still choose to reduce or eliminate in-restaurant dining.
Additionally, in connection with spread of COVID-19, there have been disruptions in various food supply chains in the United States. Our operating results substantially depend upon our ability to obtain sufficient quantities of products such as beef, bacon, and other products used in the production of items served and sold to our guests. Ongoing impacts of the COVID-19 pandemic could result in product shortages and in-turn could require us to serve a limited menu, restrict number of items purchased per guest, or close some or all of our restaurants for an indeterminate period of time. Ongoing material adverse impacts from the COVID-19 pandemic could result in reduced revenue and cash flow and could affect our assessments of impairment of intangible assets, long-lived assets, or goodwill.
Growth Strategies and Outlook.
We believe there are significant opportunities to grow customer traffic and increase awareness of our brands. Prior to the COVID-19 pandemic, we reduced our development profile as we sought to improve our financial position, and while we believe there are unit growth opportunities for both of our concepts, we are evaluating that in-line with the impact of the pandemic on the restaurant industry. We currently are filling a restaurant development pipeline and expect new Bad Daddy’s restaurant openings beginning in fiscal 2023.
Restaurant locations.
As of December 28, 2021, we operated, franchised, or licensed a total of forty-two Bad Daddy’s restaurants and thirty-two Good Times restaurants. The following table presents the number of restaurants operating at the end of the first fiscal quarters of 2022 and 2021.
Company-Owned/Co-Developed/Joint-Venture
| | | Bad Daddy’s
Burger Bar | | | Good Times Burgers
& Frozen Custard | | | Total | |
| | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | |
| Alabama | | | 2 | | | | 1 | | | | - | | | | - | | | | 2 | | | | 1 | |
| Colorado | | | 12 | | | | 12 | | | | 24 | | | | 25 | | | | 36 | | | | 37 | |
| Georgia | | | 5 | | | | 4 | | | | - | | | | - | | | | 5 | | | | 4 | |
| North Carolina | | | 14 | | | | 14 | | | | - | | | | - | | | | 14 | | | | 14 | |
| Oklahoma | | | 1 | | | | 1 | | | | - | | | | - | | | | 1 | | | | 1 | |
| South Carolina | | | 3 | | | | 3 | | | | - | | | | - | | | | 3 | | | | 3 | |
| Tennessee | | | 2 | | | | 2 | | | | - | | | | - | | | | 2 | | | | 2 | |
| Total | | | 39 | | | | 37 | | | | 24 | | | | 25 | | | | 63 | | | | 62 | |
One company-owned Good Times restaurant closed, and the property was subleased during fiscal 2021.
Franchise/License
| | | Bad Daddy’s
Burger Bar | | | Good Times Burgers
& Frozen Custard | | | Total | |
| | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | |
| Colorado | | | - | | | | - | | | | 6 | | | | 6 | | | | 6 | | | | 6 | |
| North Carolina | | | 1 | | | | 1 | | | | - | | | | - | | | | 1 | | | | 1 | |
| South Carolina | | | 1 | | | | 1 | | | | - | | | | - | | | | 1 | | | | 1 | |
| Wyoming | | | - | | | | - | | | | 2 | | | | 2 | | | | 2 | | | | 2 | |
| Total | | | 2 | | | | 2 | | | | 8 | | | | 8 | | | | 10 | | | | 10 | |
Non-Traditional*
| | | Bad Daddy’s
Burger Bar | | | Good Times Burgers
& Frozen Custard | | | Total | |
| | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | |
| Colorado | | | 1 | | | | - | | | | - | | | | - | | | | 1 | | | | - | |
| Total | | | 1 | | | | - | | | | - | | | | - | | | | 1 | | | | - | |
* The non-traditional Bad Daddy’s Burger Bar location is a location where we operate the kitchen under our Bad Daddy’s brand for a local brewery’s taproom.
Results of Operations
Fiscal quarter ended December 28, 2021 (13 weeks) compared to fiscal quarter ended December 29, 2020 (13 weeks):
Net Revenues. Net revenues for the quarter ended December 28, 2021 increased $5,620,000 or 20.5% to $32,916,000 from $27,296,000 for the quarter ended December 29, 2020. Bad Daddy’s concept revenues increased $5,856,000 while our Good Times concept revenues decreased $236,000.
Bad Daddy’s restaurant sales increased $5,899,000 to $24,590,000 for the quarter ended December 28, 2021 from $18,691,000 for the quarter ended December 29, 2020. Sales were positively impacted by two new restaurants opened in the fourth fiscal quarter of 2021 and increases in sales due to stronger customer traffic compared to the prior year in connection with easing of COVID restrictions. The average menu price increase for the quarter ended December 28, 2021 over the same prior-year quarter was approximately 4.6%.
Good Times restaurant sales decreased $304,000 to $8,086,000 for the quarter ended December 28, 2021 from $8,390,000 for the quarter ended December 29, 2020. The average menu price increase for the quarter ended December 28, 2021 over the same prior-year quarter was approximately 5.9%.
Franchise revenues were $240,000 in the quarter ended December 28, 2021 compared to $215,000 in the quarter ended December 29, 2020. This increase is primarily due to increased royalties at the Bad Daddy’s franchisee and licensee restaurants attributable to increased sales.
Same Store Sales
Sales store sales is a metric used in evaluating the performance of established restaurants and is a commonly used metric in the restaurant industry. Same store sales for our brands are calculated using all units open for at least eighteen full fiscal months and use the comparable operating weeks from the prior year to the current year quarter’s operating weeks.
Bad Daddy’s same store restaurant sales increased 24.0% during the quarter ended December 28, 2021 compared to the same thirteen-week period ended December 29, 2020 in the prior-year quarter, substantially driven by the easing of COVID-19 related capacity restrictions, prior-year dining room closures throughout Colorado, and changes in consumer behavior as the pandemic progresses. There were thirty-seven restaurants included in the same store sales base at the end of the quarter.
Good Times same store restaurant sales decreased 2.5% during the quarter ended December 28, 2021 compared to the same thirteen-week period ended December 29, 2020 in the prior-year quarter, primarily due to reduced customer traffic in November and December as a result of restaurant dining rooms in other restaurants being open in the current year compared with them being closed during the prior year, as customers had alternatives other than carry-out-only and drive-thru restaurants for dining experiences in the current year. There were twenty-four restaurants included in the same store sales base at the end of the quarter.
Restaurant Operating Costs
Food and Packaging Costs. Food and packaging costs for the quarter ended December 28, 2021 increased $2,385,000 to $10,226,000 (31.3% of restaurant sales) from $7,841,000 (29.0% of restaurant sales) for the quarter ended December 29, 2020.
Bad Daddy’s food and packaging costs were $7,812,000 (31.8% of restaurant sales) for the quarter ended December 28, 2021, up from $5,356,000 (28.7% of restaurant sales) for the quarter ended December 29, 2020. This increase is primarily attributable to higher restaurant sales during the current quarter versus the same quarter in the prior year. The increase as a percent of sales is attributable the significant inflation noted during the quarter with most of our food products seeing meaningful price increases.
Good Times food and packaging costs were $2,414,000 (29.9% of restaurant sales) for the quarter ended December 28, 2021, down from $2,485,000 (29.6% of restaurant sales) for the quarter ended December 29, 2020. This decrease is primarily attributable to decreased restaurant sales. The increase as a percent of sales is due primarily to the impact of higher purchase price on food and paper goods, partially offset by increased menu pricing.
Payroll and Other Employee Benefit Costs. Payroll and other employee benefit costs for the quarter ended December 28, 2021 increased $2,151,000 to 11,177,000 (34.1% of restaurant sales) from $8,881,000 (32.8% of restaurant sales) for the quarter ended December 29, 2020.
Bad Daddy’s payroll and other employee benefit costs were $8,418,000 (34.2% of restaurant sales) for the quarter ended December 28, 2021 up from $6,267,000 (33.5% of restaurant sales) in the same prior year period. The $2,151,000 increase is primarily attributable to higher restaurant sales during the current quarter versus the same quarter in the prior year, as well as higher average pay rates. As a percent of sales, payroll and employee benefits costs increased by 0.7% primarily attributable to higher average wage rates paid to attract qualified employees.
Good Times payroll and other employee benefit costs were $2,759,000 (34.1% of restaurant sales) in the quarter ended December 28, 2021, up from $2,614,000 (31.2% of restaurant sales) in the same prior-year period. The $145,000 increase, both in nominal dollars and as measured as a percent of restaurant sales, was attributable to higher average wage rates paid to attract qualified employees.
Occupancy Costs. Occupancy costs for the quarter ended December 28, 2021 increased $133,000 to $2,328,000 (7.1% of restaurant sales) from $2,195,000 (8.1% of restaurant sales) for the quarter ended December 29, 2020.
Bad Daddy’s occupancy costs were $1,649,000 (6.7% of restaurant sales) for the quarter ended December 28, 2021, up from $1,454,000 (7.8% of restaurant sales) in the same prior year period. The increase was primarily attributable to increases in our operating lease costs and property taxes, including additional costs for the two restaurants opened during the fourth quarter of fiscal 2021. The decrease as a percentage of sales was primarily due to the leveraging effect of higher restaurant sales.
Good Times occupancy costs were $679,000 (8.4% of restaurant sales) in the quarter ended December 28, 2021, down from $741,000 (8.8% of restaurant sales) in the same prior year period. The decrease was primarily attributable to decreases in our operating lease costs including rent abatement associated with a lease termination agreement for one good times restaurant.
Other Operating Costs. Other operating costs for the quarter ended December 28, 2021, increased $699,000 to $4,138,000 (12.7% of restaurant sales) from $3,469,000 (12.8% of restaurant sales) for the quarter ended December 29, 2020.
Bad Daddy’s other operating costs were $3,285,000 (13.4% of restaurant sales) for the quarter ended December 28, 2021 up from $2,648,000 (14.1% of restaurant sales) in the same prior year period. The $637,000 increase was attributable to higher overall sales including sales from the two new restaurants opened in the fourth quarter of fiscal 2021. The percentage decrease was primarily attributable to the shift in sales mix favoring dine-in sales compared to delivery sales as a percentage of overall sales, as the increase in sales was primarily see in dine-in traffic comparing to dining room closures in the prior year quarter.
Good Times other operating costs were $853,000 (10.5% of restaurant sales) in the quarter ended December 28, 2021, up from $821,000 (9.8% of restaurant sales) in the same prior year period. The increase was primarily attributable to general price inflation in supplies costs and increases in commissions paid to delivery service providers due to increases in overall delivery sales.
New Store Preopening Costs. In the quarter ended December 28, 2021, we incurred $50,000 of preopening costs compared to $39,000 for the quarter ended December 29, 2020. All of the preopening costs are related to our Bad Daddy’s restaurants and relate primarily to the restaurant opened in Montgomery, AL during the fourth quarter of fiscal 2021.
Depreciation and Amortization Costs. Depreciation and amortization costs for the quarter ended December 28, 2021, increased $55,000 to $984,000 from $929,000 in the quarter ended December 29, 2020.
Bad Daddy’s depreciation and amortization costs for the quarter ended December 28, 2021 increased $47,000 to $784,000 from $737,000 in the quarter ended December 29, 2020. This increase was primarily attributable to the two new restaurants opened in final quarter of fiscal 2021.
Good Times depreciation and amortization costs for the quarter ended December 28, 2021 increased $8,000 to $200,000 from $192,000 in the quarter ended December 29, 2020.
General and Administrative Costs. General and administrative costs for the quarter ended December 28, 2021, increased $531,000 to $2,705,000 (8.2% of total revenue) from $2,174,000 (8.0% of total revenues) for the quarter ended December 29, 2020.
This increase in general and administrative expenses in the quarter ended December 28, 2021 is primarily attributable to:
| · | Decrease in administrative related payroll and benefit costs of $164,000 primarily related the prior-year one-time bonus awarded to the CEO during the quarter ended December 28, 2021 in connection with the amendment of his employment agreement and reduced health insurance underwriting losses, partially offset by increased administrative salaries and wages. |
| · | Increase in costs associated with multi-unit management of $126,000 primarily related to increased multi-unit travel costs and incentive compensation |
| · | Increase in professional services of $280,000, primarily attributable to increased legal costs |
| · | Increase in general travel costs of $29,000 attributable primarily to greater restaurant travel by restaurant support personnel |
| · | Increase of $49,000 in recruiting and travel costs primarily associated with training managers for Bad Daddy’s restaurants |
| · | Increase of $91,000 associated with in-person restaurant general managers’ conference held in the current year that had not been held in the prior year |
| · | Increased director and officer liability insurance costs of approximately $21,000 |
| · | Increased technology costs of $99,000 primarily attributable to expenses related to maintenance of mobile applications and financial reporting systems, as well as costs associated with additional administrative personnel |
For the balance of the fiscal year, we expect general and administrative costs to trend similarly in nominal terms to costs incurred during the current quarter.
Advertising Costs. Advertising costs for the quarter ended December 28, 2021, increased $132,000 to $641,000 (1.9% of total revenue) from $509,000 (1.9% of total revenue) for the quarter ended December 29, 2020.
Bad Daddy’s advertising costs were $313,000 (1.3% of total revenue) in the quarter ended December 28, 2021 compared to $168,000 (0.9% of total revenue) in the same prior year period. The increase is primarily due to greater spending on physical menus and point-of-sale materials in the current quarter versus the same prior year quarter when menus and point-of-sale merchandising materials were digital. The current and prior year quarters each include advertising costs of $4,000 associated with franchise advertising contributions.
Bad Daddy’s advertising costs consist primarily of contributions made to the advertising materials fund based on a percentage of restaurant sales as well as local store marketing efforts.
Good Times advertising costs were $328,000 (4.0% of total revenue) in the quarter ended December 28, 2021 compared to $341,000 (4.0% of total revenue) in the same prior year period. The decrease is primarily due to decreased advertising expenditures in the current quarter versus the same prior year quarter. The current and prior year quarters include advertising costs of $65,000 and $67,000, respectively, of costs associated with franchise advertising contributions.
Good Times advertising costs consists primarily of contributions made to the advertising materials fund and a regional advertising cooperative based on a percentage of restaurant sales which are used to provide television and radio advertising, social media and on-site and point-of-purchase. Advertising costs are presented gross, with franchisee contributions to the fund being recognized as a component of franchise revenues. As a percentage of total revenue, we expect advertising costs to remain relatively stable, at approximately 4.0% of total revenue for the Good Times segment.
Franchise Costs. Franchise costs were $5,000 and $5,000 for the quarters ended December 28, 2021 and December 29, 2020, respectively. The costs are primarily related to the Good Times franchised restaurants. We currently have minimal direct costs associated with maintaining our franchise systems as those employees overseeing franchisee relations primarily perform responsibilities associated with company operations.
Gain on Restaurant Asset Sales and Lease Termination. The gain on restaurant asset sales and lease termination for the quarter ended December 28, 2021 was $614,000 compared to $9,000 for the quarter ended December 29, 2020.
The Company had previously entered into an agreement with the landlord for one of its Good Times restaurants which provided the landlord an option to terminate the lease with a six-month notice in exchange for a specific termination penalty. During the fiscal quarter ended December 28, 2021 the landlord for this location exercised the termination option and we recognized a $607,000 gain in connection with the lease termination. The Company will continue to operate this location through the majority of the notice period and will vacate the leased premises no later than March 31, 2022. The remainder of the gain recognized during the period ended December 28, 2021 and all of the gain recognized during the period ended December 28, 2021 is the periodic recognition of deferred gains resulting from two prior sale-leaseback transactions associated with certain Good Times restaurants.
Income from Operations. Income from operations was $1,276,000 in the quarter ended December 28, 2021 compared to income from operations of $1,263,000 in the quarter ended December 29, 2020.
The change in the income from operations for the quarter ended December 28, 2021 is due primarily due to matters discussed in the “Net Revenues,” “Restaurant Operating Costs,” “General and Administrative Costs” and “Advertising Costs” sections above.
Interest Expense. Income tax expense was $18,000 during the quarter ended December 28, 2021, primarily related to the amortization of loan initiation fees, compared with $98,000 during the quarter ended During December 29, 2020. The reduction in interest expense is attributable to the reduction in outstanding loan balances.
Provision for Income Taxes. Provision for income taxes was $8,000 for the quarter ended December 28, 2021, compared to zero for the quarter ended December 29,2020. The provision for income taxes during the quarter ended December 28, 2021 relates to the recognition of current state income taxes where the Company does not have substantial net operating loss carry-forwards.
Net Income. Net income was $1,250,000 for the quarter ended December 28, 2021 compared to net income of $1,165,000 in the quarter ended December 29, 2020.
The change from the quarter ended December 28, 2021 to the quarter ended December 29, 2020 was primarily attributable to the matters discussed in the relevant sections above.
Income Attributable to Non-Controlling Interests. The non-controlling interest represents the limited partners’ or members’ share of income in the Good Times and Bad Daddy’s joint-venture restaurants.
For the quarter ended December 28, 2021, the income attributable to non-controlling interests was $920,000 compared to $363,000 for the quarter ended December 29, 2020.
Of the current quarter’s income attributable to non-controlling interests, $684,000 is attributable to Bad Daddy’s joint-venture restaurants, compared to $180,000 in the same prior year period. This $504,000 increase is primarily due to a one-time special allocation to the non-controlling partners in these partnerships of approximately $516,000 related to a rebate of payroll costs, partially offset by slightly decreased restaurant level profitability in the current fiscal quarter. Of the current quarter’s income, $236,000 is attributable to the Good Times joint-venture restaurants, compared to $183,000 in the same prior year period. This $47,000 increase is primarily due to the noncontrolling partner’s share of gain recognized on disposal of assets in connection with the landlord exercising a termination right at one Good Times restaurant owned by the partnership, partially offset by decreased restaurant level profitability in the current fiscal quarter.
Adjusted EBITDA
EBITDA is defined as net income (loss) before interest, income taxes and depreciation and amortization.
Adjusted EBITDA is defined as EBITDA plus non-cash stock-based compensation expense, preopening expense, non-recurring acquisition costs, GAAP rent in excess of cash rent, and non-cash disposal of assets. Adjusted EBITDA is intended as a supplemental measure of our performance that is not required by or presented in accordance with GAAP. We believe that EBITDA and Adjusted EBITDA provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. Our management uses EBITDA and Adjusted EBITDA (i) as a factor in evaluating management's performance when determining incentive compensation and (ii) to evaluate the effectiveness of our business strategies.
We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company's financial measures with other fast casual restaurants, which may present similar non-GAAP financial measures to investors. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate Adjusted EBITDA in the same fashion.
Our management does not consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company's financial statements. Some of these limitations are:
| · | Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
| · | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| · | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; |
| · | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| · | stock based compensation expense is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing performance for a particular period; |
| · | Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and |
| · | other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as a supplemental measure. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.
The following table reconciles net income/loss to EBITDA and Adjusted EBITDA (in thousands) for the third fiscal quarter and year-to-date:
| | | Quarter Ended | |
| | | December 28, 2021
(13 Weeks) | | | December 29, 2020
(13 Weeks) | |
| Adjusted EBITDA: | | | | | | | | |
| Net income, as reported | | $ | 330 | | | $ | 802 | |
| Depreciation and amortization | | | 1,004 | | | | 909 | |
| Interest expense, net | | | 18 | | | | 98 | |
| Provision for income taxes | | | 8 | | | | - | |
| EBITDA | | | 1,360 | | | | 1,809 | |
| Preopening expense | | | 50 | | | | 39 | |
| Non-cash stock-based compensation | | | 95 | | | | 61 | |
| GAAP rent-cash rent difference | | | (73 | ) | | | (107 | ) |
| Gain on restaurant asset sales and lease termination | | | (484 | ) | | | (9 | ) |
One-time special allocation to Bad Daddy’s
partnerships | | | 516 | | | | - | |
| Adjusted EBITDA | | $ | 1,464 | | | $ | 1,793 | |
Depreciation and amortization expense has been reduced by amounts attributable to non-controlling interests of $67,000 and $41,000 for the quarters ended December 28,2021 and December 29, 2020, respectively.
Gain on restaurant asset sales and lease termination has been reduced by amounts attributable to non-controlling interests of $130,000 and zero for the quarters ended December 28, 2021 and December 29, 2020, respectively.
Amount represents the portion of a payroll cost rebate attributable to the non-controlling partners in these partnerships.
Liquidity and Capital Resources
Cash and Working Capital
As of December 28, 2021, we had a working capital deficit of $43,000. 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. Although we have negotiated payment terms of up to four weeks with many of our vendors, we pay our primary foodservice vendors on 1-3 day payment terms to take advantage of early pay discounts and generally pay most outstanding accounts payable upon review for accuracy and validity. In addition, our working capital position includes the recognition of the current portion of lease liabilities as we lease substantially all of our real estate and have both short-term and long-term obligations to our landlords. We believe that we will have sufficient capital to meet our working capital, recurring operating costs and recurring capital expenditure needs throughout fiscal 2022. As of December 28, 2021, we had no commitments related to construction contracts for any restaurants currently under development.
On January 31, 2022 the Company’s Board of Directors authorized a $5.0 Million share repurchase program which will become effective February 7, 2022. The authorization to repurchase will continue until the maximum value of shares is achieved or the Company terminates the program. The timing and amount of repurchases will depend upon the Company’s stock price, economic and market conditions, regulatory requirements, and other corporate considerations.
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 $8,000,000 with a maturity date of January 31, 2023 (as amended, the “Cadence Credit Facility”). As amended by the various amendments, the Cadence Credit Facility accrues commitment fees on the daily unused balance of the facility at a rate of 0.25%. As of December 28, 2021, any borrowings under the Cadence Credit Facility, 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. The Cadence Credit Facility, includes provisions for the Administrative Agent of the facility to amend the facility to replace LIBOR with an alternate benchmark rate, which may be (but is not required to be) SOFR, at such point in time when appliable LIBOR rates are no longer available or no longer reliable. The exact timing of any transition of LIBOR to an alternate benchmark rate is not currently known.
During the fiscal year ended December 28, 2021, the weighted average interest rate applicable to borrowings under the Cadence Credit Facility was 3.75%.
As of December 28, 2021, the Cadence Credit Facility, as 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 5.15:1, a minimum pre-distribution fixed charge coverage ratio of 1.25:1, a minimum post-distribution fixed charge coverage ratio of 1.10:1 and minimum liquidity of $2.0 million. As of December 28, 2021, the Company was in compliance with all financial 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 $308,500 and is amortizing these costs over the term of the credit agreement.
The obligations under the Cadence Credit Facility are collateralized by a first-priority lien on substantially all of the Company’s assets.
As of December 28, 2021, there were no outstanding borrowings against the facility. Availability of the Cadence Credit Facility for borrowings is reduced by the outstanding face value of any letters of credit issued under the facility. As of December 28, 2021, there were no outstanding letters of credit issued under the facility.
Paycheck Protection Program Loans
On May 7, 2020, Good Times and three of its wholly-owned subsidiaries entered into unsecured loans in the aggregate principal amount of $11,645,000 (the “Loans”) with Cadence Bank, N.A pursuant to the PPP.
In June 2021, the SBA approved forgiveness in full of the Loans, including accrued interest, in the aggregate amount of $11,778,226, which was recognized as gain on debt extinguishment in the fiscal year ended September 28, 2021. The principal and accrued interest balance on each of these Loans is now zero, as of the forgiveness date specific to each of the Loans.
Cash Flows
Net cash used in operating activities was $219,000 for the quarter ended December 28, 2021. The net cash used in operating activities for the quarter ended December 28, 2021 was the result of net income of $1,250,000 as well as cash and non-cash reconciling items totaling $1,469,000. These reconciling items are primarily comprised of 1) depreciation and amortization of general assets of $1,078,000, 2) amortization of operating lease assets of $757,000, 3) stock-based compensation expense of $95,000, 4) a gain on lease termination and deferred gain on sale/leaseback of restaurants of $614,000, 4) an increase in receivables and other assets of $961,000, 5) an increase in deferred liabilities and accrued expenses of $808,000, 6) a decrease in accounts payable of $915,000 and 7) a net decrease in amounts related to our operating leases of $823,000.
Net cash provided by operating activities was $847,000 for the quarter ended December 29, 2020. The net cash provided by operating activities for the quarter ended December 29, 2020 was the result of net income of $1,165,000 as well as cash and non-cash reconciling items totaling $318,000. These reconciling items are primarily comprised of 1) depreciation and amortization of general assets of $967,000, 2) amortization of operating lease assets of $1,055,000, 3) stock-based compensation expense of $61,000, 4) an increase in receivables and other assets of $659,000, 5) an increase in deferred liabilities and accrued expenses of $743,000, 6) a decrease in accounts payable of $1,340,000 and 7) a net increase in amounts related to our operating leases of $1,136,000.
Net cash used in investing activities for the quarter ended December 28, 2021 was $237,000 which primarily reflects the purchases of property and equipment of $237,000. Purchases of property and equipment is comprised of the following:
| · | $192,000 for miscellaneous capital expenditures related to our existing Bad Daddy’s restaurants |
| · | $45,000 for miscellaneous capital expenditures related to our existing Good Times restaurants |
| · | $81,000 for miscellaneous capital expenditures related to our restaurant support center, primarily automotive assets used by our internal maintenance team |
Net cash used in investing activities for the quarter ended December 29, 2020 was $480,000 which primarily reflects the purchases of property and equipment of $483,000. Purchases of property and equipment is comprised of the following:
| · | $102,000 in costs for the development of new Bad Daddy’s locations |
| · | $220,000 for miscellaneous capital expenditures related to our existing Bad Daddy’s restaurants |
| · | $113,000 for miscellaneous capital expenditures related to our existing Good Times restaurants |
| · | $48,000 for miscellaneous capital expenditures related to our restaurant support center |
Net cash used in financing activities for the quarter ended December 28, 2021 was $760,000, which includes proceeds from stock option exercises of $6,000 and distributions to non-controlling interests of $766,000, the latter including a one-time special allocation of approximately $516,000 to the non-controlling partners in our Bad Daddy’s partnerships related to a rebate of payroll costs.
Net cash used in financing activities for the quarter ended December 29, 2020 was $1,806,000, which includes principal payments on notes payable and long-term debt of $1,500,000, proceeds from stock option exercises of $13,000 and distributions to non-controlling interests of $319,000.
Impact of Inflation
Due to the impact of the COVID-19 pandemic, availability of certain commodities could be constrained and prices for those commodities could be substantially more volatile than in recent history. Additionally, headline inflation as measured by the Consumer Price Index has recently exceeded inflation amounts recorded at any time during the past forty years. We have experienced significant inflationary pressure both on the cost of labor in the form of salaries and wages, and also in raw products, across many of the commodities we use in our operations. 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. We have adjusted menu prices with intentional discipline, particularly at Bad Daddy’s. The total menu price increases at our Good Times restaurants during fiscal 2021 were approximately 8.0%, and we raised menu prices approximately 2.0% during the first quarter of fiscal 2022. We raised menu prices at our Bad Daddy’s restaurants during fiscal 2021 by approximately 3.2% and raised menu prices during the first quarter of fiscal 2022 by approximately 2.1%. We expect to subsequently raise menu prices at our Bad Daddy’s restaurants by an approximately 2.5% during the second fiscal quarter of 2022.
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.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not required.
| ITEM 4. | CONTROLS AND PROCEDURES |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this report on Form 10Q, the Company’s Chief Executive Officer (its principal executive officer and principal financial officer) has concluded that the Company’s disclosure controls and procedures were effective as of December 28, 2021.
Changes in Internal Control over Financial Reporting
There have been no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 28, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
There have been no material developments to the information provided in Part I, Item 3 of our Form 10-K for the fiscal year ended September 28, 2021.
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of our Form 10-K for the fiscal year ended September 28, 2021.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
None.
(a) Exhibits. The following exhibits are furnished as part of this report:
*Filed herewith
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | GOOD TIMES RESTAURANTS INC. |
| DATE: February 3, 2022 | |
| | |
| | |  | |
| | | Ryan M. Zink Chief Executive Officer |
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