SEC Filing | Dave & Buster's, Inc.

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10-Q

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

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM

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.

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.	Financial Statements		3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		31

Item 4.	Controls and Procedures		31

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		32

Item 1A.	Risk Factors		32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32

Item 6.	Exhibits		33

	Signatures		34

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.

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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.

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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.

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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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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

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

stores in

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%

the outstanding letters of credit under the revolving credit facility. Additionally, the full amount due under the interest rate swap

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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

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

ter of fis

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

dditional

impairment related to our operating stores was recognized

The Company has determined no events and circumstances existed during the

twenty-six

week

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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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

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-

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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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 $

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

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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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

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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The total intrinsic value of options exercised during the

twenty-six

weeks ended August

2020

was $

792

. The unrecognized expense related to our stock option plan totaled approximately $

1,157

as of August

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

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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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