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 August 2, 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
September
 4, 2020, the registrant had 47,594,912 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 AUGUST 2, 2020
TABLE OF CONTENTS
 
 
 
 
  
Page
 
PART I
 
FINANCIAL INFORMATION
  
     
     
Item 1.
 
  
 
3
 
     
Item 2.
 
  
 
18
 
     
Item 3.
 
  
 
31
 
     
Item 4.
 
  
 
31
 
     
PART II
 
OTHER INFORMATION
  
     
     
Item 1.
 
  
 
32
 
     
Item 1A.
 
  
 
32
 
     
Item 2.
 
  
 
32
 
     
Item 6.
 
  
 
33
 
     
 
 
  
 
34
 
 
 
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)
 
    
August 2,
   
February 2,
 
  
2020
   
2020
 
    
(unaudited)
 
 
 
 
(audited)
 
ASSETS
      
Current assets:
      
Cash and cash equivalents
   $ 224,305     $ 24,655  
Inventories
     31,189       34,477  
Prepaid expenses
     12,751       14,269  
Income taxes receivable
     23,805       2,331  
Other current assets
     934       3,245  
  
 
 
   
 
 
 
Total current assets
     292,984       78,977  
Property and equipment (net of $739,805 and $686,824 accumulated depreciation as of August 2, 2020 and February 2, 2020, respectively)
     872,010       900,637  
Operating lease right of use assets
     1,062,266       1,011,568  
Deferred tax assets
     21,491       7,639  
Tradenames
     79,000       79,000  
Goodwill
     272,650       272,636  
Other assets and deferred charges
     19,566       19,682  
  
 
 
   
 
 
 
Total assets
   $ 2,619,967     $ 2,370,139  
  
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
      
Current liabilities:
      
Current installments of long-term debt
   $ 15,000     $ 15,000  
Accounts payable
     59,539       65,359  
Accrued liabilities
     238,651       207,452  
Income taxes payable
     624       3,054  
  
 
 
   
 
 
 
Total current liabilities
     313,814       290,865  
Deferred income taxes
           19,102  
Operating lease liabilities
     1,285,533       1,222,054  
Other liabilities
     38,603       35,779  
Long-term debt, net
     731,646       632,689  
Commitments and contingencies
    
Stockholders’ equity:
      
Common stock, par value $0.01; authorized: 400,000,000 shares; issued: 60,422,212 shares at August 2, 2020 and 43,386,852 shares at February 2, 2020; outstanding: 47,594,912 shares at August 2, 2020 and 30,603,340 shares at February 2, 2020
     604       434  
Preferred stock, 50,000,000 authorized; none issued
     —         —    
Paid-in
capital
     526,253       339,161  
Treasury stock, 12,827,300 and 12,783,512 shares as of August 2, 2020 and February 2, 2020, respectively
     (595,728     (595,041
Accumulated other comprehensive loss
     (12,077     (8,369
Retained earnings
     331,319       433,465  
  
 
 
   
 
 
 
Total stockholders’ equity
     250,371       169,650  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 2,619,967     $ 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
 
  
August 2, 2020
   
August 4, 2019
 
Food and beverage revenues
   $ 17,002     $ 137,921  
Amusement and other revenues
     33,831       206,678  
  
 
 
   
 
 
 
Total revenues
     50,833       344,599  
Cost of food and beverage
     4,659       36,934  
Cost of amusement and other
     4,025       22,689  
  
 
 
   
 
 
 
Total cost of products
     8,684       59,623  
Operating payroll and benefits
     13,756       80,927  
Other store operating expenses
     62,682       104,376  
General and administrative expenses
     9,278       15,991  
Depreciation and amortization expense
     35,160       32,745  
Pre-opening
costs
     2,388       4,723  
  
 
 
   
 
 
 
Total operating costs
     131,948       298,385  
  
 
 
   
 
 
 
Operating income (loss)
     (81,115     46,214  
Interest expense, net
     8,163       4,605  
  
 
 
   
 
 
 
Income (loss) before provision (benefit) for income taxes
     (89,278     41,609  
Provision (benefit) for income taxes
     (30,676     9,253  
  
 
 
   
 
 
 
Net income (loss)
     (58,602     32,356  
  
 
 
   
 
 
 
Unrealized foreign currency translation gain
     304       134  
Unrealized gain (loss)
on
derivatives, net of tax
     1,372       (3,373
  
 
 
   
 
 
 
Total other comprehensive
income (
loss
)
     1,676       (3,239
  
 
 
   
 
 
 
Total comprehensive income (loss)
   $ (56,926   $ 29,117  
  
 
 
   
 
 
 
Net income (loss) per share:
    
Basic
   $ (1.24   $ 0.91  
Diluted
   $ (1.24   $ 0.90  
Weighted average shares used in per share calculations:
    
Basic
     47,111,763       35,407,965  
Diluted
     47,111,763       36,015,710  
See accompanying notes to consolidated financial statements.
 
4

Table of Contents
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands, except share and per share amounts)
 
    
Twenty-Six Weeks
   
Twenty-Six Weeks
 
  
Ended
   
Ended
 
  
August 2, 2020
   
August 4, 2019
 
Food and beverage revenues
   $ 80,922     $ 286,142  
Amusement and other revenues
     129,717       422,039  
  
 
 
   
 
 
 
Total revenues
     210,639       708,181  
Cost of food and beverage
     22,003       75,688  
Cost of amusement and other
     14,753       45,660  
  
 
 
   
 
 
 
Total cost of products
     36,756       121,348  
Operating payroll and benefits
     57,493       163,800  
Other store operating expenses
     158,354       210,621  
General and administrative expenses
     23,841       32,837  
Depreciation and amortization expense
     70,512       63,886  
Pre-opening
costs
     6,211       11,725  
  
 
 
   
 
 
 
Total operating costs
     353,167       604,217  
  
 
 
   
 
 
 
Operating income (loss)
     (142,528     103,964  
Interest expense, net
     14,278       8,661  
  
 
 
   
 
 
 
Income (loss) before provision (benefit) for income taxes
     (156,806     95,303  
Provision (benefit) for income taxes
     (54,660     20,504  
  
 
 
   
 
 
 
Net income (loss)
     (102,146     74,799  
  
 
 
   
 
 
 
Unrealized foreign currency translation loss
     (131     (57
Unrealized loss
on
derivatives, net of tax
     (3,577     (5,907
  
 
 
   
 
 
 
Total other comprehensive loss
     (3,708     (5,964
  
 
 
   
 
 
 
Total comprehensive income (loss)
   $ (105,854   $ 68,835  
  
 
 
   
 
 
 
Net income (loss) per share:
    
Basic
   $ (2.59   $ 2.07  
Diluted
   $ (2.59   $ 2.03  
Weighted average shares used in per share calculations:
    
Basic
     39,470,874       36,117,815  
Diluted
     39,470,874       36,803,001  
 
See accompanying notes to consolidated financial statements.
 
5

Table of Contents
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
 
    
Thirteen Weeks Ended August 2, 2020
 
    
Common Stock
    
Paid-In

Capital
    
Treasury Stock
At Cost
   
Accumulated
Other
Comprehensive
Loss
    
Retained
Earnings
   
Total
 
    
Shares
    
Amt.
    
 
    
Shares
    
Amt.
   
 
    
 
   
 
 
Balance May 3, 2020
     49,578,351      $ 496      $ 411,048        12,786,624      $ (595,077   $ (13,753   $ 389,921     $ 192,635  
Net loss
     —          —          —          —          —         —         (58,602     (58,602
Unrealized foreign currency translation gain
     —          —          —          —          —         304       —         304  
Unrealized gain on derivatives, net of tax
     —          —          —          —          —         1,372       —         1,372  
Share-based compensation
     —          —          2,734        —          —         —         —         2,734  
Issuance of common stock
     10,843,861        108        112,471        —          —         —         —         112,579  
Repurchase of common stock
     —          —          —          40,676        (651     —         —         (651
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance August 2, 2020
     60,422,212      $ 604      $ 526,253        12,827,300      $ (595,728   $ (12,077   $ 331,319     $ 250,371  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Thirteen Weeks Ended August 4, 2019
 
    
Common Stock
    
Paid-In

Capital
    
Treasury Stock
At Cost
   
Accumulated
Other
Comprehensive
Loss
   
Retained
Earnings
   
Total
 
    
Shares
    
Amt.
    
 
    
Shares
    
Amt.
   
 
   
 
   
 
 
Balance May 5, 2019
     43,323,049      $ 433      $ 333,515        6,958,291      $ (361,186 )   $ (3,408 )   $ 390,771     $ 360,125  
Net income
     —          —          —          —          —         —         32,356       32,356  
Unrealized foreign currency translation gain
     —          —          —          —          —         134       —         134  
Unrealized loss
on
derivatives, net of tax
     —          —          —          —          —         (3,373 )     —         (3,373
Share-based compensation
     —          —          1,907        —          —         —         —         1,907  
Issuance of common stock
     14,076        —          177        —          —         —         —         177  
Repurchase of common stock
     —          —             3,400,000        (136,676 )     —         —         (136,676
Dividends declared ($0.15 per share)
     —          —          —          —          —         —         (5,348 )     (5,348
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance August 4, 2019
     43,337,125      $ 433      $ 335,599        10,358,291      $ (497,862 )   $ (6,647 )   $ 417,779     $ 249,302  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
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Table of Contents
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
 
    
Twenty-Six
Weeks Ended August 2, 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 loss
     —          —          —          —          —         —         (102,146     (102,146
Unrealized foreign currency translation loss
     —          —          —          —          —         (131     —         (131
Unrealized loss
on
derivatives, net of tax
     —          —          —          —          —         (3,577     —         (3,577
Share-based compensation
     —          —          2,345        —          —         —         —         2,345  
Issuance of common stock
     17,035,360        170        184,747        —          —         —         —         184,917  
Repurchase of common stock
     —          —          —          43,788        (687     —         —         (687
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance August 2, 2020
     60,422,212      $ 604      $ 526,253        12,827,300      $ (595,728   $ (12,077   $ 331,319     $ 250,371  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Twenty-Six
Weeks Ended August 4, 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
     —          —          —          —          —         —         74,799       74,799  
Unrealized foreign currency translation loss
     —          —          —          —          —         (57     —         (57
Unrealized loss
on
derivatives, net of tax
     —          —          —          —          —         (5,907     —         (5,907
Share-based compensation
     —          —          3,732        —          —         —         —         3,732  
Issuance of common stock
     159,649        1        612        —          —         —         —         613  
Repurchase of common stock
     —          —             4,702,900        (200,733     —         —         (200,733
Dividends declared ($0.30 per share)
     —          —          —          —          —         —         (10,837     (10,837
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance August 4, 2019
     43,337,125      $ 433      $ 335,599        10,358,291      $ (497,862   $ (6,647   $ 417,779     $ 249,302  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
 
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DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
    
Twenty-Six Weeks

Ended
   
Twenty-Six Weeks

Ended
 
  
August 2, 2020
   
August 4, 2019
 
Cash flows from operating activities:
    
Net income (loss)
   $ (102,146   $ 74,799  
Adjustments to reconcile net income to net cash provided by operating activities:
    
Depreciation and amortization expense
     70,512       63,886  
Non-cash
interest expense
     2,201       —    
Impairment of long-lived assets
     13,727       —    
Deferred taxes
     (31,609     4,659  
Loss on disposal of fixed assets
     417       826  
Share-based compensation
     2,345       3,732  
Other, net
     173       376  
Changes in assets and liabilities:
    
Inventories
     3,288       (94
Prepaid expenses
     2,089       (4,811
Income tax receivable
     (21,474     311  
Other current assets
     2,311       (444
Other assets and deferred charges
     107       (1,163
Accounts payable
     6,646       (428
Accrued liabilities
     37,522       22,057  
Income taxes payable
     (2,430     (7,362
Other liabilities
     2,817       346  
  
 
 
   
 
 
 
Net cash provided by
(us
e
d in
)
operating activities
     (13,504     156,690  
  
 
 
   
 
 
 
Cash flows from investing activities:
    
Capital expenditures
     (63,486     (117,875
Proceeds from sales of property and equipment
     152       375  
  
 
 
   
 
 
 
Net cash used in investing activities
     (63,334     (117,500
  
 
 
   
 
 
 
Cash flows from financing activities:
    
Proceeds from debt
     138,000       233,000  
Payments of debt
     (38,500     (59,500
Net proceeds from the issuance of common stock
     182,207       —    
Proceeds from the exercise of stock options
     359       613  
Repurchase of common stock under share repurchase program
     —         (200,147
Dividends paid
     (4,891     (10,837
Repurchases of common stock to satisfy employee withholding tax obligations
     (687     (586
  
 
 
   
 
 
 
Net cash provided by (used in) financing activities
     276,488       (37,457
  
 
 
   
 
 
 
Increase in cash and cash equivalents
     199,650       1,733  
Beginning cash and cash equivalents
     24,655       21,585  
  
 
 
   
 
 
 
Ending cash and cash equivalents
   $ 224,305     $ 23,318  
  
 
 
   
 
 
 
Supplemental disclosures of cash flow information:
    
Decrease in fixed asset accounts payable
   $ (12,466   $ (6,101
Cash paid for income taxes, net
   $ 752     $ 22,850  
Cash paid for interest, net
   $ 11,295     $ 8,050  
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 August 2, 2020, we owned and operated 137 stores located in 39 states, Puerto Rico and one Canadian province.
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
 
c
losed
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. During our first quarter, one store
re-opened
to the public with limited food and beverage offerings and two additional stores offered
off-premise
dining options. During our second quarter, we have progressively
re-opened
limited operations in an additional
83
stores in
27
 
states, Puerto Rico and Canada. Subsequent to the end of our second quarter, we
re-opened
one store and opened a new store located in Manchester, New Hampshire. As of September 4, 2020, 52 stores are closed due to jurisdictional restrictions. 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 steps to reduce operating costs and to conserve cash. The Company initially furloughed nearly all its workforce, except a small team of essential personnel and temporarily reduced pay and benefits for the remaining employees for a twelve-week period. 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. During our first and second quarter, the Company obtained additional liquidity through the sale of common stock, which resulted in net proceeds of $182,207.
Additionally, the Company initiated ongoing discussions with landlords and other vendors to negotiate relief from cash payments under existing lease and trade payable obligations. As of August 2, 2020, a total of 92 rent relief agreements related to our operating locations and corporate headquarters were executed, which generally provide for full deferral for three months beginning April 2020, with partial deferral continuing for periods of up to six months, at approximately 50% of those locations. We have also been successful in negotiating extended and reduced payment terms with several vendors.
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
 
9

Table of Contents
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.
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
twenty-six
weeks ended August 2, 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 August 2, 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
(used in)
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. 
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.
 
During the first quarter
of
 
fiscal
2020, each store’s past and present operating performance was reviewed in combination with projected future results primarily through projected undiscounted cash flows that included management’s current expectation of future financial impacts from
COVID-19.
If the store’s assets
were
 
not
determined to be
 
recoverable
through comparison of the asset’s carrying value to its undiscounted cash flows, the Company compared the carrying amount of each store’s assets to its fair value as estimated by management to calculate the impairment amount The fair value of the store’s assets is generally determined using a discounted cash flow projection model, which is based on Level Three inputs. Store asset impairment charges represent the excess of the carrying amount over the estimated fair value of the store asset.
 
The Company recorded an impairment charge for its long-lived assets, including ROU assets, of $6,746 during the
first qu
ar
ter of fis
c
al
 
2020, primarily driven by the expected impact of the
COVID-19
pandemic on future cash flows of specific stores.
 
During the second quarter of fiscal 2020, the Company did not identify additional triggering events which would require a change in management’s estimate regarding the recoverability of store asset values, and
no
 
a
dditional
impairment related to our operating stores was recognized
.
The Company has determined no events and circumstances existed during the
twenty-six
week
s
ended August 2, 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.
Additionally, the Company
is c
ontinu
ing
 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 and
twenty-six
weeks ended August 2, 2020, we recorded an impairment loss and related contract termination costs of $2,178 and $6,981
related to these projects, which is included in “Other store operating expenses” in the Consolidated Statements of Comprehensive Income (Loss).
 
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Table of Contents
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.
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
loss
of $
17,609
as of the de-
d
e
si
gnation
date
into “Interest expense, net” using a straight-line approach over the remaining life of the originally designated hedging relationship.
The
amount of
pre-tax
losses in accumulated other comprehensive loss that was reclassified into interest expense subsequent to the
de-designation
date was $
1,887
and $
2,201
 for the thirt
een and twenty
-six weeks ended August 2, 2020
, respectively, 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 and
twenty-six
weeks ended August 2, 2020, a loss of $
976
and $
1,796
was recognized,
respectively,
which
are
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 Sheet Location
    
August 2, 2020
    
February 2, 2020
 
Interest rate swaps
     Accrued liabilities      $ (8,215    $ (3,518
Interest rate swaps
     Other liabilities        (8,724      (6,967
     
 
 
    
 
 
 
Total derivatives (1)
      $ (16,939    $ (10,485
     
 
 
    
 
 
 
 
(1)
 
The balance at August 2, 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
    
Twenty-six
Weeks Ended
 
  
August 2, 2020
    
August 4, 2019
    
August 2, 2020
    
August 4, 2019
 
Amount of loss recorded in accumulated other comprehensive income
   $ —          4,668      $ 7,602        8,140  
Amount of loss reclassified into income (1)
   $ (1,887      (27    $ (2,680      (12
Income tax expense (benefit) in accumulated other comprehensive income
   $ 515        (1,268    $ (1,345      (2,221
 
(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 and twenty-six weeks ended August 2, 2020, we recognized revenue of approximately $
2,500 and $
12,100
, respectively, related to the amount in deferred amusement revenue as of the end of fiscal 2019.
 
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Table of Contents
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 and
twenty-six
weeks ended August 2, 2020, we recognized revenue of approximately $
140
and $1,440, respectively, related to the amount in deferred gift card revenue as of the end of fiscal 2019, of which approximately $
40
and $210 was breakage revenue.
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
twenty-six
week
s
ended August 2, 2020, the Company indefinitely suspended all share repurchase activity. As of August 2, 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
twenty-six
weeks ended August 2, 2020 and August 4, 2019, we withheld 43,788 and 11,336 shares of common stock to satisfy $687 and $586 of employees’ tax obligations, respectively. The share activity in the
twenty-six
weeks ended August 2, 2020 includes the settlements of $2,351 cash obligations through the issuance of 150,455 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. 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, and on May 18, 2020, the underwriter exercised its over-allotment option for an additional 1,014,871 shares at $10.44 per share, resulting in additional proceeds of $110,600 prior to deducting offering costs.
On June 23, 2020, shareholders approved a proposal to amend our 2014 Omnibus Incentive Plan (“Plan”) to increase the number of shares available for awards under the Plan by 3,000,000 shares.
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.
 
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Table of Contents
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.
Note 2: Accrued Liabilities
Accrued liabilities consist of the following as of the end of each period: 
 
    
August 2, 2020
    
February 2, 2020
 
Deferred amusement revenue
   $ 78,159      $ 75,113  
Current portion of operating lease liabilities, net (1)
     52,636        45,611  
Rent payable (note 4)
     31,589        —    
Variable rent liabilities (note 4)
 
 
9,037
 
  
 
1,331
 
Deferred gift card revenue
     10,832        11,253  
Property taxes
     9,936        7,226  
Compensation and benefits
     8,664        23,421  
Current portion of derivatives
     8,215        3,518  
Current portion of long-term insurance
     6,200        6,500  
Utilities
     4,219        4,442  
Customer deposits
     1,840        4,324  
Inventory liabilities
     1,737        2,179  
Sales and use taxes
     973        4,000  
Dividend payable
     —          4,891  
Other
     14,614        13,643  
  
 
 
    
 
 
 
Total accrued liabilities
   $ 238,651      $ 207,452  
  
 
 
    
 
 
 
 
(1)
The balance of leasehold incentive receivables of $2,231 and $6,339 at August 2, 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:
 
    
August 2, 2020
    
February 2, 2020
 
Credit facility
term
   $ 258,750      $ 266,250  
Credit facility
revolver
     489,000        382,000  
  
 
 
    
 
 
 
Total debt outstanding
     747,750        648,250  
Current installments
term
     (15,000      (15,000
Debt issuance costs
term
     (1,104      (561
  
 
 
    
 
 
 
Long-term debt, net
   $ 731,646      $ 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 August 2, 2020, we had letters of credit outstanding of $9,686 and an unused commitment balance of $1,314 under of revolving credit facility.
 
 
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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.
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, and the termination of additional borrowings under our revolving credit facility during the suspension period. The interest rate increased to LIBOR plus 2.00% with a LIBOR floor of 1.00%. For the
twenty-six
weeks ended August 2, 2020,
 
and August 4, 2019, the Company’s weighted average interest rate on outstanding borrowings was 3.98% and 4.11%, 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 table sets forth our recorded interest expense, net for the periods indicated:
 
    
Thirteen Weeks Ended
    
Twenty-six Weeks Ended
 
  
August 2, 2020
    
August 4, 2019
    
August 2, 2020
    
August 4, 2019
 
Interest expense on credit facilities
   $ 5,865        4,708      $ 11,163        8,903  
Interest associated with swap agreements
 
 
1,887
 
  
 
27
 
  
 
2,680
 
  
 
12
 
Amortization of issuance cost
     411        198        654        396  
Interest income
               (25      (22      (51
Capitalized interest
               (303      (197      (599
  
 
 
    
 
 
    
 
 
    
 
 
 
Total interest expense, net
   $ 8,163      $ 4,605      $ 14,278      $ 8,661  
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:
 
    
Thirteen Weeks Ended
    
Twenty-six
Weeks Ended
 
  
August 2, 2020
    
August 4, 2019
    
August 2, 2020
    
August 4, 2019
 
Operating lease cost
   $
33,321
       30,448      $
66,884
       60,240  
Variable lease cost
  
5,688
     6,713     
13,054
     14,643  
Short-term lease cost
  
140
     116     
227
     217  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $
39,149
     $ 37,277      $
80,165
     $ 75,100  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
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During the
twenty-six
weeks ended August 2, 2020, the Company entered into 92 rent relief agreements with our respective landlords on operating locations and our corporate headquarters. Under these agreements, certain rent payments will be abated, deferred or modified without penalty for various periods, generally providing for full deferral for three months beginning April 2020, with partial deferrals continuing for periods of up to six months at approximately 50% of those locations. 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
twenty-six
weeks ended August 2, 2020, 84 of our 92 rent relief agreements qualified for this accounting election, and the remaining eight agreements were treated as lease modifications, primarily due to a significant extension of the lease term. Further, as a result of the
COVID-19
pandemic and its impact on our financial condition, the Company has chosen not to pay the majority of its remaining facility operating lease obligations as they become due for properties without rent relief agreements as of the end of the second quarter. As of August 2, 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.
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 a portion of the California Cases, the Company has estimated and accrued for the most likely amount of loss. 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 160,967 and 97,502 in the thirteen and
twenty-six
weeks ended August 4, 2019.
 
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The following table sets forth the computation of EPS, basic and diluted for the periods indicated:
 
    
Thirteen Weeks
    
Thirteen Weeks
 
    
Ended
    
Ended
 
    
August 2, 2020
    
August 4, 2019
 
Numerator:
     
Net income (loss)
   $ (58,602    $ 32,356  
Denominator:
     
Weighted average number of common shares
 
outstanding (basic)
     47,111,763        35,407,965  
Weighted average dilutive impact of equity-based
 
awards (1)
     —          607,745  
Weighted average number of common and common
 
equivalent shares outstanding (diluted)
     47,111,763        36,015,710  
Net income (loss) per share:
     
Basic
   $ (1.24    $ 0.91  
Diluted
   $ (1.24    $ 0.90  
 
    
Twenty-Six Weeks

Ended
August 2, 2020
    
Twenty-Six Weeks

Ended
August 4, 2019
 
Numerator:
     
Net income (loss)
   $ (102,146    $ 74,799  
Denominator:
     
Weighted average number of common shares outstanding (basic)
     39,470,874        36,117,815  
Weighted average dilutive impact of equity-based awards (1)
     —          685,186  
Weighted average number of common and common equivalent shares
outstanding (diluted)
     39,470,874        36,803,001  
Net income (loss) per share:
     
Basic
   $ (2.59    $ 2.07  
Diluted
   $ (2.59    $ 2.03  
 
(1)
Due to the net loss for the thirteen and
twenty-six
weeks ended August 2, 2020, zero incremental shares are included because the effect would be anti-dilutive.
Note 7: Share-Based Compensation
Compensation expense related to stock options, time-based and performance-based RSU’s is included in general and administrative expenses and is as follows:
 
    
Thirteen Weeks Ended
    
Twenty-six
Weeks Ended
 
  
August 2, 2020
    
August 4, 2019
    
August 2, 2020
    
August 4, 2019
 
Stock options
   $ 290        804      $ 830        1,563  
RSU’s
     2,444        1,103        1,515        2,169  
  
 
 
    
 
 
    
 
 
    
 
 
 
Share-based compensation expense
   $ 2,734      $ 1,907      $ 2,345      $ 3,732  
  
 
 
    
 
 
    
 
 
    
 
 
 
Transactions related to stock option awards during the
twenty-six
weeks ended August 
2
,
2020
were as follows:
 
    
2014 Stock Incentive Plan
    
2010 Stock Incentive Plan
 
    
Number
    
Wtd. Avg.
    
Number
    
Wtd. Avg.
 
  
of Options
    
Exercise Price
    
of Options
    
Exercise Price
 
Outstanding at February 2, 2020
     1,323,495      $ 36.97        266,900      $ 6.72  
Granted
     —          —          —          —    
Exercised
     —          —          (79,142 )      4.54  
Forfeited
     (82,741 )      38.60        —          —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Outstanding at August 2, 2020
     1,240,754      $ 36.86        187,758      $ 7.64  
  
 
 
    
 
 
    
 
 
    
 
 
 
Exercisable at August 2, 2020
     1,037,513      $ 34.49        187,758      $ 7.64  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
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Table of Contents
The total intrinsic value of options exercised during the
twenty-six
weeks ended August 
2
,
2020
was $
792
. The unrecognized expense related to our stock option plan totaled approximately $
1,157
as of August 
2
,
2020
and will be expensed over a weighted average period of
1.5
years.
Transactions related to time-based and performance-based RSU’s during the
twenty-six
weeks ended August 
2
,
2020
, were as follows:
 
           
Wtd. Avg.
 
 
 
  
Shares
    
Fair Value
 
Outstanding at February 2, 2020
     216,815      $ 51.58  
Granted
     1,061,926        12.74  
Change in performance units
     4,352        59.67  
Vested
     (62,411      53.81  
Forfeited
     (48,409      28.14  
  
 
 
    
 
 
 
Outstanding at August 2, 2020
     1,172,273      $ 17.27  
  
 
 
    
 
 
 
Fair value of our time-based and performance-based RSU’s 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 $12,658 as of August 2, 2020 and will be expensed over a weighted average period of 2.3 years.
During the
twenty-six
weeks ended August 2, 2020 and August 4, 2019, excess tax expense (benefit) of $477 and ($884), respectively, were recognized as an 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.
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 August 2, 2020, we have elected to defer employer-paid portion of social security taxes of $1,448, 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
twenty-six
weeks ended August 2, 2020. The effective tax rate for the
twenty-six
weeks ended August 2, 2020, was a benefit of 34.9%, compared to an effective tax rate of 21.5% for the
twenty-six
weeks ended August 4, 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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Table of Contents
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, 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 of our 137 operating stores were temporarily closed. During our first quarter, one store
re-opened
to the public with limited food and beverage offerings and two additional stores offered
off-premise
dining options. During our second quarter, we have progressively
re-opened
limited operations in an additional 83 stores in 27 states, Puerto Rico and Canada. Additionally, eight stores were
re-opened
during the second quarter and subsequently closed prior to August 2, 2020, due to changes in jurisdictional operating limits. Our scaled-down operating model includes a limited
15-item
menu, reduced dining capacity and games in our midway for social distancing, reduced operating hours and reduced staffing levels designed to be responsive to restrictions imposed by various jurisdictions related to
COVID-19
re-openings.
Subsequent to the end of our second quarter, we
re-opened
one store and opened a new store located in Manchester, New Hampshire. As of September 4, 2020, 52 stores are closed due to jurisdictional restrictions.
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 and
twenty-six
weeks ended August 2, 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 to enhance financial flexibility:
 
   
reduced expenses broadly, including by furloughing all of our hourly store team members and approximately 94% of store management personnel, on or about March 19, 2020, while enacting
12-week
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, enacted
12-week
salary reductions ranging from 10% to 50%, and suspended all cash board fees through the remainder of fiscal 2020;
 
   
canceled or delayed all
non-essential
planned capital spending for the remainder of fiscal 2020;
 
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halted or delayed planned store openings after our one store opening in Chattanooga, TN, on March 16, 2020, including delayed construction through the second quarter of fiscal 2020;
 
   
stopped work on future planned sites and commenced negotiations to terminate related contracts, as applicable;
 
   
suspended our share repurchase program and declaration of dividends;
 
   
drew down substantially all the remaining credit available under our $500,000 revolving credit facility;
 
   
sold shares of our common stock, which generated gross proceeds of approximately $185,600; and
 
   
negotiated with our landlords, vendors, and other business partners to temporarily reduce our lease and contract payments and obtain other concessions. As of August 2, 2020, a total of 92 rent relief agreements related to our operating locations and corporate headquarters were executed, which generally provide for full deferral for three months beginning April 2020, with partial deferral continuing for periods of up to six months, at approximately 50% of those locations.
The
re-opening
process has been a gradual one with the safety of our employees and guests as our top priority. All of our
re-opened
stores are operating with streamlined menus, reduced games, new seating and game configurations, reduced operating hours, and reduced staff levels. 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. On an ongoing basis, we will also continue to pursue long-term operating efficiencies and fixed cost restructuring opportunities.
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 several key performance measures to manage our business and evaluate financial and operating performance. These measures include: