| 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 27, 2022. Also, documents subsequently filed by us with the SEC and incorporated herein by reference may contain forward-looking
statements. We caution investors that any forward-looking statements made by us are not guarantees of future performance and actual results
could differ materially from those in the forward-looking statements as a result of various factors, including but not limited to the
following:
| (I) | The COVID-19 pandemic and the associated government response, change in consumer behavior, labor market
effects and supply chain impacts significantly affected the results of operations and financial condition of our business. Though the
effects of this specific pandemic have mostly subsided, the risk of similar government and consumer response to future pandemics or other
public health concerns, and the risk of similar impacts within the labor markets and global supply chain, could cause significant disruption
to our business. |
| (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. |
| (III) | 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. |
| (IV) | 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 which
have resulted in increases in commodity, labor and energy costs for both concepts as well as increased product substitutions, elevated
freight costs, and increased variability in product quality. Further significant increases in inflation could affect the global and U.S.
economies, which could have an adverse impact on our business and results of operations if we and our franchisees are not able to adjust
prices sufficiently to offset the effect of cost increases without negatively impacting consumer demand. |
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; increased wages and salaries
for hourly and salaried 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 27, 2022.
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.
Macro-Economic Factors and Operating Environment.
During the two quarters ended March 28, 2023,
high rates of inflation have been seen globally which have also resulted in increases in commodity, labor and energy costs for both concepts.
Further significant continued increases in inflation could affect the global and U.S. economies, which could have an adverse impact on
our business and results of operations if we and our franchisees are not able to adjust prices sufficiently to offset the effect of cost
increases without negatively impacting consumer demand.
The Company maintains deposits with certain banks
in excess of the maximum insured limits by the FDIC. The significant interest rate increases by the Federal Reserve have caused recent
bank failures. Although in certain of those cases, depositors have been protected from loss by government intervention, no assurances
can be made in the case of any failure of a bank in which the Company has uninsured deposits, that the Company would be similarly protected
against loss of such uninsured deposits.
Although we conduct all of our restaurant operations
within the USA, worldwide product supply chains have been impacted by the war in Ukraine. Specifically sunflower oil and wheat, which
are fungible commodities, are used as ingredients in our raw materials and purchased by our suppliers, have significant supplies that
typically originate in Ukraine. The lack of availability of supplies of such products may impact the availability and supplier pricing
for products purchased by us for use in our business, which could result in higher food and packaging costs or reduced revenues.
Growth Strategies and Outlook.
We believe there are significant opportunities
to grow customer traffic and increase awareness of our brands. In 2019 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 continue to evaluate that in-line
with the inflationary impact currently seen in the restaurant industry. We anticipate the opening of one new restaurant in late Fiscal
2023 in the greater Huntsville, Alabama market.
Restaurant locations.
As of March 28, 2023, we operated, franchised,
or licensed a total of forty Bad Daddy’s restaurants and thirty-one Good Times restaurants. The following table presents the number
of restaurants operating at the end of the fiscal quarters ended March 28, 2023 and March 29, 2022. During the fiscal quarter ended March
28, 2023, the Company acquired all of the membership interests in five Bad Daddy’s, four located in North Carolina and one located
in South Carolina.
Company-Owned/Co-Developed:
| |
Bad Daddy’s Burger Bar | | |
Good Times Burgers & Frozen Custard | | |
Total | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Alabama | |
| 2 | | |
| 2 | | |
| - | | |
| - | | |
| 2 | | |
| 2 | |
Colorado | |
| 11 | | |
| 12 | | |
| 23 | | |
| 23 | | |
| 34 | | |
| 35 | |
Georgia | |
| 5 | | |
| 5 | | |
| - | | |
| - | | |
| 5 | | |
| 5 | |
North Carolina | |
| 14 | | |
| 14 | | |
| - | | |
| - | | |
| 14 | | |
| 14 | |
Oklahoma | |
| 1 | | |
| 1 | | |
| - | | |
| - | | |
| 1 | | |
| 1 | |
South Carolina | |
| 4 | | |
| 4 | | |
| - | | |
| - | | |
| 4 | | |
| 4 | |
Tennessee | |
| 2 | | |
| 2 | | |
| - | | |
| - | | |
| 2 | | |
| 2 | |
Total | |
| 39 | | |
| 40 | | |
| 23 | | |
| 23 | | |
| 62 | | |
| 63 | |
One company-owned Bad Daddy’s restaurant closed, due to a termination
by the landlord, for redevelopment during the fiscal quarter ended March 28, 2023.
Franchise/License:
| |
Bad Daddy’s Burger Bar | | |
Good Times Burgers & Frozen Custard | | |
Total | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Colorado | |
| - | | |
| - | | |
| 6 | | |
| 6 | | |
| 6 | | |
| 6 | |
North Carolina | |
| 1 | | |
| 1 | | |
| - | | |
| - | | |
| 1 | | |
| 1 | |
South Carolina | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Wyoming | |
| - | | |
| - | | |
| 2 | | |
| 2 | | |
| 2 | | |
| 2 | |
Total | |
| 1 | | |
| 1 | | |
| 8 | | |
| 8 | | |
| 9 | | |
| 9 | |
Non-Traditional*
| | |
Bad Daddy’s Burger Bar | | |
Good Times Burgers & Frozen Custard | | |
Total | |
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Colorado | | |
| - | | |
| 1 | | |
| - | | |
| - | | |
| - | | |
| 1 | |
Total | | |
| - | | |
| 1 | | |
| - | | |
| - | | |
| - | | |
| 1 | |
*The non-traditional Bad Daddy’s
Burger Bar location, where we operated the kitchen under our Bad Daddy’s brand for a local brewery’s taproom, closed in 2022.
Results of Operations
Fiscal quarter ended March 28, 2023 (13
weeks) compared to fiscal quarter ended March 29, 2022 (13 weeks):
Net Revenues. Net revenues for the
fiscal quarter ended March 28, 2023 increased $1,188,000 or 3.5% to $34,785,000 from $33,597,000 for the fiscal quarter ended March 29,
2022. Bad Daddy’s concept revenues increased $884,000 while our Good Times concept revenues increased $304,000.
Bad Daddy’s restaurant sales increased $895,000
to $26,342,000 for the fiscal quarter ended March 28, 2023 from $25,447,000 for the fiscal quarter ended March 29, 2022. Sales were positively
impacted due to stronger customer traffic as well as increased menu prices. The average menu price increase for the fiscal quarter ended
March 28, 2023 over the same prior-year quarter was approximately 3.4%.
Good Times restaurant sales increased $309,000
to $8,226,000 for the fiscal quarter ended March 28, 2023 from $7,917,000 for the fiscal quarter ended March 29, 2022. The average menu
price increase for the fiscal quarter ended March 28, 2023 over the same prior-year quarter was approximately 10.5%.
Franchise revenues decreased $16,000 to $217,000
in the fiscal quarter ended March 28, 2023 compared to $233,000 in the fiscal quarter ended March 29, 2022. This decrease is primarily
due to the acquisition, during the second fiscal quarter of 2022, by the Company of one Bad Daddy’s restaurant previously owned
by a franchisee.
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 company-owned 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. The calculation of same store sales for Bad Daddy’s excludes the
results of one restaurant for the March fiscal month due to that restaurant’s extended remodel closure.
Bad Daddy’s same store restaurant sales
increased 4.6% during the fiscal quarter ended March 28, 2023 compared to the same thirteen-week period ended March 29, 2022, primarily
driven by strong off premise sales and menu price increases. There were thirty-nine restaurants included in the same store sales base
at the end of the current quarter.
Good Times same store restaurant sales increased
7.6% during the fiscal quarter ended March 28, 2023 compared to the same thirteen-week period ended March 29, 2022, primarily due to menu
price increases, slightly offset by lower traffic. There were twenty-three restaurants included in the same store sales base at the end
of the current quarter.
Restaurant
Operating Costs
Food
and Packaging Costs. Food and packaging costs for the fiscal quarter ended March 28, 2023 increased
$198,000 to $10,655,000 (30.8% of restaurant sales) from $10,457,000 (31.3% of restaurant sales) for
the fiscal quarter ended March 28, 2022.
Bad Daddy’s food and packaging costs were
8,052,000 (30.6% of restaurant sales) for the fiscal quarter ended March 28, 2023, up from $7,972,000 (31.3% of restaurant sales) for
the fiscal quarter ended March 29, 2022. This increase is primarily attributable to higher restaurant sales during the current fiscal
quarter versus prior fiscal quarter, and the decrease as a percent of sales is attributed to lower purchase prices for beef, chicken,
and other food commodities.
Good Times
food and packaging costs were $2,603,000 (31.6% of restaurant sales) for the fiscal quarter ended March 28, 2023, up from $2,485,000
(31.4% of restaurant sales) for the fiscal quarter ended March 29, 2022. This increase is
primarily attributable to the impact of higher sales. This slight increase as a percent of sales is due to the pricing of our all-natural
beef and custard, which continued to be elevated compared to the prior year during the quarter, offsetting purchase price reductions for
other commodities.
Payroll
and Other Employee Benefit Costs. Payroll and other employee benefit costs for the fiscal quarter ended March 28, 2023 increased
$434,000 to $11,989,000 (34.7% of restaurant sales) from $11,555,000 (34.6% of restaurant sales) for
the fiscal quarter ended March 29, 2022.
Bad Daddy’s
payroll and other employee benefit costs were $9,143,000 (34.7% of restaurant sales) for the fiscal quarter ended March 28, 2023 up from
$8,736,000 (34.3% of restaurant sales) for the fiscal quarter ended March 29, 2022. The $407,000
increase is primarily attributable to higher restaurant sales during the current quarter versus the same quarter in the prior year, as
well as slightly higher average pay rates. As a percent of sales, payroll and employee benefits costs increased by 0.4% primarily attributable
to higher average wage rates paid to attract qualified employees.
Good Times
payroll and other employee benefit costs were $2,846,000 (34.6% of restaurant sales) in the fiscal quarter ended March 28, 2023, up from
$2,819,000 (35.6% of restaurant sales) in the same prior-year period. The decrease as a percent
of sales is due primarily to increased labor productivity.
Occupancy
Costs. Occupancy costs for the fiscal quarter ended March 28, 2023 increased $51,000 to $2,428,000 (7.0% of restaurant sales)
from $2,377,000 (7.1% of restaurant sales) for the fiscal quarter ended March 29, 2022.
Bad Daddy’s
occupancy costs were $1,693,000 (6.4% of restaurant sales) for the fiscal quarter ended March 28, 2023, up from $1,679,000 (6.6%
of restaurant sales) for the fiscal quarter ended March 29, 2022.
Good
Times occupancy costs were $735,000 (8.9% of restaurant sales) in the fiscal quarter ended March 28, 2023, up from $698,000 (8.8%
of restaurant sales) in the fiscal quarter ended March 29, 2022. The increase was primarily attributable
to increased property and liability insurance costs.
Other
Operating Costs. Other operating costs for the fiscal quarter ended March 28, 2023, increased $160,000 to $4,827,000 (14.0% of
restaurant sales) from $4,667,000 (14.0% of restaurant sales) for the fiscal quarter ended
March 29, 2022.
Bad
Daddy’s other operating costs were $3,812,000 (14.5% of restaurant sales) for the fiscal quarter ended March 28, 2023 up from $3,670,000
(14.4% of restaurant sales) for the fiscal quarter ended March 29, 2022. The $142,000 increase was
attributable to higher overall sales, increased delivery charges, and increased restaurant supply costs.
Good Times other operating costs were $1,015,000
(12.3% of restaurant sales) in the fiscal quarter ended March 28, 2023, up from $997,000 (12.6% of restaurant sales) in the fiscal quarter
ended March 29, 2022. The increase was primarily attributable to increased overall sales.
New Store Preopening Costs. In the
fiscal quarter ended March 28, 2023, preopening costs were $30,000 compared to no preopening costs for the fiscal quarter ended March
29, 2022. These costs primarily relate to re-training costs incurred as part of our closure and remodel of our Greenville, SC Bad Daddy’s
location.
Depreciation and Amortization Costs.
Depreciation and amortization costs for the fiscal quarter ended March 28, 2023, decreased $102,000 to $911,000 from $1,013,000 in the
fiscal quarter ended March 29, 2022. These decreases at both concepts are due to assets performing past their estimated usable lives and
the prior-year impairment of assets.
Bad Daddy’s depreciation and amortization
costs for the fiscal quarter ended March 28, 2023 decreased $73,000 to $761,000 from $834,000 in the fiscal quarter ended March 29, 2022.
Good Times depreciation and amortization costs
for the fiscal quarter ended March 28, 2023 decreased $29,000 to $150,000 from $179,000 in the fiscal quarter ended March 29, 2022.
General and Administrative Costs.
General and administrative costs for the fiscal quarter ended March 28, 2023, decreased $280,000 to $2,297,000 (7.1% of total revenues)
from $2,577,000 (6.6% of total revenue) for the fiscal quarter ended March 29, 2022.
This decrease in general and administrative expenses
in the fiscal quarter ended March 28, 2023 is primarily attributable to:
| ● | Decrease in professional services of $429,000 |
| ● | Decrease in insurance related costs of $138,000 |
| ● | Decrease in recruiting and training related costs
of $20,000 |
| ● | Decrease in Stock Compensation costs of $10,000 |
| ● | Decrease in Office lease and equipment expense
of $10,000 |
| ● | Decrease in other costs of $32,000 |
| ● | Increase in general travel-related expenses of
$26,000 |
| ● | Increase in costs associated with multi-unit
supervisory roles of $63,000 |
| ● | Increase in home office payroll and benefits
costs of $130,000 |
| ● | Increase in administrative, accounting, and technology
costs of $140,000 |
Advertising Costs. Advertising costs
for the fiscal quarter ended March 28, 2023, decrease to $778,000 (2.2% of total revenue) from $812,000 (2.4% of total revenue) for the
fiscal quarter ended March 29, 2023.
Bad Daddy’s advertising costs were $422,000
(1.6% of restaurant sales) in the fiscal quarter ended March 28, 2023 compared to $467,000 (1.8% of total revenue) for the fiscal quarter
ended March 29, 2022. The decrease is primarily due to lesser recognition of commissions earned by third parties on gift cards sold through
large-box retailers. Bad Daddy’s advertising costs consist primarily of a combination of menus
and other point of purchase materials, digital advertising, and commissions incurred for placement of gift parties at third party retailers,
as well as local store marketing efforts.
Good Times
advertising costs were $356,000 (4.2% of restaurant sales) in the fiscal quarter ended March 28, 2023 compared to $345,000 (4.3%
of total revenue) in the fiscal quarter ended March 29, 2022. The current and prior year quarters
include advertising costs of $65,000 and $62,000, respectively, of costs associated with franchise advertising contributions.
Good Times
advertising costs consist 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.
Franchise
Costs. There were no franchise costs for the fiscal quarter ended March 28, 2023 compared to $6,000 for the fiscal quarter ended
March 29, 2022, respectively. The costs are 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 fiscal quarter
ended March 28, 2023 was $22,000, which is composed of a net loss of $9,000 on disposal of miscellaneous assets, and $31,000 of deferred
gains, compared to $43,000 for the fiscal quarter ended March 29, 2022, of which $35,000 is attributable to gains in connection with a
lease termination at a Good Times restaurant and the remainder primarily attributable to deferred gains on prior sale-leaseback transactions
of certain Good Times restaurants.
Impairment
of Long-Lived Assets Costs. The costs associated with impairments for the fiscal quarter ended March 28, 2023 was $76,000, which
primarily consists of new assets associated with previously impaired locations, compared to $1,753,000 for the fiscal quarter ended March
29, 2022.
Litigation
Contingency Costs. There were no litigation contingency costs in the fiscal quarter ended March 28, 2023, compared to $332,000
for the fiscal quarter ended March 29, 2022.
Income
(Loss) from Operations. Income from operations was $817,000 in the fiscal quarter ended March 28, 2023 compared to loss from operations
of $1,909,000 in the fiscal quarter ended March 29, 2022.
The
change in the income (loss) from operations for the fiscal quarter ended March 28, 2023 is due primarily due to matters discussed in the
“Net Revenues,” “Restaurant Operating Costs,” “General and Administrative Costs”, “Advertising
Costs”, “Gain on Restaurant Sales and Lease Termination”, “Impairment of Long-Lived Assets Costs”,
and “Litigation Contingency Costs” sections above.
Interest
Expense. Interest expense was $26,000 during the fiscal quarter ended March 28, 2023, primarily related to the amortization of
loan initiation fees, compared with $11,000 during the fiscal quarter ended March 29, 2022.
Provision
for Income Taxes. Provision for income taxes was $(9,952,000) for the fiscal quarter ended March 28, 2023, compared to no provision
for income taxes for the fiscal quarter ended March 29, 2022. This most significant driver of this provision was the release, during this
quarter, of the valuation allowance during previously assessed on the deferred tax assets.
Net
Income (Loss). Net income was $10,743,000 for the fiscal quarter ended March 28, 2023 compared to net loss of $1,920,000 in the
fiscal quarter ended March 29, 2022.
The
change from the fiscal quarter ended March 28, 2023 to the fiscal quarter ended March 29, 2022 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 fiscal quarter ended March 28, 2023, the income attributable to non-controlling interests was $122,000 compared to $230,000 for the
fiscal quarter ended March 29, 2022.
Of the quarter’s
income attributable to non-controlling interests, $40,000 is attributable to Bad Daddy’s joint-venture restaurants, compared to
$157,000 in the same prior year period. This $117,000 decrease is primarily due to the company’s
purchase of all the Bad Daddy’s membership interests during the fiscal quarter ended March 28, 2023, as described in Note
15 to the unaudited, consolidated financial statements included in this report.
Of the current
fiscal quarter’s income, $82,000 is attributable to the Good Times joint-venture restaurants, compared to $73,000 in
the same prior year period. This $9,000 increase is primarily due to increased restaurant level profitability in the current fiscal quarter.
Fiscal two quarters ended March 28, 2023
(26 weeks) compared to fiscal two quarters ended March 29, 2022 (26 weeks):
Net Revenues. Net revenues for the
two quarters ended March 28, 2023 increased $1,666,000, or 2.5%, to $68,179,000 from $66,513,000 for the two quarters ended March 29,
2023. Bad Daddy’s concept revenues increased $1,438,000 while our Good Times concept revenues increased $228,000.
Bad Daddy’s restaurant sales increased $1,470,000
to $51,507,000 for the two quarters ended March 28, 2023 from $50,037,000 for the two quarters ended March 29, 2022. Sales were positively
impacted by increases in sales primarily due to higher average menu prices as well as the purchase of a previously franchised Bad Daddy’s
location that occurred in March 2022. The average menu price increase for the two quarters ended March 28, 2023 over the same prior-year
quarter was approximately 4.4%.
Good Times restaurant sales decreased $237,000
to $16,240,000 for the two quarters ended March 28, 2023 from $16,003,000 for the two quarters ended March 29, 2022, primarily due to
increased menu prices. The average menu price increase for the two quarters ended March 28, 2023 over the same prior-year quarter was
approximately 9.2%.
Franchise revenues decreased $41,000 to $432,000
in the two quarters ended March 28, 2023 compared to $473,000 in the two quarters ended March 29, 2022. This decrease is primarily due
to the acquisition, during the second fiscal quarter of 2022, by the Company of one Bad Daddy’s restaurant previously owned by a
franchisee.
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 company-owned units open for at least eighteen full fiscal months and use the comparable operating weeks from the
prior year-to-date period to the current year-to-date period’s operating weeks. The calculation of same store sales for Bad Daddy’s
excludes the results of one restaurant for the March fiscal month due to that restaurant’s extended remodel closure.
Bad Daddy’s same store restaurant sales
increased 3.5% during the two quarters ended March 28, 2023 compared to the same two quarters ended March 29, 2022, primarily driven by
strong off premise sales and menu price increases. There were thirty-nine restaurants included in the same store sales base at the end
of the current quarter.
Good Times same store restaurant sales increased
5.3% during the two quarters ended March 28, 2023 compared to the same two quarters period ended March 29, 2022, primarily due to menu
price increases, slightly offset by lower traffic. There were twenty-three restaurants included in the same store sales base at the end
of the current quarter.
Restaurant
Operating Costs
Food
and Packaging Costs. Food and packaging costs for the two quarters ended March 28, 2023 increased
$579,000 to $21,262,000 (31.4% of restaurant sales) from $20,683,000 (31.3% of restaurant sales) for
the two quarters ended March 28, 2022.
Bad Daddy’s food and packaging costs were
$16,025,000 (31.1% of restaurant sales) for the two quarters ended March 28, 2023, up from $15,784,000 (31.5% of restaurant sales) for
the two quarters ended March 29, 2022. This increase is primarily attributable to higher restaurant sales during the current fiscal quarter
versus the prior fiscal quarter. The decrease as a percent of sales reflects lower input prices experienced during the second fiscal quarter.
Good Times
food and packaging costs were $5,237,000 (32.2% of restaurant sales) for the two quarters ended March 28, 2023, up from $4,899,000
(30.6% of restaurant sales) for the two quarters ended March 29, 2022. This increase is primarily attributable to the impact of higher
purchase prices on food and paper goods, partially offset by the impact of an 8.8% increase in menu pricing.
Payroll
and Other Employee Benefit Costs. Payroll and other employee benefit costs for the two quarters ended March 28, 2023 increased
$805,000 to $23,537,000 (34.7% of restaurant sales) from $22,732,000 (34.4% of restaurant sales) for
the two quarters ended March 29, 2022.
Bad Daddy’s
payroll and other employee benefit costs were $17,898,000 (34.7% of restaurant sales) for the two quarters ended March 28, 2023 up from
$17,154,000 (34.3% of restaurant sales) for the two quarters ended March 29, 2022. The $744,000
increase is primarily attributable to higher restaurant sales during the current quarter versus the same quarter in the prior year, as
well as slightly higher average pay rates. As a percent of sales, payroll and employee benefits costs increased by 0.4% primarily attributable
to higher average wage rates paid to attract qualified employees.
Good Times
payroll and other employee benefit costs were $5,639,000 (34.7% of restaurant sales) in the two quarters ended March 28, 2023, up from
$5,578,000 (34.9% of restaurant sales) in the same prior-year period. The $61,000 increase
was attributable to higher sales.
Occupancy
Costs. Occupancy costs for the two quarters ended March 28, 2023 increased $181,000 to $4,886,000 (7.2% of restaurant sales) from
$4,705,000 (7.1% of restaurant sales) for the two quarters ended March 29, 2022.
Bad Daddy’s
occupancy costs were $3,425,000 (6.6% of restaurant sales) for the two quarters ended March 28, 2023, up from $3,327,000 (6.6%
of restaurant sales) for the two quarters ended March 29, 2022. The increase was primarily attributable
to additional lease costs associated with the purchase of our Bad Daddy’s Franchisee in the second quarter of fiscal 2022.
Good
Times occupancy costs were $1,461,000 (9.0% of restaurant sales) in the two quarters ended March 28, 2023, up from $1,378,000 (8.6%
of restaurant sales) in the two quarters ended March 29, 2022. The increase was primarily attributable
to increased property and liability insurance costs.
Other
Operating Costs. Other operating costs for the two quarters ended March 28, 2023, increased $514,000 to $9,319,000 (13.8% of restaurant
sales) from $8,805,000 (13.3% of restaurant sales) for the two quarters ended March 29, 2022.
Bad
Daddy’s other operating costs were $7,334,000 (14.2% of restaurant sales) for the two quarters ended March 28, 2023 up from $6,955,000
(13.9% of restaurant sales) for the two quarters ended March 29, 2022. The $379,000 increase and
the increase as a percentage of sales was attributable to higher overall sales, increased third party delivery fees, increased utility
costs, and a general increase in restaurant supplies.
Good Times other operating costs were $1,985,000
(12.2% of restaurant sales) in the two quarters ended March 28, 2023, up from $1,850,000 (11.6% of restaurant sales) in the two quarters
ended March 29, 2022. The increase was primarily attributable to increased sales and general price inflation in supplies costs.
New Store Preopening Costs. New
store preopening costs were $30,000 for the two quarters ended March 28, 2023, primarily associated with re-training costs in connection
with our remodel of our Greenville, SC Bad Daddy’s, compared to $50,000 for the two quarters ended March 29, 2022.
Depreciation and Amortization Costs.
Depreciation and amortization costs for the two quarters ended March 28, 2023, decreased $176,000 to 1,821,000 from $1,997,000 in the
two quarters ended March 29, 2022.
Bad Daddy’s depreciation and amortization
costs for the two quarters ended March 28, 2023 decreased $83,000 to $1,535,000 from $1,618,000 in the two quarters ended March 29, 2022.
Good Times depreciation and amortization costs
for the two quarters ended March 28, 2023 decreased $93,000 to $286,000 from $379,000 in the two quarters ended March 29, 2022.
General and Administrative Costs.
General and administrative costs for the two quarters ended March 28, 2023, decreased $610,000 to $4,672,000 (6.9% of total revenues)
from $5,282,000 (7.9% of total revenue) for the two quarters ended March 29, 2022.
This decrease in general and administrative expenses
in the two quarters ended March 28, 2023 is primarily attributable to:
| ● | Decrease in professional services of $697,000 |
| ● | Decrease in insurance related costs $222,000 |
| ● | Decrease in Stock Compensation costs of $58,000 |
| ● | Decrease in Office lease and equipment expense
of $25,000 |
| ● | Decrease in other costs of $61,000 |
| ● | Increase in recruiting and training related costs
of $8,000 |
| ● | Increase in general travel-related costs of $9,000 |
| ● | Increase in costs associated with multi-unit
supervisory roles of $86,000 |
| ● | Increase in home office payroll and benefits
costs of $104,000 |
| ● | Increase in administrative, accounting, and technology
costs of $246,000 |
Advertising Costs. Advertising costs
for the two quarters ended March 28, 2023, increased to $1,672,000 (2.5% of sales from $1,453,000 (2.2% of total revenue) for the two
quarters ended March 29, 2023.
Bad Daddy’s advertising costs were $1,031,000
(1.6% of restaurant sales) in the two quarters ended March 28, 2023compared to $781,000 (1.6% of total revenue) for the two quarters ended
March 29, 2022. The increase is primarily due to recognition of commission earned by third parties on gift cards sold through large-box
retailers. Bad Daddy’s advertising costs consist primarily of menu development, printing costs, local store marketing and social
media. The two fiscal quarters ended March 28, 2023 had no advertising costs associated with franchise
contributions.
Good Times
advertising costs were $641,000 (3.9% of restaurant sales) in the two quarters ended March 28, 2023 compared to $672,000 (4.1%
of total revenue) in the two quarters ended March 29, 2022. The current and prior year quarters
include advertising costs of $129,000 and $127,000, respectively, of costs associated with franchise advertising contributions.
Good Times
advertising costs consist 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.
Franchise
Costs. Franchise costs were $3,000 and $11,000 for the two quarters ended March 28, 2023 and March 29, 2022, respectively. The
costs are 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 two quarters
ended March 28, 2023 was $22,000, which is composed of a net $3,000 gain on the sale miscellaneous assets, and $19,000 of deferred gains,
compared to $657,000 for the two quarters ended March 29, 2022.
Impairment
of Long-Lived Assets Costs. The costs associated with impairments for the two quarters ended March 28, 2023 was $76,000, which
primarily consists of new assets associated with previously impaired locations, compared to $1,753,000 for the two quarters ended March
29, 2022.
Litigation
Contingency Costs. There were no litigation contingency costs in the two quarters ended March 28, 2023, compared to $332,000 for
the two quarters ended March 29, 2022.
Income
(Loss) from Operations. Income from operations was $924,000 in the two quarters ended March 28, 2023 compared to loss from operations
of $633,000 in the two quarters ended March 29, 2022.
The
change in the income (loss) from operations for the two quarters ended March 28, 2023 is due primarily due to matters discussed in the
“Net Revenues,” “Restaurant Operating Costs,” “General and Administrative Costs”, “Advertising
Costs”, “Gain on Restaurant Sales and Lease Termination”, “Impairment of Long-Lived Assets Costs”,
and “Litigation Contingency Costs” sections above.
Interest
Expense. Interest expense was $38,000 during the two quarters ended March 28, 2023, primarily related to the amortization of loan
initiation fees, compared with $29,000 during the two quarters ended March 29, 2022.
Provision
for Income Taxes. Provision for income taxes was $9,952,000 for the two quarters ended March 28, 2023, compared to no provision
for income taxes for the two quarters ended March 29, 2022. This most significant driver of this provision was the release, during the
quarter ended March 28, 2023, of the valuation allowance during previously assessed on the deferred tax assets.
Net
Income (Loss). Net income was $10,838,000 for the two quarters ended March 28, 2023 compared to net loss of $670,000 in the two
quarters ended March 29, 2022.
The
change from the two quarters ended March 28, 2023 to the two quarters ended March 29, 2022 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 two quarters ended March 28, 2023, the income attributable to non-controlling interests was $344,000 compared to $1,150,000 for the
two quarters ended March 29, 2022.
Of the two
quarters’ income attributable to non-controlling interests, $219,000 is attributable to Bad
Daddy’s joint-venture restaurants, compared to $840,000 in the same prior year period.
This $621,000 decrease is primarily due to a one-time special allocation to the non-controlling partners in these partnerships of approximately
$516,000 in the fiscal quarter ended December 28, 2021 related to a rebate of payroll costs. Of the current quarter’s income, $125,000
is attributable to the Good Times joint-venture restaurants, compared to $310,000 in the
same prior year period. This $185,000 decrease is primarily due to decreased restaurant level profitability in the current fiscal quarter.
The Company acquired all of the membership interests in Bad Daddy’s during the two quarters ended March 28, 2023, as described
in Note 15 to the unaudited, consolidated financial statements included in this report.
Adjusted
EBITDA
EBITDA
is defined as net income (loss) before interest, income taxes and depreciation and amortization.
Adjusted
EBITDA is defined as EBITDA plus non-cash stock-based compensation expense, preopening expense, non-recurring acquisition costs, GAAP
rent in excess of cash rent, and non-cash disposal of assets. Adjusted EBITDA is intended as a supplemental measure of our performance
that is not required by or presented in accordance with GAAP. We believe that EBITDA and Adjusted EBITDA provide useful information to
management and investors regarding certain financial and business trends relating to our financial condition and operating results. Our
management uses EBITDA and Adjusted EBITDA (i) as a factor in evaluating management's performance when determining incentive compensation
and (ii) to evaluate the effectiveness of our business strategies.
We
believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results
and trends and in comparing the Company's financial measures with other fast casual restaurants, which may present similar non-GAAP financial
measures to investors. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses
similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference
that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable
to other similarly titled measures computed by other companies, because all companies do not calculate Adjusted EBITDA in the same fashion.
Our
management does not consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance
with GAAP. The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required
by GAAP to be recorded in the Company's financial statements. Some of these limitations are:
| ● | Adjusted
EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
| ● | Adjusted
EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| ● | Adjusted
EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; |
| ● | although
depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future,
and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| ● | stock
based compensation expense is and will remain a key element of our overall long-term incentive compensation package, although we exclude
it as an expense when evaluating our ongoing performance for a particular period; |
| ● | Adjusted
EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations;
and |
| ● | Other
companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because
of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in
accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as a
supplemental measure. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below and not rely on any single
financial measure to evaluate our business.
The
following table reconciles net loss/income to EBITDA and Adjusted EBITDA (in thousands) for the fiscal quarter ended March 28,
2023:
| |
Quarter Ended | | |
Year-to-Date | |
| |
March 28, 2023 (13 Weeks) | | |
March 29, 2022 (13 Weeks) | | |
March 28, 2023 (26 Weeks) | | |
March 29, 2022 (26 Weeks) | |
Adjusted EBITDA: | |
| | | |
| | | |
| | | |
| | |
Net Income (Loss), as reported | |
$ | 10,621 | | |
$ | (2,150 | ) | |
$ | 10,494 | | |
$ | (1,820 | ) |
Depreciation and amortization1 | |
| 900 | | |
| 977 | | |
| 1,767 | | |
| 1,982 | |
Interest expense, net | |
| 25 | | |
| 11 | | |
| 38 | | |
| 29 | |
Provision for income taxes | |
| (9,952 | ) | |
| - | | |
| (9,952 | ) | |
| 8 | |
EBITDA | |
| 1,594 | | |
| (1,162 | ) | |
| 2,347 | | |
| 199 | |
Preopening expense | |
| 30 | | |
| - | | |
| 30 | | |
| 50 | |
Non-cash stock-based compensation | |
| 43 | | |
| 52 | | |
| 89 | | |
| 147 | |
Asset Impairment | |
| 76 | | |
| 1,753 | | |
| 76 | | |
| 1,753 | |
GAAP rent-cash rent difference | |
| (190 | ) | |
| (110 | ) | |
| (314 | ) | |
| (182 | ) |
Loss (Gain) on restaurant asset sales and lease termination2 | |
| (22 | ) | |
| (35 | ) | |
| (22 | ) | |
| (519 | ) |
One-time special allocation to Bad Daddy’s partnerships | |
| - | | |
| - | | |
| - | | |
| 516 | |
Litigation contingencies | |
| - | | |
| 332 | | |
| - | | |
| 332 | |
Adjusted EBITDA | |
$ | 1,531 | | |
$ | 830 | | |
$ | 2,206 | | |
$ | 2,296 | |
| 1 | Depreciation and amortization expense has been reduced by amounts attributable to non-controlling interests
of $34,000 and $66,000 for the quarter ended March 28, 2023 and March 29, 2022, respectively. Depreciation and amortization expense has
been reduced by amounts attributable to non-controlling interests of $100,000 and $133,000 for the two quarters ended March 28, 2023 and
March 29, 2022, respectively. |
| 2 | Gain (Loss) on restaurant asset sales and lease termination had no impact from amounts attributable to
non-controlling interests in the quarter ended March 28, 2023 and was reduced $8,000 for the quarter ended March 29, 2022, respectively,
Gain (loss) on restaurant asset sales and lease termination had no impact from amounts attributable to non-controlling interests in the
two quarters ended March 28, 2023 and was reduced $138,000 for the two quarters ended March 29, 2022, 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 March 28, 2023, we had a working capital
deficit of $6,334,000. 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 some of 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 2023. As of March 28, 2023, we entered into
a construction contract for one new Bad Daddy’s restaurant development located in Alabama, scheduled to open in Q4 2023. The construction
is expected to begin in Q3 2023 and is not anticipated to materially impact the Company’s liquidity or operations.
On January 31, 2022, the Company‘s Board
of Directors authorized a $5.0 Million share repurchase program which became 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
Through the end of the period covered by this
report on Form 10-Q, the Company maintained a credit agreement with Cadence Bank (“Cadence”) pursuant to which, as amended,
Cadence agreed to loan the Company up to $8,000,000, which as of March 28, 2023 had a maturity date of April 30, 2023 (the “Prior
Cadence Credit Facility”). The Prior Cadence Credit Facility is discussed in more detail in Note 9 of the Company’s unaudited,
consolidated financial statements contained in this Form 10-Q.
On
April 20, 2023, subsequent to the end of the fiscal quarter ended March 28, 2023, the Company and each of its wholly-owned subsidiaries,
as guarantors (the “Subsidiary Guarantors”), entered into an Amended and Restated Credit Agreement (the “Senior Credit
Facility”) with Cadence Bank, as administrative agent and sole lender (“Cadence”). The Senior Credit Facility provides
for an $8.0 million senior revolving loan (the “Revolver”) and amends and restates the Company’s prior Cadence Credit
Facility with Cadence in its entirety.
Proceeds from the Senior
Credit Facility, [if and when drawn] will be used (i) to fund new restaurant development, (ii) to finance the buyout of non-controlling
joint venture partners in certain restaurants, (iii) to finance the redemption, purchase or other acquisition of equity interests in the
Company and (iv) for working capital and other general corporate purposes.
The Revolver will be
available until April 20, 2028. The loans may from time to time consist of a mixture of SOFR Rate Loans and Base Rate Loans with differing
interest rates based upon varying additions to the Federal Funds Rate, the Cadence prime rate or Term SOFR. The Senior Credit Facility
also carries an upfront fee of 0.25% of the aggregate principal amount of the Revolver commitment and a commitment fee of 0.25% per annum
on the unused portion of the Revolver commitment.
The Senior Credit Facility
includes customary affirmative and negative covenants and events of default. The Senior Credit Facility also requires the Company to maintain
various financial condition ratios, including minimum liquidity, an amended maximum leverage ratio and an amended minimum fixed charge
coverage ratio. In addition, to the extent the aggregate outstandings under the Revolver exceed $4.0 million, the Company is required
to meet a new specified leverage ratio, on a pro forma basis, before making further borrowings as well as certain restricted payments,
investments and growth capital expenditures.
Cash
Flows
Net cash
provided by operating activities was $4,158,000 for the two quarters ended March 28, 2023. The net cash used in operating activities
for the two quarters ended March 28, 2023 was the result of net income of $10,838,000 as well as cash and non-cash reconciling items totaling
$6,680,000. These reconciling items are primarily comprised of 1) depreciation and amortization of general assets of $1,859,000, 2) amortization
of operating lease assets of $1,836,000, 3) decrease of ROU assets of $2,161,000 4) stock-based compensation expense of $89,000, 5) a
net gain on sales and disposals of assets of $22,000, 5) an increase in receivables and other assets of $643,000, 5) a decrease in deferred
liabilities and accrued expenses of $649,000, 7) an increase in accounts payable of $1,596,000 and 8) a net decrease in amounts related
to our operating leases of $2,161,000, 8) impairment of long lived assets of $76,000, and 9) income tax provision of $9,959,000.
Net cash provided by operating activities was
$1,312,000 for the two quarters ended March 29, 2022. The net cash provided by operating activities for the two quarters ended March 29,
2022 was the result of net loss of $670,000 as well as cash and non-cash reconciling items totaling $1,982,000. These reconciling items
are primarily comprised of 1) depreciation and amortization of general assets of $2,114,000, 2) amortization of operating lease assets
of $1,751,000, 3) impairment of long-lived assets of $1,753,000 4) stock-based compensation expense of $147,000 5) a gain on lease termination
and deferred gain on sale/leaseback of restaurants of $657,000, 6) A decrease in ROU assets of $39,000, 7) Income tax provision of $8,000,
8) an increase in prepaids of $1,176, primarily attributable to an in prepaid rent, 9) an increase in accrued expenses of $395,000, 10)
a decrease in accounts payable of $370,000, 11) a net decrease in amounts related to our operating lease liabilities of $1,976,000 and
12) An increase of $46,000 in inventory and other receivables.
Net cash used in investing activities for the
two quarters ended March 28, 2023 was $5,817,000 which primarily reflects the purchases of property and equipment of $1,423,000, and the
net purchase of all non-controlling interests in our Bad Daddy’s locations of $4,394,000. Purchases of property and equipment is
comprised of the following:
| ● | $448,000 for miscellaneous capital expenditures
related to our existing Bad Daddy’s restaurants; |
| ● | $975,000 for miscellaneous capital expenditures
related to our existing Good Times restaurants, of which $420,000 is related to the installation of new signage and digital menu boards. |
Net cash used in investing activities for the
two quarters ended March 29, 2022 was $1,905,000 which primarily reflects the general purchases of property and equipment of $1,177,000
and an acquisition of a restaurant from franchisee, net of cash acquired, for $728,000. Purchases of property and equipment is comprised
of the following:
| ● | $856,000 for miscellaneous capital expenditures
related to our existing Bad Daddy’s restaurants, including the payment of amounts in accounts payable at September 29, 2021 associated
with the construction of one new Bad Daddy’s restaurant near the end of fiscal 2021 |
| ● | $120,000 for miscellaneous capital expenditures
related to our existing Good Times restaurants |
| ● | $201,000 for miscellaneous capital expenditures
related to our restaurant support center, primarily initial development costs for the computer software underlying our two brands’
mobile apps and automotive assets used by our internal maintenance team |
Net cash used in financing activities for the
two fiscal quarters ended March 28, 2023 was $1,880,000, which includes proceeds from stock option exercises of $5,000 and net distributions
to non-controlling interests of $453,000, $92,000 in restricted stock vesting paid in cash, and $1,340,000 in payments for the purchase
of treasury stock.
Net cash used in financing activities for the
two fiscal quarters ended March 29, 2022 was $1,197,000, which includes distributions to non-controlling interests of $956,000, payment
for the repurchase of the Company’s common stock of $331,000 and proceeds from stock option exercise of $90,000.
Impact of Inflation
Commodity prices, particularly for key proteins,
have recently been at near-record highs and have exhibited extreme volatility. Though we have seen some moderation in certain commodities,
we continue to experience higher year-over-year prices on many goods, including food and beverage items, paper and packaging, other restaurant
supplies, and energy (utilities) costs. Due to the volatility in commodity pricing, we are unable to reasonably predict the impact of
future inflationary pressures.
In addition to food cost inflation, we have also
experienced the need to meaningfully increase wages to attract workers in our restaurants. While we are hopeful that wage rate inflation
moderates, the persistent shortage of qualified workers, rather than statutory wage rate increases, which have traditionally created rate
pressure, is the primary factor creating upward pressure on wages, as demand for labor is currently significantly exceeding the supply
of qualified workers.
We have historically used menu price increases
to manage profitability in times of inflation, however the current unusually high rate of inflation, both of goods and labor, exceeds
what we believe we can reasonably pass through to our customers without negatively affecting frequency and trial by our customers.
Seasonality
Revenues of the Company are subject to seasonal
fluctuations based on weather conditions adversely affecting Colorado restaurant sales primarily during the months of December, January,
February, and March.