10-Q
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form
10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE QUARTERLY PERIOD ENDED May 3, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE TRANSITION PERIOD FROM
                    
TO
                    
Commission File No.
 001-35664
 
Dave & Buster’s Entertainment, Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
35-2382255
(State of Incorporation)
 
(I.R.S. Employer ID)
 
 
 
2481 Mañana Drive, Dallas, Texas, 75220
 
(214)
357-9588
(Address of principal executive offices) (Zip Code)
 
(Registrant’s telephone number)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
         
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock $0.01 par value
 
PLAY
 
NASDAQ Global Select Market
Preferred Stock Purchase Rights
 
PLAY
 
NASDAQ Global Select Market
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
    No  
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
             
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated
filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging Growth Company
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by checkmark whether the registrant is a shell company (as defined in Rule
 12b-2
of the Exchange Act).    Yes  
    No  
As of June 4, 2020, the registrant had 47,452,732 shares of common stock, $0.01 par value per share, outstanding.
 
 

Table of Contents
DAVE & BUSTER’S ENTERTAINMENT, INC.
FORM
10-Q
FOR QUARTERLY PERIOD ENDED MAY 3, 2020
TABLE OF CONTENTS
             
 
 
Page
 
 
 
 
 
 
 
 
PART I
 
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
3
 
 
 
 
 
 
 
 
Item 2.
 
 
 
16
 
 
 
 
 
 
 
 
Item 3.
 
 
 
25
 
 
 
 
 
 
 
 
Item 4.
 
 
 
25
 
 
 
 
 
 
 
 
PART II
 
OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
25
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
26
 
 
 
 
 
 
 
 
Item 2.
 
 
 
27
 
 
 
 
 
 
 
 
Item 6.
 
 
 
28
 
 
 
 
 
 
 
 
 
 
 
29
 
 
 
 
2

Table of Contents
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
 
 
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
                 
 
May 3,
 
 
February 2,
 
2020
 
 
2020
 
 
(unaudited)
 
 
(audited)
 
ASSETS
 
 
 
 
 
 
Current assets:
   
     
 
Cash and cash equivalents
  $
156,833
    $
24,655
 
Inventories
   
34,726
     
34,477
 
Prepaid expenses
   
13,018
     
14,269
 
Income taxes receivable
   
23,241
     
2,331
 
Other current assets
   
1,974
     
3,245
 
                 
Total current assets
   
229,792
     
78,977
 
Property and equipment (net of $706,468 and $686,824 accumulated depreciation as of May 3, 2020 and February 2, 2020, respectively)
   
905,577
     
900,637
 
Operating lease right of use assets
   
1,045,598
     
1,011,568
 
Deferred tax assets
   
11,136
     
7,639
 
Tradenames
   
79,000
     
79,000
 
Goodwill
   
272,702
     
272,636
 
Other assets and deferred charges
   
19,546
     
19,682
 
                 
Total assets
  $
2,563,351
    $
 
2,370,139
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Current liabilities:
   
     
 
Current installments of long-term debt
  $
15,000
    $
15,000
 
Accounts payable
   
79,083
     
65,359
 
Accrued liabilities
   
221,405
     
207,452
 
Income taxes payable
   
1,207
     
3,054
 
                 
Total current liabilities
   
316,695
     
290,865
 
Deferred income taxes
   
19,847
     
19,102
 
Operating lease liabilities
   
1,259,687
     
1,222,054
 
Other liabilities
   
39,226
     
35,779
 
Long-term debt, net
   
735,261
     
632,689
 
Commitments and contingencies
   
     
 
Stockholders’ equity:
   
     
 
Common stock, par value $0.01; authorized: 400,000,000 shares; issued: 49,578,351 shares at May 3, 2020 and 43,386,852 shares at February 2, 2020; outstanding: 36,791,727 shares at May 3, 2020 and 30,603,340 shares at February 2, 2020
   
496
     
434
 
Preferred stock, 50,000,000 authorized; none issued
   
—  
     
—  
 
Paid-in
capital
   
411,048
     
339,161
 
Treasury stock, 12,786,624 and 12,783,512 shares as of May 3, 2020 and February 2, 2020, respectively
   
(595,077
)    
(595,041
)
Accumulated other comprehensive loss
   
(13,753
)    
(8,369
)
Retained earnings
   
389,921
     
433,465
 
                 
Total stockholders’ equity
   
192,635
     
169,650
 
                 
Total liabilities and stockholders’ equity
  $
 
2,563,351
    $
2,370,139
 
                 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
3

Table of Contents
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (LOSS)
(UNAUDITED)
(in thousands, except share and per share amounts)
                 
 
Thirteen Weeks
 
 
Thirteen Weeks
 
Ended
 
 
Ended
 
May 3, 2020
 
 
May 5, 2019
 
Food and beverage revenues
  $
63,920
    $
148,221
 
Amusement and other revenues
   
95,886
     
215,361
 
                 
Total revenues
   
159,806
     
363,582
 
Cost of food and beverage
   
17,344
     
38,754
 
Cost of amusement and other
   
10,728
     
22,971
 
                 
Total cost of products
   
28,072
     
61,725
 
Operating payroll and benefits
   
43,737
     
82,873
 
Other store operating expenses
   
95,672
     
106,245
 
General and administrative expenses
   
14,563
     
16,846
 
Depreciation and amortization expense
   
35,352
     
31,141
 
Pre-opening
costs
   
3,823
     
7,002
 
                 
Total operating costs
   
221,219
     
305,832
 
                 
Operating income (loss)
   
(61,413
)    
57,750
 
Interest expense, net
   
6,115
     
4,056
 
                 
Income (loss) before provision (benefit) for income taxes
   
(67,528
)    
53,694
 
Provision (benefit) for income taxes
   
(23,984
)    
11,251
 
                 
Net income (loss)
   
(43,544
)    
42,443
 
                 
Unrealized foreign currency translation loss
   
(435
)    
(191
)
Unrealized loss of derivatives, net of tax
   
(4,949
)    
(2,534
)
                 
Total other comprehensive loss
   
(5,384
)    
(2,725
)
                 
Total comprehensive income (loss)
  $
(48,928
)   $
39,718
 
                 
Net income
(
loss
)
per share:
   
     
 
Basic
  $
(1.37
)   $
1.15
 
Diluted
  $
(1.37
)   $
1.13
 
Weighted average shares used in per share calculations:
   
     
 
Basic
   
31,829,985
     
36,827,665
 
Diluted
   
31,829,985
     
37,591,944
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
4

Table of Contents
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
                                                                 
 
Thirteen Weeks Ended May 3, 2020
 
 
Common Stock
   
Paid-In

Capital
 
 
Treasury Stock
 
At Cost
   
Accumulated
Other
Comprehensive
Loss
 
 
Retained
Earnings
 
 
Total
 
 
Shares
 
 
Amt.
 
 
 
 
Shares
 
 
Amt.
 
 
 
 
 
 
 
Balance February 2, 2020
   
43,386,852
    $
434
    $
339,161
     
12,783,512
    $
(595,041
)   $
(8,369
)   $
433,465
    $
169,650
 
Net income (loss)
   
—  
     
—  
     
—  
     
—  
     
—  
     
—  
     
(43,544
)    
(43,544
)
Unrealized foreign currency
 
translation
loss
   
—  
     
—  
     
—  
     
—  
     
—  
     
(435
)    
—  
     
(435
)
Unrealized loss of derivatives, net of
 
tax
   
—  
     
—  
     
—  
     
—  
     
—  
     
(4,949
)    
—  
     
(4,949
)
Share-based compensation
   
—  
     
—  
     
(389
)    
—  
     
—  
     
—  
     
—  
     
(389
)
Issuance of common stock
   
6,191,499
     
62
     
72,276
     
—  
     
—  
     
—  
     
—  
     
72,338
 
Repurchase of common stock
   
—  
     
—  
     
—  
     
3,112
     
(36
)    
—  
     
—  
     
(36
)
                                                                 
Balance May 3, 2020
   
49,578,351
    $
 
496
    $
 
411,048
     
12,786,624
    $
 
(595,077
)   $
(13,753
)   $
 
389,921
    $
 
192,635
 
                                                                 
       
 
Thirteen Weeks Ended May 5, 2019
 
 
Common Stock
   
Paid-In

Capital
 
 
Treasury Stock
 
At Cost
   
Accumulated
Other
Comprehensive
Loss
 
 
Retained
Earnings
 
 
Total
 
 
Shares
 
 
Amt.
 
 
 
 
Shares
 
 
Amt.
 
 
 
 
 
 
 
Balance February 3, 2019
   
43,177,476
    $
432
    $
331,255
     
5,655,391
    $
(297,129
)   $
(683
)   $
353,962
    $
387,837
 
Cumulative effect of a change in accounting principle, net of tax
   
     
     
     
     
     
     
(145
)    
(145
)
Net income
   
—  
     
—  
     
—  
     
—  
     
—  
     
—  
     
42,443
     
42,443
 
Unrealized foreign currency
 
translation
loss
   
—  
     
—  
     
—  
     
—  
     
—  
     
(191
)    
—  
     
(191
)
Unrealized loss of derivatives, net of tax
   
—  
     
—  
     
—  
     
—  
     
—  
     
(2,534
)    
—  
     
(2,534
)
Share-based compensation
   
—  
     
—  
     
1,825
     
—  
     
—  
     
—  
     
—  
     
1,825
 
Issuance of common stock
   
145,573
     
1
     
435
     
—  
     
—  
     
—  
     
—  
     
436
 
Repurchase of common stock
   
—  
     
—  
     
     
1,302,900
     
(64,057
)    
—  
     
—  
     
(64,057
)
Dividends declared ($0.15 per share)
   
—  
     
—  
     
—  
     
—  
     
—  
     
—  
     
(5,489
)    
(5,489
)
                                                                 
Balance May 5, 2019
   
43,323,049
    $
433
    $
333,515
     
6,958,291
    $
(361,186
)   $
(3,408
)   $
390,771
    $
360,125
 
                                                                 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
5

Table of Contents
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
                 
 
Thirteen Weeks
Ended
May 3, 2020
 
 
Thirteen Weeks
Ended
May 5, 2019
 
Cash flows from operating activities:
   
     
 
Net income (loss)
  $
(43,544
)   $
42,443
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
     
 
Depreciation and amortization expense
   
35,352
     
31,141
 
Non-cash 
interest expense
   
314
     
—  
 
Impairment of long-lived assets
   
11,549
     
—  
 
Deferred taxes
   
(892
)    
1,511
 
Loss on disposal of fixed assets
   
153
     
420
 
Share-based compensation
   
(389
)    
1,825
 
Other, net
   
(156
   
185
 
Changes in assets and liabilities:
   
     
 
Inventories
   
(249
)    
(2,294
)
Prepaid expenses
   
1,828
     
(2,036
)
Income tax receivable
   
(20,910
   
786
 
Other current assets
   
1,271
     
827
 
Other assets and deferred charges
   
(110
)    
33
 
Accounts payable
   
21,441
     
(5,727
)
Accrued liabilities
   
11,647
     
9,218
 
Income taxes payable
   
(1,847
)    
7,884
 
Other liabilities
   
1,359
     
(476
)
                 
Net cash provided by operating activities
   
16,817
     
85,740
 
                 
Cash flows from investing activities:
   
     
 
Capital expenditures
   
(55,168
)    
(67,247
)
Proceeds from sales of property and equipment
   
18
     
135
 
                 
Net cash used in investing activities
   
(55,150
)    
(67,112
)
                 
Cash flows from financing activities:
   
     
 
Proceeds from debt
   
138,000
     
81,000
 
Payments of debt
   
(34,750
)    
(31,750
)
Net proceeds from the issuance of common stock
   
72,144
     
—  
 
Proceeds from the exercise of stock options
   
44
     
436
 
Repurchase of common stock under share repurchase program
   
  
     
(63,471
)
Dividends paid
   
(4,891
)    
(5,489
)
Repurchases of common stock to satisfy employee withholding tax obligations
   
(36
)    
(586
)
                 
Net cash provided by (used in) financing activities
   
170,511
     
(19,860
)
                 
Increase (decrease) in cash and cash equivalents
   
132,178
     
(1,232
)
Beginning cash and cash equivalents
   
24,655
     
21,585
 
                 
Ending cash and cash equivalents
  $
156,833
    $
20,353
 
                 
Supplemental disclosures of cash flow information:
   
     
 
Decrease in fixed asset accounts payable
  $
(7,717
)   $
(5,838
)
Cash paid (refund received) for income taxes, net
  $
(357
  $
1,068
 
Cash paid for interest, net
  $
5,574
    $
3,743
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
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DAVE & BUSTER’S ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 1: Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements include the accounts of Dave & Buster’s Entertainment, Inc. (referred to herein as the “Company”, “we,” “us” and “our”), any predecessor companies and its wholly-owned subsidiaries, Dave & Buster’s Holdings, Inc. (“D&B Holdings”), which owns 100% of the outstanding common stock of Dave & Busters, Inc. (“D&B Inc”), the operating company. All intercompany balances and transactions have been eliminated in consolidation. The Company, headquartered in Dallas, Texas, is a leading operator of high-volume entertainment and dining venues (“stores”) in North America for adults and families under the name “Dave & Buster’s”. The Company operates its business as one operating and one reportable segment. As of May 3, 2020, we owned and operated 137 stores located in 39 states, Puerto Rico and one Canadian province. During the first quarter of fiscal 2020, we opened one store in Chattanooga, Tennessee, on March 16, 2020.
The Company operates on a 52 or
53-week
fiscal year that ends on the Sunday after the Saturday closest to January 31. Each quarterly period reported has 13 weeks. Fiscal 2020 and 2019, which end on January 31, 2021 and February 2, 2020, respectively, contain 52 weeks.
The Company’s financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information as prescribed by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Our quarterly financial data should be read in conjunction with the audited financial statements and notes thereto for the year ended February 2, 2020, included in our Annual Report on Form
10-K
as filed with the SEC.
Going concern
— During the period from March 14, 2020 to March 20, 2020, the Company closed 100% of its 137 operating stores in compliance with guidance and orders issued by federal, state and local governments to combat the spread of the
COVID-19
pandemic. The extent of impact of these conditions will be based in part on the duration of the store closures or
re-opening
of stores at full capacity and the timing and extent of customers
re-engaging
with the brand. Almost all our stores remained closed for the duration of the of the first quarter. On April 30, 2020 one store opened to the public with limited food and beverage offerings. Two additional stores offered limited food and beverage for
off-premises
dining. During the period subsequent to the end of our first quarter through
June 4, 2020
, we have progressively reopened limited operations in an additional 27 stores resulting in a total of 28 stores operating in 12
 
states. Our remaining stores are closed. The Company is unable to determine whether, when or the manner in which the conditions surrounding the
COVID-19
pandemic will change, including when any restrictions or closure requirements will be lifted or potentially
re-imposed
in certain states or local jurisdictions, whether it will be able to successfully staff stores, and the degree to which it will be able to
re-engage
customers. These developments have caused a material adverse impact on the Company’s revenues, results of operations and cash flows, including the Company’s ability to meet its obligations when due. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date the financial statements are issued.
The Company has taken several immediate steps to reduce operating costs and to conserve cash. The Company furloughed nearly all of its workforce, except a small team of essential personnel and reduced pay and benefits for the remaining employees. On March 18, 2020, the Company borrowed substantially all the remaining availability under its revolving credit facility, and the Company continues to actively manage its daily cash flows. Additionally, the Company is in ongoing discussions with landlords and other vendors to discuss relief from cash payments during this period, which have been moderately successful to date. On April 14, 2020, the Company
sold $75,000 of our common stock, and subsequent to the end of our first quarter, the Company sold an additional $110,600 of our common stock.
Effective April 14, 2020, the Company negotiated an amendment to its existing credit facility, which included relief from compliance with financial covenants for the periods ended May 3, 2020, August 2, 2020 and November 1, 2020. During the financial covenant suspension period, the Company is required to maintain a minimum liquidity amount of $30,000. If the Company
is
not in compliance with financial covenants after the suspension period or some other event of default arises, the Company’s lenders could instruct the administrative agent under the existing credit facility to exercise remedies including declaring the principal of and accrued interest on all outstanding indebtedness due and payable, terminating all remaining commitments and obligations under the revolving credit facility and requiring the posting of cash collateral in respect of 103% of the outstanding letters of credit under the revolving credit facility. Additionally, the full amount due under the interest rate swap agreements would become due.
 
Although the lenders under the existing credit facility may waive the default or forebear the exercise of remedies, they are not obligated to do so. Failure to obtain additional waivers would have a material adverse effect on the Company’s liquidity, financial condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code to implement a restructuring plan.
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The consolidated financial statements have been prepared assuming the Company will continue as a going concern.
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities at the date of the consolidated financial statements and for the period then ended. Actual results could differ from those estimates. Operating results for the thirteen weeks ended May 3, 2020 are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year ending January 31, 2021.
Cash and cash equivalents
— We consider transaction settlements in process from credit card companies and all highly-liquid investments with original maturities of three months or less to be cash equivalents. Our cash management system provides for the daily funding of all major bank disbursement accounts as checks are presented for payment. Under this system, outstanding checks in excess of the cash balances at certain banks creates book overdrafts. There was no book overdraft as of May 3, 2020. A book overdraft of $14,026 is presented in “Accounts payable” in the Consolidated Balance Sheets as of February 2, 2020. Changes in the book overdraft position are presented within “Net cash provided by operating activities” within the Consolidated Statements of Cash Flows.
Fair value of financial instruments
— Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value as follows: Level One inputs are quoted prices available for identical assets or liabilities in active markets; Level Two inputs are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; and Level Three inputs are unobservable and reflect management’s own assumptions.
The carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable, and other current liabilities approximate fair value because of their short-term nature. We believe that the carrying amount of our credit facility approximates its fair value because the interest rates reflect current market conditions. The fair value of the Company’s credit facility was determined to be a Level Two instrument as defined by GAAP. The fair value of the Company’s interest rate swap is determined based upon Level Two inputs which includes valuation models as reported by our counterparties. These valuation models are based on the present value of expected cash flows using forward rate curves.    
Non-financial
assets and liabilities recognized or disclosed at fair value in the consolidated financial statements on a nonrecurring basis include such items as property and equipment,
right-of-use
(“ROU”) assets, goodwill, tradenames and other assets. These assets are measured at fair value when they are evaluated for impairment.
The disruption in operations and reduction in
revenues
have led the Company to consider the impact of the
COVID-19
pandemic on the recoverability of its property and equipment and ROU assets for operating leases. The Company recorded an impairment charge for its long-lived assets, including ROU assets, of $6,746 for the thirteen weeks ended May 3, 2020, primarily driven by the expected impact of the
COVID-19
pandemic on future cash flows of specific stores. The Company has determined no events and circumstances existed during the first quarter of fiscal 2020 that would indicate it is more likely than not that its goodwill or tradename are impaired. The ultimate severity and longevity of the
COVID-19
pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.
To preserve cash flow, we have halted or delayed construction on 7 store locations under operating leases for which we have taken possession. Additionally, the Company has begun discussions to terminate or delay possession on several executed lease contracts that have not yet commenced. The Company is also curtailing several potential new store projects that were in the early stage of development. During the thirteen weeks ended May 3, 2020,
we recorded an impairment loss and related contract termination costs of
$4,803 related to these abandoned projects, which is included in “Other store operating expenses” in the Consolidated Statements of Comprehensive Income (Loss).
Interest rate swaps
— The Company entered into three interest rate swap agreements to manage our exposure to interest rate movements on our variable rate credit facility. The agreements entitle the Company to receive at specified intervals, a variable rate of interest based on
one-month
LIBOR in exchange for the payment of a fixed rate of interest throughout the life of the agreements. The notional amount of the swap agreements total $350,000 and the fixed rate of interest for all agreements is 2.47%. The agreements became effective on February 28, 2019 and mature on August 17, 2022, which is the maturity date of our credit facility.
 
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The Company initially designated its interest rate swap agreements as a cash flow hedge and accounted for the underlying activity in accordance with hedge accounting. Effective April 14, 2020, the Company amended its existing credit facility agreement to obtain relief from its financial covenants, and as a result, the variable interest rate terms were modified to create an interest rate floor of 1.00%. Accordingly, and as a result of the current forward interest rate curve, the Company discontinued the hedging relationship as of April 14, 2020
(de-designation
date). Given the continued existence of the hedged interest payments, the Company will reclassify its accumulated other comprehensive balance of $17,609 into “Interest expense, net” using a straight-line approach over the remaining life of the originally designated hedging relationship. For the thirteen weeks ended May 3, 2020, the amount of
pre-tax
losses in accumulated other comprehensive loss that was reclassified into interest expense was $314, and the Company expects to reclassify $7,547 within the next twelve months. Effective with the
de-designation,
any gain or loss on the derivatives are recognized
in earnings in the period in which the change occurs. For the thirteen weeks ended May 3, 2020, a loss of $820 was recognized, which is included in “Other store operating expenses” in the Consolidated Statements of Comprehensive Income (Loss).
Prior to the
de-designation,
changes in the fair values of the interest rate swaps were recorded as a component of other comprehensive loss until the interest payments being hedged were recorded as interest expense, at which time the amounts in accumulated other comprehensive loss were reclassified as an adjustment to interest expense. Cash flows related to the interest rate swaps were included as component of interest expense and in operating activities.
Credit risk related to the failure of the our counterparties to perform under the terms of the swap agreements is minimized by entering into transactions with carefully selected, credit-worthy parties and the fact that the swap contracts are distributed among several financial institutions to reduce the concentration of credit risk. Our swap agreements with our derivative counterparties contain a provision where if the Company defaults on any of its indebtedness, and repayment of the indebtedness has been accelerated, the Company could also be declared in default on its derivative obligations.
The following derivative instruments were outstanding as of the end of the periods indicated:
                         
 
 
 
 
Fair Value
 
 
Balance
S
heet
Location
 
 
May 3, 2020
 
 
February 2, 2020
 
Interest rate swaps
 
 
Accrued liabilities
 
 
$
(7,920
)
 
$
(3,518
)
Interest rate swaps
 
 
Other liabilities
 
 
 
(10,016
)
 
 
(6,967
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives (1)
 
 
 
 
$
(17,936
)
 
$
(10,485
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The balance at May 3, 2020 relates to our swap agreements after hedge accounting was discontinued, effective April 14, 2020.
 
 
The following table summarizes the activity in accumulated other comprehensive loss related to our derivative instruments:
                 
 
Thirteen
Weeks Ended
May 3, 2020
 
 
Thirteen
Weeks Ended
May 5, 2019
 
Amount of loss recorded in accumulated other comprehensive income
 
$
7,603
 
 
$
3,487
 
Amount of loss (gain) reclassified into income (1)
 
$
793
 
 
$
—  
 
Income tax benefit of interest rate swaps in accumulated other comprehensive loss
 
$
(1,860
)
 
$
(953
)
 
 
 
 
 
 
 
 
 
 
(1)
Amounts reclassified into income are included in “Interest expense, net” in the Consolidated Statements of Comprehensive Income (Loss).
 
 
Revenue recognition
— Amusement revenues are primarily recognized upon utilization of game play credits on power cards purchased and used by customers to activate video and redemption games. Redemption games allow customers to earn tickets, which may be redeemed for prizes in our WIN! area. We have deferred a portion of amusement revenues for the estimated unfulfilled performance obligations based on an estimated rate of future use by customers of unused game play credits and the material right provided to customers to redeem tickets in the future for prizes. During the thirteen weeks ended May 3, 2020, we recognized revenue of approximately $9,600, related to the amount in deferred amusement revenue as of the end of fiscal 2019.
    
In jurisdictions where we do not have a legal obligation to remit
unredeemed
gift card
balances
to a legal authority, we recognize revenue on unredeemed gift cards in proportion to the pattern of redemption by the customers. During the thirteen weeks ended May 3, 2020, we recognized revenue of approximately $1,300, related to the amount in deferred gift card revenue as of the end of fiscal 2019, of which approximately $170 was gift card breakage revenue.
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Table of Contents
Stockholders’ equity
— Our Board of Directors has approved a share repurchase program under which the Company may repurchase shares on the open market, through privately negotiated transactions and through trading plans. The total share repurchase authorization is $800,000 and the share repurchase authorization expires at the end of fiscal 2020. During the thirteen-week period ended May 3, 2020, the Company 
indefinitely
 
suspended all share repurchase activity. As of May 3, 2020, we have approximately $172,820 of share repurchase authorization remaining under the current plan.
In our consolidated financial statements, the Company treats shares withheld for tax purposes on behalf of our employees in connection with the vesting of time-based and performance restricted stock units as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. These withheld shares of common stock are not considered common stock repurchases under our authorized common stock repurchase plan. During the thirteen weeks ended May 3, 2020 and May 5, 2019, we withheld 3,112 and 11,336 shares of common stock to satisfy $36 and $586 of employees’ tax obligations, respectively. The share repurchase activity in the first quarter of fiscal year 2020
re
lates to
the settlement of a $150 cash obligation through the issuance of 12,975 shares of common stock.
Effective March 18, 2020, the Board of Directors of the Company adopted a
364-day
duration Shareholder Rights Plan (the “Rights Plan”) and declared a dividend of one preferred share purchase right for each outstanding share of common stock to shareholders of record on March 30, 2020 to purchase from the Company
one-ten
thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company for an exercise price of $45.00 once the rights become exercisable, subject to adjustment as provided in the related rights agreement.
On April 14, 2020, pursuant to an open market sale agreement, the Company sold 6,149,936 shares of its common stock at a price of $12.20 per share, for proceeds of $75,000, prior to deducting offering expenses related to the offering. Subsequent to the end of our first quarter, on May 4, 2020, the Company entered into an underwriting agreement, pursuant to which it sold 9,578,545 shares of its common stock at a price of $10.44 per share. On May 18, 2020, the underwriter exercised its over-allotment option for an additional 1,014,871 shares at $10.44 per share. During the second quarter of fiscal 2020, the Company received proceeds of approximately $110,600 prior to deducting offering expenses related to the offering, including the over-allotment option.
Recently adopted accounting guidance
— In June 2016, the
Financial
Accounting Standards Board (“FASB”) issued ASU
2016-13
, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
which requires measurement and recognition of expected versus incurred losses for financial assets held. The guidance primarily relates to our credit card and tenant incentive receivables. The Company adopted this standard as of the beginning of fiscal year 2020, and the adoption did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU
2017-04
, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
which eliminates the requirement to calculate the implied fair value of goodwill if the fair value of a reporting unit is less than the carrying amount of the reporting unit. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The Company adopted this standard as of the beginning of fiscal year 2020, and the adoption did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU
2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
, which eliminates, modifies and adds disclosure requirements for fair value measurements. The Company adopted this standard as of the beginning of fiscal year 2020, and the adoption did not have a material impact on our consolidated financial statements.
Recent accounting pronouncements
— In December 2019, the FASB issued ASU
2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
, which removes certain exceptions related to the approach for intraperiod tax allocations, the calculation of income taxes in interim periods, and the recognition of deferred taxes for taxable goodwill. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those years, with early adoption permitted. The Company is currently assessing the impact of this new standard on our consolidated financial statements.
In March 2020, the FASB issued ASU
2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Reform on Financial Reporting
, which provides temporary optional expedients and exceptions to the current guidance for contract modifications and hedging relationships through December 31, 2022, that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. A contract modification resulting from reference rate reform may be accounted for as a continuation of the existing contract rather than the creation of a new contract. Additionally, changes in the critical terms of hedging relationships, caused by reference rate reform, should not result in the
de-designation
of the instrument, provided certain criteria are met. As of the end of the first quarter of fiscal 2020, the Company’s exposure to LIBOR rates included its senior credit facility and swap agreements. The Company is currently evaluating the impact of this new standard on our consolidated financial statements.
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Table of Contents
Note 2: Accrued Liabilities
Accrued liabilities consist of the following as of the end of each period:     
                 
 
May 3, 2020
 
 
February 2, 2020
 
Deferred amusement revenue
  $
78,409
    $
75,113
 
Current portion of operating lease liabilities, net (1)
   
59,732
     
45,611
 
Deferred gift card revenue
   
10,796
     
11,253
 
Rent payable (note 4)
   
10,701
     
—  
 
Compensation and benefits
 
   
9,331
     
23,421
 
Property taxes
   
8,572
     
7,226
 
Current portion of derivatives
   
7,920
     
3,518
 
Current portion of long-term insurance
   
6,500
     
6,500
 
Utilities
   
4,767
     
4,442
 
Customer deposits
   
3,117
     
4,324
 
Inventory liabilities
   
1,937
     
2,179
 
Variable rent liabilities
   
535
     
1,331
 
Sales and use taxes
   
343
     
4,000
 
Dividend payable
   
  
     
4,891
 
Other
   
18,745
     
13,643
 
                 
Total accrued liabilities
  $
221,405
    $
207,452
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The balance of leasehold incentive receivables of $
3,000
and $6,339 at May 3, 2020 and February 2, 2020, respectively, is reflected as a reduction of the current portion of operating lease liabilities.
 
 
 
 
 
 
Note 3: Debt
Long-term debt consists of the following as of:
                 
 
May 3, 2020
 
 
February 2, 2020
 
Credit facility—term
  $
262,500
    $
266,250
 
Credit facility—revolver
   
489,000
     
382,000
 
                 
Total debt outstanding
   
751,500
     
648,250
 
Less:
   
     
 
Current installments—term
   
(15,000
)    
(15,000
)
Debt issuance costs—term
   
(1,239
)    
(561
)
                 
Long-term debt, net
  $
735,261
    $
632,689
 
                 
 
 
 
 
 
 
 
 
On August 17, 2017, we entered into a senior secured credit facility that provides a $300,000 term loan facility and a $500,000 revolving credit facility with a maturity date of August 17, 2022. The $500,000 revolving credit facility includes a $35,000 letter of credit
sub-facility
and a $15,000 swing loan
sub-facility.
The revolving credit facility is available to provide financing for general purposes. Principal payments on the term loan facility are $3,750 per quarter through maturity, when the remaining balance is due. Our current credit facility is secured by the assets of D&B Inc and is unconditionally guaranteed by D&B Holdings and each of its direct and indirect domestic wholly-owned subsidiaries. As of May 3, 2020, we had letters of credit outstanding of $10,147 and $853 of borrowing available under our revolving credit facility.
The interest rates per annum applicable to loans, other than swing loans, under our existing credit facility are currently set based on a defined LIBOR rate plus an applicable margin. Swing loans bear interest at a base rate plus an applicable margin. The loans bear interest subject to a pricing grid based on a total leverage ratio, at
one-month
LIBOR plus a spread ranging from 1.25% to 2.00% for the term loans and the revolving loans.
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Our credit facility contains restrictive covenants that, among other things, place certain limitations on our ability to: incur additional indebtedness, make loans or advances to subsidiaries and other entities, pay dividends, acquire other businesses or sell assets. In addition, our credit facility requires us to maintain certain financial ratio covenants.
Effective April 14, 2020, we amended our existing credit facility, which included relief from compliance with financial covenants for the quarterly periods ended May 3, 2020, August 2, 2020 and November 1, 2020. During the financial covenant suspension period, a
 
$
30,000
 
liquidity covenant was added as well as certain additional reporting requirements. The interest rate increased to LIBOR plus 2.00% with a LIBOR floor of 1.00%. As of May 3, 2020, and May 5, 2019, the Company’s weighted average interest rate on outstanding borrowings
was
 
3.59
% and
4.17
%,
 
respectively. In connection with the amendment, we incurred debt costs of $2,000, which are being
amortized
over the life of the credit facility. These costs are payable at the maturity date of the credit facility, with earlier payment required in the event of certain conditions, as defined in the agreement.
Interest expense, net
— The following tables set forth our recorded interest expense, net for the periods indicated:
                 
 
Thirteen Weeks
 
 
Thirteen Weeks
 
Ended
 
 
Ended
 
May 3, 2020
 
 
May 5, 2019
 
Interest expense on credit facilities
  $
6,092
    $
4,180
 
Amortization of issuance cost
   
242
     
198
 
Interest income
   
(22
)    
(26
)
Capitalized interest
   
(197
)    
(296
)
                 
Total interest expense, net
  $
6,115
    $
4,056
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 4: Leases
We currently lease the building or site for our stores, corporate office and warehouse space under facility operating leases. These leases typically have initial terms ranging from ten to twenty years and include one or more options to renew. When determining the lease term, we include option periods for which renewal is reasonably certain. Most of the leases require us to pay property taxes, insurance and maintenance of the leased assets. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Operating leases also includes certain equipment leases that have a term in excess of one year. Certain facility leases also have provisions for additional contingent rentals based on revenues.
Operating lease cost, variable lease cost and short-term lease cost related primarily to our facilities is included in “Other store operating expenses” for our operating stores,
“Pre-opening
costs” for our stores not yet operating, or “General and administrative expenses” for our corporate office and warehouse, in the Consolidated Statements of Comprehensive Income (Loss).
The components of lease expense, including variable lease costs primarily consisting of common area maintenance charges and property taxes, are as follows for the fiscal year ended:
                 
 
May 3, 2020
 
 
May 5, 2019
 
Operating lease cost
 
$
33,563
 
 
$
29,792
 
Variable lease cost
 
 
7,366
 
 
 
1,218
 
Short-term lease cost
 
 
87
 
 
 
101
 
 
 
 
 
 
 
 
 
 
Total lease cost
 
$
41,016
 
 
$
31,111
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As a result of the
COVID-19
pandemic, the
Company
entered into four rent deferral agreements with our respective landlords during the thirteen weeks ended May 3, 2020. Subsequent to the end of our first quarter through June 4, 2020, we have entered into 42 additional rent deferral agreements. Under these agreements, certain rent payments will be abated, deferred or modified without penalty for various periods, generally for a minimum of three months. The Company has elected to account for lease concessions and deferrals resulting directly from
COVID-19
as though the enforceable rights and obligations to the deferrals existed in the respective contracts at lease inception and will not account for the concessions as lease modifications, unless the concession results in a substantial increase in the Company’s obligations. During the first quarter of fiscal 2020, only one of the four concession agreements qualified for this accounting election, and the remaining three rent deferral agreements were treated as lease modifications. Further, as a result of the
COVID-19
pandemic and its impact on our financial condition, the Company has chosen not to pay the remaining facility operating lease obligations as they become due even though a rent concession has not been granted by the respective landlords. As of May 3, 2020, we have bifurcated our current operating lease liabilities into the portion that remains subject to accretion and the portion that is accounted for as a deferral of payments or as short payments.
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Note 5: Commitments and Contingencies
We are subject to certain legal proceedings and claims that arise in the ordinary course of our business, including claims alleging violations of federal and state law regarding workplace and employment matters, discrimination,
slip-and-fall
and other guest-related incidents, and similar matters. In the opinion of management, based upon consultation with legal counsel, the amount of ultimate liability with respect to such legal proceedings and claims will not materially affect the consolidated results of our operations or our financial condition. Legal costs related to such claims are expensed as incurred.
The Company is currently a defendant in several lawsuits filed in courts in California alleging violations of California Business and Professions Code, industry wage orders,
wage-and-hour
laws and rules and regulations pertaining primarily to the failure to pay proper regular and overtime wages, failure to pay for missed meals and rest periods, pay stub violations, failure to pay all wages due at the time of termination and other employment related claims (the “California Cases”). Some of the California Cases purport or may be determined to be class actions or Private Attorneys General Act representative actions and seek substantial damages and penalties. With respect to these California Cases, where the Company has determined that a loss is reasonably possible but not probable, the Company is unable to estimate the amount or range of the reasonably possible loss due to the inherent difficulties of predicting the outcome of uncertainties regarding legal proceedings. The Company’s assessments are based on assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Management’s assessment of these California Cases could change because of future determinations or the discovery of facts that are not presently known. Accordingly, the ultimate costs of resolving these cases may be substantially higher or lower than estimated. The Company is aggressively defending these cases.    
Note 6: Earnings per share
Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options (both vested and unvested), unvested time-based restricted stock units (RSU’s) and unvested performance RSU’s to the extent performance measures were attained as of the end of the reporting period, calculated using the treasury-stock method. Potential dilutive shares are excluded from the computation of earnings per share (“EPS”) if their effect is anti-dilutive. Stock options for which the exercise price exceeds the average market price over the period are anti-dilutive and, accordingly, are excluded from the calculation. The weighted average anti-dilutive options excluded from the calculation of common equivalent shares were 51,772 in the thirteen weeks ended May 5, 2019.
 
The following table sets forth the computation of EPS, basic and diluted for the periods indicated:
                 
 
Thirteen Weeks
 
 
Thirteen Weeks
 
 
Ended
 
 
Ended
 
 
May 3, 2020
 
 
May 5, 2019
 
Numerator:
 
 
 
 
 
 
Net income (loss)
  $
(43,544
)   $
42,443
 
Denominator:
 
 
 
 
 
 
Weighted average number of common shares outstanding (basic)
   
31,829,985
     
36,827,665
 
Weighted average dilutive impact of equity-based awards (1)
   
     
764,279
 
Weighted average number of common and common equivalent
shares outstanding (diluted)
   
31,829,985
     
37,591,944
 
Net income
 (loss)
per share:
 
 
 
 
 
 
Basic
  $
(1.37
)   $
1.15
 
Diluted
  $
(1.37
)   $
1.13
 
 
(1)
Due to a net loss for the thirteen weeks ended May 3, 2020, zero incremental shares are included because the effect would be anti-dilutive.
 
 
 
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Note 7: Share-Based Compensation
Compensation expense related to stock options, time-based and performance-based RSU’s are included in general and administrative expenses and were as follows:
                 
 
Thirteen Weeks Ended
 
 
May 3,
 
2020
 
 
May 5,
 
2019
 
Stock options
  $
540
     
759
 
RSU’s and restricted stock
   
(929
)    
1,066
 
                 
Total share-based compensation expense
  $
(389
)   $
1,825
 
                 
 
 
 
Transactions related to stock option awards during the thirteen weeks ended May 3, 2020 were as follows:
                                 
 
2014 Stock Incentive Plan
   
2010 Stock Incentive Plan
 
 
Number
of Options
 
 
Weighted
Average
Exercise
Price
 
 
Number
of Options
 
 
Weighted
Average
Exercise
Price
 
Outstanding at February 2, 2020
   
1,323,495
    $
36.97
     
266,900
    $
6.72
 
Granted
   
—  
     
—  
     
—  
     
—  
 
Exercised
   
—  
     
—  
     
(9,244
)    
4.74
 
Forfeited
   
(17,620
)    
49.21
     
—  
     
—  
 
                                 
Outstanding at May 3, 2020
   
1,305,875
    $
36.80
     
257,656
    $
6.79
 
                                 
Exercisable at May 3, 2020
   
1,097,556
    $
34.47
     
257,656
    $
6.79
 
                                 
 
 
 
 
 
 
 
 
 
The total intrinsic value of options exercised during the thirteen weeks ended May 3, 2020 was $200. The unrecognized expense related to our stock option plan totaled approximately $1,449 as of May 3, 2020 and will be expensed over a weighted average period of 1.7 years.
Transactions related to time-based and performance-based RSU’s during the thirteen weeks ended May 3, 2020, were as follows:
 
 
Shares
 
 
Weighted
Average
Fair Value
 
Outstanding at February 2, 2020
   
216,815
    $
51.58
 
Granted
   
72,593
     
12.85
 
Vested
   
(19,344
)    
51.68
 
Forfeited
   
(18,455
)    
47.45
 
                 
Outstanding at May 3, 2020
   
251,609
    $
40.70
 
                 
Fair value of our time-based and performance-based RSU’s and restricted stock is based on our closing stock price on the date of grant. The unrecognized expense related to our time-based and performance-based RSU’s was $2,984 as of May 3, 2020 and will be expensed over a weighted average period of 1.7 years.
During the thirteen weeks ended May 3, 2020 and May 5, 2019, excess tax expense (benefit) of $140 and ($788), respectively, were recognized as a expense (benefit) in the “Provision (benefit) for income taxes” in the Consolidated Statement of Comprehensive Income (Loss) and classified as a source in operating activities in the Consolidated Statement of Cash Flows.
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Forfeitures are estimated at the time of grant and adjusted if necessary, in subsequent periods, if actual forfeitures differ from those estimates. The forfeiture rate is based on historical experience.
Subsequent to the end of the first quarter of fiscal 2020, we granted 523,117 time-based RSU’s at a weighted average fair value of $10.81, and we granted 378,416 market stock units (MSU’s) at a weighted average fair value of $15.30.
Note 8: Income Taxes
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). Intended to provide economic relief to those impacted by the
COVID-19
pandemic, the CARES Act includes provisions, among others, addressing the carryback of net operating losses for specific periods, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property. Additionally, the CARES Act, in efforts to enhance business’ liquidity, provides for the deferral of the employer-paid portion of social security taxes. As of May 3, 2020, we have elected to defer employer-paid portion of social security taxes of $372, which is included in “Other liabilities” in the Consolidated Balance Sheets.
The Company has historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annualized effective tax rate for the full fiscal year to “ordinary” income or loss for the reporting period. Due to the uncertainty created by the events surrounding the
COVID-19
pandemic, the actual effective tax rate for the year to date period was used to calculate the income tax benefit for the thirteen weeks ended May 3, 2020. The effective tax rate for the thirteen weeks ended May 3, 2020, was a benefit of 35.5%, compared to an effective tax rate of 21.0% for the thirteen weeks ended May 5, 2019, primarily due to the impact of a decrease in operating earnings before income tax and the impact of the tax provisions within the CARES Act.    As a result of the impact of the technical amendments for qualified improvement property within the CARES Act, the Company generated a taxable loss in 2019, which together with the taxable loss in 2020, can now be carried back to prior years when the statutory federal tax rate was at 35.0%.
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with the accompanying unaudited consolidated financial statements and the related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form
10-K
as filed with the Securities and Exchange Commission (“SEC”) on April 3, 2020. Unless otherwise specified, the meanings of all defined terms in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are consistent with the meanings of such terms as defined in the Notes to Unaudited Consolidated Financial Statements. This discussion contains statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this quarterly report as a result of various factors, including those set forth in the section entitled “Risk Factors” in our Annual Report on Form
10-K
filed with the SEC on April 3, 2020. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form
10-Q,
those results or developments may not be indicative of results or developments in subsequent periods.
Recent Developments
On March 11, 2020, the World Health Organization declared the
COVID-19
outbreak to be a global pandemic and on March 13, 2020, the United States declared a National Public Health Emergency. As a result, several state and local mandates were implemented that encouraged the practice of social distancing, placed restrictions from individuals gathering in groups and, in many areas and placed complete restrictions on
non-essential
movement outside of the home. Shortly after the national emergency declaration, state and local officials began placing restrictions on restaurants, some of which allowed
To-Go
or curbside service only while others limited capacity in the dining room or midway. By March 20, 2020, all our 137 operating stores were temporarily closed. Almost all our stores remained closed for the duration of the first quarter. On April 30, 2020 one store opened to the public with limited food and beverage offerings. Two additional stores offered limited food and beverage for
off-premises
dining.
As a result of these developments, the Company is experiencing a significant decrease in traffic which has impacted the Company’s operating results during the thirteen weeks ended May 3, 2020. We expect our operating results to continue to be severely impacted until such time that state and local restrictions are lifted, and our dining rooms and midways can
re-open
at full capacity. We cannot predict how long the pandemic will last or when the state and local restrictions will be lifted or potentially
re-imposed.
In addition, we cannot predict how quickly our guests will return to our restaurants once such restrictions have been lifted or the impact this will have on consumer spending habits.
In response to the pandemic, the Company and its Board of Directors implemented the following measures during the quarter to enhance financial flexibility:
  reduced expenses broadly, including by furloughing all our hourly store team members and approximately 94% of store management personnel, on or about March 19, 2020, while enacting temporary salary reductions for remaining managers. In addition, effective March 24, 2020, the Company furloughed all but a small team of essential corporate and administrative staff, temporarily reducing salaries by 10% to 50%, and temporarily suspended all board fees through the remainder of fiscal 2020;
  canceled or delayed all
non-essential
planned capital spending for the remainder of fiscal 2020;
  halted all planned store openings after our one store opening in Chattanooga, TN, on March 16, 2020, including delayed construction;
  abandoned work on future planned sites;
  suspended our share repurchase program and declaration of dividends;
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  drew down substantially all the remaining credit available under our $500,000 revolving credit facility;
  sold shares of our common stock, which generated net proceeds of $72,144; and
  began discussions with our landlords, vendors, and other business partners to reduce our lease and contract payments and obtain other concessions, including executing amendments to four of our operating leases, abating or deferring rent obligations of approximately $1,400, generally for a minimum of three months beginning in April 2020, and modifying rents an additional six months for two of these stores.
We expect the
re-opening
process to be a gradual one with the safety of our employees and guests as our top priority. During the period subsequent to the end of our first quarter through June 4, 2020, we have progressively reopened limited operations in an additional 27 stores resulting in a total of 28 stores operating in 12 states. Our remaining stores are closed. All our
re-opened
stores are operating with streamlined menus, reduced games, new seating and game configurations and reduced operating hours. As dining room and midway restrictions continue to ease and sales begin to improve, some labor inefficiencies and increased cleaning and supply costs are anticipated as stores adjust to improved sales volumes and enhanced health and safety protocols.
Given the level of volatility and uncertainty surrounding the future impact of the pandemic, we have not provided a full year financial outlook for fiscal 2020.
General
We are a leading owner and operator of high-volume venues in North America that combine dining and entertainment for both adults and families under the name “Dave & Buster’s”. Founded in 1982, the core of our concept is to offer our customers the opportunity to “Eat, Drink, Play and Watch” all in one location. Eat and Drink are offered through a full menu of entrées and appetizers and a full selection of
non-alcoholic
and alcoholic beverages. Our Play and Watch offerings provide an extensive assortment of entertainment attractions centered around playing games and watching live sports and other televised events. Our brand appeals to a relatively balanced mix of male and female adults, as well as families and teenagers, in low to middle-income households.
Our stores average 41,000 square feet, range in size between 16,000 and 70,000 square feet and are open seven days a week, with normal hours of operation typically from 11:30 a.m. to midnight on Sunday through Thursday and 11:30 a.m. to 2:00 a.m. on Friday and Saturday.
Key Measures of Our Performance
We monitor and analyze a number of key performance measures to manage our business and evaluate financial and operating performance. These measures include:
Comparable store sales.
Comparable store sales are a year-over-year comparison of sales at stores open at the end of the period which have been open for at least 18 months as of the beginning of each of the fiscal years. It is a key performance indicator used within the industry and is indicative of acceptance of our initiatives as well as local economic and consumer trends. Our comparable store base consisted of 116 stores as of May 3, 2020.
New store openings.
Our ability to expand our business and reach new customers is influenced by the opening of additional stores in both new and existing markets. The success of our new stores is indicative of our brand appeal and the efficacy of our site selection and operating models. Between May 5, 2019 and May 3, 2020, we opened ten new stores, four of which were in new markets.
Non-GAAP
Financial Measures
In addition to the results provided in accordance with generally accepted accounting principles (“GAAP”), we provide
non-GAAP
measures which present operating results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with GAAP and include Adjusted EBITDA, Adjusted EBITDA Margin, Store Operating Income Before Depreciation and Amortization and Store Operating Income Before Depreciation and Amortization Margin (defined below). These
non-GAAP
measures do not represent and should not be considered as an alternative to net income or cash flows from operations, as determined in accordance with GAAP, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Although we use these
non-GAAP
measures to assess the operating performance of our business, they have significant limitations as an analytical tool because they exclude certain material costs. For example, Adjusted EBITDA does not take into account a number of significant items, including our interest expense and depreciation and amortization expense. In addition, Adjusted EBITDA excludes
pre-opening
and other costs which may be important in analyzing our GAAP results. Because
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Adjusted EBITDA does not account for these expenses, its utility as a measure of our operating performance has material limitations. Our calculations of Adjusted EBITDA adjust for these amounts because they vary from period to period and do not directly relate to the ongoing operations of the currently underlying business of our stores and therefore complicate comparison of underlying business between periods. Nevertheless, because of the limitations described above, management does not view Adjusted EBITDA or Store Operating Income Before Depreciation and Amortization in isolation and also uses other measures, such as revenues, gross margin, operating income and net income, to measure operating performance.
Adjusted EBITDA and Adjusted EBITDA Margin
. We define “Adjusted EBITDA” as net income (loss) plus interest expense, net, loss on debt refinancing, provision (benefit) for income taxes, depreciation and amortization expense, loss on asset disposal, impairment of long-lived assets, share-based compensation,
pre-opening
costs, currency transaction (gains) losses and other costs. “Adjusted EBITDA Margin” is defined as Adjusted EBITDA divided by total revenues.
Adjusted EBITDA is presented because we believe that it provides useful information to investors and analysts regarding our operating performance. By reporting Adjusted EBITDA, we provide a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.
Store Operating Income Before Depreciation and Amortization and Store Operating Income Before Depreciation and Amortization Margin.
We define “Store Operating Income Before Depreciation and Amortization” as operating income (loss) plus depreciation and amortization expense, general and administrative expenses and
pre-opening
costs. “Store Operating Income Before Depreciation and Amortization Margin” is defined as Store Operating Income Before Depreciation and Amortization divided by total revenues. Store Operating Income Before Depreciation and Amortization Margin allows us to evaluate operating performance of each store across stores of varying size and volume.
We believe that Store Operating Income Before Depreciation and Amortization is another useful measure in evaluating our operating performance because it removes the impact of general and administrative expenses, which are not incurred at the store-level, and the costs of opening new stores, which are
non-recurring
at the store-level, and thereby enables the comparability of the operating performance of our stores for the periods presented. We also believe that Store Operating Income Before Depreciation and Amortization is a useful measure in evaluating our operating performance within the entertainment and dining industry because it permits the evaluation of store-level productivity, efficiency and performance, and we use Store Operating Income Before Depreciation and Amortization as a means of evaluating store financial performance compared with our competitors. However, because this measure excludes significant items such as general and administrative expenses and
pre-opening
costs, as well as our interest expense, net and depreciation and amortization expense, which are important in evaluating our consolidated financial performance from period to period, the value of this measure is limited as a measure of our consolidated financial performance.
Presentation of Operating Results
We operate on a 52 or
53-week
fiscal year that ends on the Sunday after the Saturday closest to January 31. Each quarterly period has 13 weeks, except in a
53-week
year when the fourth quarter has 14 weeks. All references to the first quarter of 2020 relate to the
13-week
period ended May 3, 2020. All references to the first quarter of 2019 relate to the
13-week
period ended May 5, 2019. Fiscal 2020 and fiscal 2019 consist of 52 weeks. All dollar amounts are presented in thousands, unless otherwise noted, except share and per share amounts. 
Store-Level Variability, Quarterly Fluctuations, Seasonality and Inflation
We have historically operated stores varying in size and have experienced significant variability among stores in volumes, operating results and net investment costs.
Our new stores typically open with sales volumes in excess of their expected long term
run-rate
levels, which we refer to as a “honeymoon” effect. We expect our new store sales volumes in year two to be 10% to 20% lower than our year one targets, and to grow in line with the rest of our comparable store base thereafter. As a result of the substantial revenues associated with each new store, the number and timing of new store openings will result in significant fluctuations in quarterly results.
In the first year of operation new store operating margins (excluding
pre-opening
expenses) typically benefit from honeymoon sales leverage on occupancy, management labor, and other fixed costs. This benefit is partially offset by normal inefficiencies in hourly labor and other costs associated with establishing a new store. In year two, operating margins may decline due to the loss of honeymoon sales leverage on fixed costs which is partially offset by improvements in store operating efficiency. Furthermore, rents in our new stores are typically higher than our comparable store base.
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Our operating results fluctuate significantly due to seasonal factors. Typically, we have higher revenues associated with spring and
year-end
holidays which will continue to be susceptible to the impact of severe or unseasonably mild weather on customer traffic and sales during that period. Our third quarter, which encompasses the
back-to-school
fall season, has historically had lower revenues as compared to the other quarters.
We expect that economic and environmental conditions and changes in regulatory legislation will continue to exert pressure on both supplier pricing and consumer spending related to entertainment and dining alternatives. Although there is no assurance that our cost of products will remain stable or that federal, state or local minimum wage rates will not increase beyond amounts currently legislated, the effects of any supplier price increases or wage rate increases might be partially offset by selected menu price increases if competitively appropriate. In addition, how quickly, and to what extent, normal economic and operating conditions can resume cannot be predicted, and the resumption of normal business operations may be delayed or constrained by lingering effects of the
COVID-19
pandemic on us or our suppliers, third-party service providers, and/or customers.
Thirteen Weeks Ended May 3, 2020 Compared to Thirteen Weeks Ended May 5, 2019
Results of operations.
The following table sets forth selected data, in thousands of dollars and as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying unaudited consolidated statements of comprehensive income (loss).
                             
 
Thirteen Weeks
 Ended
May 3, 2020
 
Thirteen Weeks
 Ended
May 5, 2019
 
Food and beverage revenues
 
$ 63,920
   
40.0
%   $
  148,221
     
40.8
%
Amusement and other revenues
 
95,886
   
60.0
     
215,361
     
59.2
 
Total revenues
 
159,806
   
100.0
     
363,582
     
100.0
 
Cost of food and beverage (as a percentage of food and beverage revenues)
 
17,344
   
27.1
     
38,754
     
26.1
 
Cost of amusement and other (as a percentage of amusement and other revenues)
 
10,728
   
11.2
     
22,971
     
10.7
 
Total cost of products
 
28,072
   
17.6
     
61,725
     
17.0
 
Operating payroll and benefits
 
43,737
   
27.4
     
82,873
     
22.8
 
Other store operating expenses
 
95,672
   
59.8
     
106,245
     
29.2
 
General and administrative expenses
 
14,563
   
9.1
     
16,846
     
4.6
 
Depreciation and amortization expense
 
35,352
   
22.1
     
31,141
     
8.6
 
Pre-opening
costs
 
3,823
   
2.4
     
7,002
     
1.9
 
Total operating costs
 
221,219
   
138.4
     
305,832
     
84.1
 
                             
Operating income (loss)
 
(61,413)
   
(38.4
)    
57,750
     
15.9
 
Interest expense, net
 
6,115
   
3.9
     
4,056