Good Times Restaurants Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended March 31, 2020 (13 weeks), with year-to-date results covering 27 weeks. Comparatives are the 13-week quarter and 26-week year-to-date period ended March 26, 2019. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context
The company operates and franchises Bad Daddy’s Burger Bar, a full-service casual dining concept, and Good Times Burgers & Frozen Custard, a drive-through concept. At quarter-end, it reported 37 company-owned/co-developed/joint-venture Bad Daddy’s restaurants and 25 such Good Times restaurants, plus 2 Bad Daddy’s and 8 Good Times franchise or license locations.
Financial performance and liquidity
| Metric | Quarter ended Mar. 31, 2020 | Comparable quarter | Year to date | Prior year to date |
|---|---|---|---|---|
| Revenue | $26.182 | $27.167 | $56.996 | $52.532 |
| Operating income (loss) | $(14.533) | $0.018 | $(14.905) | $(0.563) |
| Net income (loss) | $(14.742) | $(0.180) | $(15.341) | $(0.922) |
| Net loss attributable to common shareholders | $(14.916) | $(0.450) | $(15.727) | $(1.501) |
| Adjusted EBITDA, non-GAAP | $0.836 | $1.147 | $2.340 | $1.894 |
| Operating cash flow | $(0.204), year to date | $2.487, prior year to date |
Quarterly revenue fell 3.6%; Bad Daddy’s revenue declined $1.105 million, while Good Times revenue rose $0.120 million. Bad Daddy’s same-store sales fell 15.7%, substantially reflecting dining-room closures in the final three weeks. Good Times same-store sales increased 3.0%. Year-to-date revenue rose 8.5%, helped by new Bad Daddy’s restaurants and an extra fiscal week; management estimated the extra week contributed about $2.015 million in Bad Daddy’s sales and $0.460 million in Good Times sales.
Restaurant operating costs were $24.211 million in the quarter, or approximately 92.5% of total revenue. As a share of restaurant sales, food and packaging costs were 29.3%, payroll and benefits 38.0%, occupancy 8.5%, and other operating costs 12.4%. Management cited higher wages and delivery-service commissions, as well as sales deleveraging, among cost pressures.
The quarter and year-to-date losses included $10.0 million of non-cash Bad Daddy’s goodwill impairment and $4.359 million of non-cash impairment charges for five Bad Daddy’s restaurants. Excluding impairment and other specified adjustments, quarterly Adjusted EBITDA was $0.836 million versus $1.147 million; the measure is non-GAAP and the filing cautions it has limitations and may not be comparable across companies.
Cash and cash equivalents were $4.056 million at March 31, versus $2.745 million at September 24, 2019. Current assets were $6.430 million and current liabilities $27.956 million, producing a $21.526 million working-capital deficit; the deficit includes debt classified as current. The company reported $16.750 million outstanding under its Cadence credit facility, bearing a 4.531% weighted-average interest rate, and $60.223 million of operating lease liabilities. The facility is secured by substantially all company assets and matures December 31, 2021.
Year-to-date investing cash outflow was $2.021 million, primarily capital expenditures of $1.954 million. Financing cash inflow was $3.536 million. The company’s cash flow from operations was negative $0.204 million, compared with positive $2.487 million in the prior-year period.
Material changes and unusual items
- Bad Daddy’s goodwill was written down by $10.0 million following the COVID-19 disruption and a sustained share-price decline; five Bad Daddy’s restaurant assets were also impaired by $4.359 million.
- The company adopted lease accounting Topic 842 at the start of fiscal 2020, recognizing $50.898 million in operating lease assets and $60.223 million in lease liabilities at March 31. Management said adoption had a significant balance-sheet impact but an immaterial impact on the income statement, cash flows, and overall liquidity.
- The company repurchased 43,110 shares for $75,000 during the year-to-date period.
- After quarter-end, the company received $11.645 million in Paycheck Protection Program loans. Forgiveness depends on program requirements and documentation; the company said it could not assure that any portion would be forgiven.
Outlook, risks, and contingencies
- COVID-19 materially disrupted operations: Bad Daddy’s dining rooms were closed by government orders during portions of March, with delivery and carry-out service continuing; Good Times experienced reduced volumes. Management expected the impact on the quarter ending June 30, 2020 to be more significant than in the reported quarter and could not estimate its duration.
- Management warned that supply-chain disruption could cause shortages of beef, bacon, and other products, potentially requiring menu limits or restaurant closures. It also cited the possibility of lower customer traffic, capacity limits, workforce disruption, further impairments, and reduced revenue and cash flow.
- The company was not in compliance with the credit facility’s maximum leverage ratio at March 31, although it reported compliance with minimum fixed-charge coverage and liquidity covenants. Cadence agreed to forbear from exercising specified remedies through June 30, 2020 for identified potential defaults and to consent to deferral of a March 31 principal payment until maturity. Management expected further forbearance would be needed; it could not assure that Cadence would agree. Accordingly, the full $16.750 million facility balance was classified as current.
- Management stated it believed it could meet fiscal 2020 working-capital, debt, and recurring capital needs, citing available CARES Act sources including PPP loans, but also said additional liquidity may be needed and availability on favorable terms was uncertain.
- On April 24, Nasdaq notified the company that its share price did not meet the $1 minimum bid-price requirement. The extended compliance deadline was December 28, 2020; continued listing was not assured.
- Management expected general and administrative costs to decline slightly from fiscal 2019 for the remainder of fiscal 2020. It expected Good Times advertising costs to remain around 3.9% of segment revenue. It said elevated and volatile food commodity prices made the inflation impact for the rest of the year difficult to predict.
- The company remains contingently liable on certain leases previously assigned or subleased to franchisees. It reported no known defaults on those leases. Management considered potential losses from ordinary-course legal matters immaterial.
Important facts for investors to verify
- Whether operating results and same-store sales stabilized after March, particularly at Bad Daddy’s, and how COVID-related restrictions affected the June quarter.
- Whether Cadence granted additional covenant relief after June 30, and the resulting debt classification, repayment terms, and liquidity position.
- How much of the $11.645 million PPP borrowing was forgiven, and the terms and repayment burden of any unforgiven balance.
- Whether further restaurant, long-lived asset, or goodwill impairments were recorded, and whether the five impaired locations remained open.
- Whether the company regained Nasdaq’s minimum bid-price compliance within the applicable period.
- How the extra fiscal week and new restaurant openings affected year-over-year comparisons; the year-to-date periods were not equal in length.