Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No
þ
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No
þ
Indicate by check mark 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 þ No
¨
Indicate by check mark whether the registrant has submitted
electronically every interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files)
Yes þ No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No
þ
As of March 26, 2019 (the last business day of our most recently
completed second fiscal quarter), the aggregate market value of the 12,522,778 shares of common stock held by non-affiliates of
the registrant was $23,787,726.
As of December 16, 2019, the registrant had 12,620,138 shares
of common stock outstanding.
Certain information required by Part III
of this Annual Report on Form 10-K is incorporated by reference herein from the registrant’s definitive proxy statement
relating to our 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after
the end of the registrant's fiscal year ended September 24, 2019.
PART I
Our Company
Good Times Restaurants Inc., a Nevada corporation
formed on October 6, 1996, operates and franchises Bad Daddy’s Burger Bar restaurants (“BDBB” or “Bad Daddy’s”)
and Good Times Burgers & Frozen Custard (“GTBFC” or “Good Times”) restaurants. Bad Daddy’s and
Good Times are two distinctly different, yet complementary, restaurant concepts. Each is positioned as a high-quality brand within
its respective segment of the industry. Bad Daddy’s is positioned at the upper end of the full-service casual theme restaurant
segment and Good Times is positioned at the upper end of the quick-service restaurant segment.
Through our subsidiaries, as of December
16, 2019, we own, operate, franchise, or license a total of thirty-nine Bad Daddy’s restaurants in seven states. We own and
operate twelve Bad Daddy’s restaurants in Colorado, one Bad Daddy’s restaurant in Oklahoma, fifteen Bad Daddy’s
restaurants in North Carolina, and ten Bad Daddy’s restaurants in three other states within the Southeast region of the US.
Of these restaurants, four restaurants are operated through joint-venture arrangements where we are the operating partner and own
between 23% and 75% interest in the joint-venture entities. We license the Bad Daddy’s brand for the Bad Daddy’s restaurant
located in the Charlotte Douglas International Airport which is owned and operated by a third-party licensee. One additional Bad
Daddy’s restaurant in Greenville, S.C. is operated by a third-party franchisee.
We currently own and operate or franchise
thirty-four total Good Times restaurants. Of these restaurants, thirty-two are in Colorado. Two of the restaurants are in Wyoming
and are “dual brand” concept restaurants operated by a franchisee of both Good Times and Taco John’s.
The terms “we,” “us,”
“our,” the “Company,” “Good Times” and similar terms refer to Good Times Restaurants Inc.,
a Nevada corporation, and its wholly-owned consolidated subsidiaries, including Bad Daddy’s Franchise Development, LLC; Bad
Daddy’s International, LLC; Good Times Drive-Thru Inc. (“Drive Thru”); and BD of Colorado, LLC. Unless otherwise
indicated or the context otherwise requires, financial and operating data in this 10-K report reflect the consolidated business
and operations of Good Times Restaurants Inc. and its subsidiaries.
Fiscal 2019 Financial & Brand Highlights
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·
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Our net revenues for fiscal 2019 increased
by $11,187,000 (11.2%) to $110,758,000 from $99,571,000 in fiscal year 2018, primarily due to four new Bad Daddy’s locations
opened during the fiscal year ended September 24, 2019 (“fiscal 2019”) and a full year of operations for units opened
during the fiscal year ended September 25, 2018 (“fiscal 2018”).
|
|
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·
|
The Bad Daddy’s brand had a 0.2%
decrease in same store sales for fiscal 2019.
|
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|
·
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We opened four Bad Daddy’s restaurants
in fiscal 2019. We opened two Bad Daddy’s in the first quarter of fiscal 2020 and are assessing our development plans for
the balance of fiscal 2020.
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·
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We purchased all of the equity interest
in three of the North Carolina Bad Daddy’s joint-venture entities that then became wholly-owned subsidiaries of BDI.
|
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·
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The Good Times brand had a 0.4% decrease
in same store sales for fiscal 2019.
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|
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·
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One franchisee-owned Good Times restaurant
closed during fiscal 2019.
|
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·
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We ended fiscal 2019 with $2.7 million
in cash and a $12.9 million balance in notes payable.
|
Recent Developments
We previously entered into a credit agreement
with Cadence Bank to provide the necessary capital to fund future Bad Daddy’s and Good Times locations as well as fund the
continued remodel of existing Good Times locations and recurring capital expenditures. In October 2018, this agreement was amended
to increase the borrowing capacity of the revolving line of credit to a total of $17,000,000. In February 2019, we entered into
an amendment to the senior debt revolving line of credit to provide Consent for BDI to purchase all of the non-controlling equity
interest of three joint-venture Bad Daddy’s entities in the Raleigh market. In December 2019, we entered into an amendment
to the senior debt revolving line of credit in connection with the separation of the Company’s former CEO, to amend the definition
of “Consolidated EBITDA” for the purposes of financial covenants, to require certain installment payments, and to permit
the company to make certain “Restricted Payments” (as defined in the Cadence Credit Facility).
Concepts
Bad Daddy’s Burger Bar
Bad Daddy’s Burger Bar operates in
the casual dining segment of the restaurant industry. Bad Daddy’s currently operates all of its company-owned restaurants
under a table service / full-bar service model.
There are three primary elements of the
concept that we try and differentiate for our guests:
|
|
1.
|
Artfully Crafted Food. The menu consists of chef-inspired burgers, salads, sandwiches, and appetizers
made with high-quality ingredients with flavor profiles, portion sizes, and presentations that are premium to the casual dining
segment of the industry. Many sauces and dressings are made in house and we offer our guests an assortment of non-beef alternatives,
including buffalo, tuna, turkey and chicken. We offer our guests and unparalleled ability to customize their burgers and salads,
including Create Your Own Burgers and Salads, restricted only by the ingredients available in the kitchen.
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|
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2.
|
A “Bad Ass Bar.” The food menu is complemented by a full bar that focuses on local
and craft beers and unique, handcrafted cocktails. Two specialties are our Bad Daddy’s Amber Ale, available only at Bad Daddy’s,
and our Bad Ass Margarita. System-wide, total alcoholic beverages account for approximately 15% of sales in our Bad Daddy’s
restaurants. Our customers typically do not consider us a sports bar, but instead we focus on making our bar a place where both
newcomers and regular guests can comfortably relax and enjoy a beverage at happy hour, with their meal, or at any other time of
day.
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3.
|
Radical Hospitality. The restaurants have a high-energy yet family friendly environment with iconic
pop culture design elements and a personal, ultra-friendly and informal service platform with a legacy of southern hospitality.
Bad Daddy’s menu, service and environment are designed around a slightly irreverent brand personality, including menu items
such as our Bad Ass Burger made with deep fried bacon, and iconic Farrah Fawcett and Paul Newman Cool Hand Luke posters
in the men’s and women’s restrooms. We have developed our own playlist of classic rock and modern rock music that adds
to the high energy atmosphere.
|
This brand positioning results in transactions
that generate an average per person check of approximately $17. The lunch daypart (open until 2pm) represents approximately 35%
and the happy hour and dinner dayparts (2pm until close) represent approximately 65% of restaurant sales, withrestaurantsopening
daily at 11 am and closing generally between 10 pm and 11 pm, with some restaurants open slightly later on weekends, depending
on the surrounding trade area.
A typical Bad Daddy’s restaurant
is approximately 3,500-4,000 square feet with an enclosed patio, smaller than most other casual dining restaurants. Based on average
annual restaurant sales of approximately $2.6 million, Bad Daddy’s restaurants generate average sales per square foot of
approximately $700, which we believe is a key metric indicating the strength and expansion potential of the concept. While sharing
common design elements, each restaurant has unique features intended to create the impression that each Bad Daddy’s is local
to its trade area and serves as a further point of differentiation from the larger casual dining chains. We believe Bad Daddy’s’
innovative menu and personalized service combined with a unique, fun restaurant design enhance our customers’ experience
and differentiate Bad Daddy’s from its competitors.
Good Times Burgers & Frozen Custard
Good Times is an upscale, quick-service
restaurant concept offering fresh, 100% all-natural, hand-crafted products. We operate 26 Good Times restaurants, and franchise
an additional eight, located primarily in the Denver market and along the front range of Colorado. We believe Good Times was the
first quick-service chain in our region, and one of the first in the country to offer a menu of fresh all-natural Angus beef and
all-natural chicken from animals that are humanely raised and vegetarian fed without the use of added hormones, steroids, or antibiotics.
We compete primarily on the quality of
our products and we believe that our menu items are consistent with the quality found at fast casual restaurants, with quick-service
restaurant speed. Our brand positioning is based on “Taking a Better Food Stand” supported by the marketing headline
“Happiness Made to Order” with three primary brand pillars of Innovation, Quality, and Connectedness. Within
Innovation, we strive to create products and flavor profiles available only at Good Times and that challenge traditional
quick-service restaurant norms. We communicate Quality throughout our menu, from our made-to-order items to our fresh, all-natural,
handcrafted attributes. We strive for Connectedness with our customers based on strong emotional ties to our brand through
social media and radio advertising, appealing to an outdoor and active lifestyle, promoting high quality ingredients, by building
an irreverent yet approachable brand personality and through community support and involvement.
Our average per person check is approximately
$9.50, which we believe is lower than the average check at fast casual hamburger concepts such as Habit Burger, Five Guys, and
Smashburger, but higher than the typical quick-service restaurant average check. We do not offer a low-priced value menu like most
national and multi-regional quick-service chains, choosing to define our value proposition based on a range of price choices within
each of our menu categories and the quality of our food.
Good Times is primarily a drive-through
concept, as all our restaurants have at least one drive-through lane. Many of our restaurants have no indoor seating and consist
of one or two drive-through lanes and outdoor patio seating. Speed of service in this segment is critical for success and we average
less than three-minute transaction times, as measured from the time the customer places their order until they leave the drive-through
lane. Even in our restaurants that feature dine-in seating, a majority of our sales are conducted through the drive-thru lane.
The success of our strategy is evident
in our long-term same-store sales growth (sales growth over the prior year period at restaurants open more than 18 months, also
referred to as comparable sales). Fiscal 2019’s minimal same store sales decline of (0.4%) followed comparable sales growth
of 4.2% in fiscal 2018, 2.1% in fiscal 2017, 0.3% in fiscal 2016, 0.9% in 2015 and 14.6% growth in 2014.
Our Business Strengths
Our Brands Are Complementary.
While operating in different segments of
the restaurant industry, our two brands share the following qualities:
Each is positioned at the upper end of
its respective segment with the value proposition primarily driven by quality and uniqueness. Bad Daddy’s Burger Bar is an
early entrant in the “small box” better burger casual dining segment. The menu contains chef-driven items with many
made from scratch in our kitchens. Bad Daddy’s resonates with consumers by consistently executing high-quality menu items
with unique flavor profiles that are delivered in a personalized, high-energy environment with a slightly irreverent brand personality.
We believe Good Times is the only quick-service
chain in our region with an all-natural platform. We do not offer a dollar menu that many national chains do, choosing to compete
on a market position emphasizing quality and uniqueness with a variety of price points across the menu and serving made-to-order
products with quick-service restaurant speed of service.
Our Brands Have a Common Culture
and Operating Philosophy.
While each of our brands is led by separate
operating teams, each shares a commitment to four elements of success:
|
|
·
|
Values. Each brand focuses on developing
behaviors and expectations around our core values of Integrity, Respect, Continuous Improvement, and Fun.
|
|
|
·
|
People. Each brand seeks to hire
high quality people throughout and provide them with comprehensive training programs designed to ensure that they deliver consistently
superior products and service. Each has an incentive program at the restaurant level based on balanced metrics that drive customer
service, personnel development, and financial performance.
|
|
|
·
|
Distinctive quality. Each brand
strives to offer unique, high quality menu items with distinctive taste profiles made with fresh, high quality ingredients.
|
|
|
·
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Excellent systems. Each brand takes
a “best practices” approach, cross-pollinating the best ideas that are applicable to either brand. We seek to provide
the best operating systems and processes to ease the administrative burden of management, enabling them to focus on leading their
team members and operating their restaurants. Our philosophy is that systems and processes drive financial success and leadership
serves as an example and motivating force to our crew members who interact with our guests, driving sales and customer loyalty.
|
Our Brands Share a Similar Customer
Demographic.
Due to the common strategic focus on a
quality positioning, both Good Times and Bad Daddy’s appeal to a slightly higher income, more upscale consumer demographic
profile. However, there is little, if any, overlap between the brands in how consumers use them. Good Times is convenience-driven
and operates in the quick-service restaurant segment with a $9.50 per person average check deriving the majority of its sales from
the drive-through occasion, while Bad Daddy’s provides a more destination-oriented, full-service dining occasion with an
average per person check of approximately $17.
Our Brands Have Growth Potential.
We believe both of our brands are well
positioned to take advantage of consumers’ growing demand for restaurants with fresh, high-quality, all-natural products
that offer fully customizable menu choices. Consumers want to know where their food comes from, want to be able to customize menu
items to fit their individual preference and dining occasions, and place a higher value on perceived healthiness and on brands
they can trust to execute on those attributes. We believe Good Times and Bad Daddy’s are both well positioned to capitalize
on those macro-trends.
Both of our brands currently operate with
relatively small market penetration and overall development footprints, providing significant expansion potential. As we further
develop our markets, we expect to realize efficiencies in supervision and development and training of our employees, as well as
economies of scale in our supply chain cost structure. It is our goal to grow relatively contiguously from our existing operating
bases in order to maximize brand awareness and operating and distribution efficiencies.
Good Times and Bad Daddy’s operate
with a common point-of-purchase system and we have implemented a common back office system for both brands. We are also continuing
to invest in sophisticated digital training tools, making each brand’s restaurant level processes, systems, recipes and management
tools available in one commonly accessible database.
We Have Assembled a Dedicated Management
Team with Significant Experience.
Each of the members of our senior management
team have more than fifteen years of industry experience, with many members having worked together for more than 20 years developing
the Good Times concept. Upon adding the Bad Daddy’s concept to the business, we made strategic hires to complement our management
team with individuals with depth of experience in operating and growing full-service concepts.
Each of our brands are operated under separately
dedicated management teams utilizing shared support services in administration, finance, accounting, human resources, development,
marketing and information technology. We believe we have the processes and systems in place to support both concepts and targeted
future growth of the Bad Daddy’s concept.
We Have Significant Operating Momentum.
Same-store sales at Good Times have increased
eight of the past nine years. Although same-store sales declined for fiscal 2019, this was primarily due to the rollover of an
unseasonably warm and dry winter during Fiscal 2018, and same-store sales increased in both of the final two quarters of fiscal
2019. Our compound same-store sales growth rate was approximately 45% from fiscal 2013 to fiscal 2019. We believe this performance
is largely the result of the evolution in our brand positioning, the re-imaging of several of our older restaurants, effective
management of media mix, and consistent execution of the customer experience. We plan to continue to periodically re-image and
remodel our restaurants, maintain a relevant menu in keeping with our brand strategy, and communicate our brand story to maintain
our same-store sales growth.
The Bad Daddy’s concept was started
in 2007 in Charlotte, North Carolina. Sales of the Bad Daddy’s restaurants which were open for at least 18 months averaged
$2.6 million for the fifty-two weeks ended September 24, 2019. We opened four restaurants during fiscal 2019 in addition to the
nine opened during fiscal 2018.
We believe that the strength of the Bad
Daddy’s unit economic model provides us with significant expansion potential, both in our existing markets of the Southeastern
U.S., and in new markets.
Business Strategies
We are focused on continuing to grow same
store sales and improve the profitability of Drive Thru while continuing targeted unit growth the Bad Daddy’s Burger Bar
concept in U.S. markets. We believe that there are significant opportunities to develop new units, grow customer traffic and increase
awareness of our brands. The following sets forth the key elements of our growth strategy:
|
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1.
|
Increase same-store sales in both brands. We intend to continue to focus on
increasing our same-store sales. We plan to further strengthen our fresh, handcrafted, all-natural brand position at Good
Times with menu innovation and targeted merchandising around each of our menu categories and focus around consumer price choice
instead of deep discounts. We also expect to continue various advertising programs, shifting the media mix periodically as we determine
appropriate to maximize advertising effectiveness and efficiency. We intend to increase Bad Daddy’s same store sales
through continual innovation in both ongoing menu engineering that we believe drive increased customer visits as well as the per
person average check. Bad Daddy’s advertising is targeted to individual trade areas, community involvement and in-store,
“four-wall” marketing activities that focus on optimizing the guests’ food, bar and service experience.
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|
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2.
|
Improve operational efficiencies and expense management. We continue to focus on
managing our expenses in the operation of our restaurants and in our general and administrative functions, with a particular focus
on cost of sales, labor and operating expense controls and efficiencies while not adversely impacting our overall quality and service
proposition. Macroeconomic, state legislative increases to wages and other external factors have resulted in upward trends in certain
of these operating costs. We continue to have implemented multiple programs to mitigate the impact of these external factors and
continue to explore other opportunities to improve efficiency of general and administrative costs. We expect an elevated level
of focus in managing overhead costs and gaining further efficiencies in supervision and support services costs.
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3.
|
Pursue disciplined unit growth of Company-operated Bad Daddy’s Burger Bar restaurants.
We own the Bad Daddy’s Burger Bar brand, including all associated intellectual property. We have opened two new Bad Daddy’s
restaurants subsequent to September 24, 2019 in the Charleston, SC and Columbia, SC markets. We are currently assessing our development
strategies and intend to follow a disciplined strategy of unit growth that may include both company-owned and franchisee-owned
units.
|
Expansion
strategy and site selection
Bad Daddy’s Burger Bar
Our development of the Bad Daddy’s
Burger Bar concept in company-owned restaurants has focused on urban and suburban upper income demographic areas with median household
incomes over $60,000, with a high concentration of daytime employment, upscale retail and movie theaters. We continue
to refine our site selection model with new data available upon each new unit opening.
Bad Daddy’s Burger Bar locations
are primarily end-cap locations in new and existing shopping center developments using approximately 3,500 to 4,000 square feet. While
our Good Times restaurants are free standing and require extensive site development and entitlement processes, Bad Daddy’s
Burger Bar restaurants can be developed much more quickly due to the requirement for only a building permit, signage approvals
and liquor license without the need for extensive on- and off-site development or land and zoning submittals and modifications.
We estimate that it will take approximately 115 to 135 days to develop a Bad Daddy’s Burger Bar from the time a building
permit is issued. We expect that most, if not all, of the Company’s unit growth will be through the development of additional
Bad Daddy’s Burger Bar locations.
Good Times Burgers & Frozen Custard
We do not have explicit plans to develop
additional Good Times restaurants, as we believe that our highest return on investment opportunity is through the development of
Bad Daddy’s locations. However, we expect that any opportunistic development in Good Times locations would be through a lens
of growth in Colorado and potentially surrounding states, which would preserve operating and marketing efficiencies created by
the geographic concentration of our existing base of restaurants.
Any development of new Good Times restaurants
will involve our new prototype restaurant design on sites that are on or adjacent to big box or grocery store anchored shopping
centers or in high activity and employment areas. Our site selection for new restaurants is oriented toward slightly
higher income demographic areas than many of our urban locations and most of our targeted trade areas are in relatively high growth
areas of the Denver and northern Colorado markets.
We lease all of our sites. When
we do purchase and develop a site, we intend to ultimately sell the developed site into the sale-leaseback market under a long-term
lease. Our primary site objective is to secure a suitable site, with the decision to buy or lease as a secondary objective. Our
site selection process includes evaluating several criteria, including a mix of substantial daily traffic, density of at least
30,000 people within a three-mile radius, strong daytime population and employment base, retail and entertainment traffic generators,
good visibility and easy access.
Restaurant locations
As of December 16, 2019, we operate, franchise
or license a total of thirty-nine Bad Daddy’s Burger Bar locations. The location in the Charlotte Douglas International Airport
is operated pursuant to a License Agreement.
Additionally, we operate or franchise a
total of thirty-four Good Times restaurants.
Company-Owned/Co-Developed/Joint-Venture
|
|
|
Bad Daddy’s
Burger Bar
|
|
|
Good Times Burgers
& Frozen Custard
|
|
|
Total
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Alabama
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
0
|
|
|
Colorado
|
|
|
12
|
|
|
|
12
|
|
|
|
26
|
|
|
|
26
|
|
|
|
38
|
|
|
|
38
|
|
|
Georgia
|
|
|
4
|
|
|
|
4
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4
|
|
|
|
4
|
|
|
North Carolina
|
|
|
14
|
|
|
|
13
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14
|
|
|
|
13
|
|
|
Oklahoma
|
|
|
1
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
1
|
|
|
South Carolina
|
|
|
3
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3
|
|
|
|
1
|
|
|
Tennessee
|
|
|
2
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
1
|
|
|
Total
|
|
|
37
|
|
|
|
32
|
|
|
|
26
|
|
|
|
26
|
|
|
|
63
|
|
|
|
58
|
|
Franchise/License
|
|
|
Bad Daddy’s
Burger Bar
|
|
|
Good Times Burgers
& Frozen Custard
|
|
|
Total
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Colorado
|
|
|
0
|
|
|
|
0
|
|
|
|
6
|
|
|
|
7
|
|
|
|
6
|
|
|
|
7
|
|
|
North Carolina
|
|
|
1
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
1
|
|
|
South Carolina
|
|
|
1
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
1
|
|
|
Wyoming
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
Total
|
|
|
2
|
|
|
|
2
|
|
|
|
8
|
|
|
|
9
|
|
|
|
10
|
|
|
|
11
|
|
We opened four company-owned or joint-venture
Bad Daddy’s restaurants during fiscal 2019. In fiscal 2019, one franchise Good Times restaurants in Colorado closed their
operations.
Menu
Bad Daddy’s Burger Bar
We take great pride in offering a menu
at Bad Daddy’s Burger Bar consisting of high quality, handcrafted Angus beef burgers with unique toppings such as buttermilk
country-fried bacon, house-made American cheese, scratch made pesto and our specialty Bad Daddy’s sauce. The customizable
menu options also include artisanal cheeses, tuna, turkey, buffalo and chicken sandwiches. We also offer recipe or customizable
chopped salads, a full gluten free menu and regional menu items that incorporate local flavors. We also offer appetizers, hand-cut
fries, house-made potato chips, hand-spun ice cream milk shakes and desserts. We offer a variety of craft beers from local breweries
and a full bar serving spirits, cocktails, and wine.
Signature recipes include the Bad Ass Burger,
Sam I Am Burger and Emilio’s Chicken Sandwich. Chopped Salads include the Texican Chicken Salad, and the Stella’s Greek
Salad. A unique element to Bad Daddy’s menu is the option for full customization through the Create Your Own Burger or Salad
with choices of bun, protein, vegetables and over sixty toppings. The craft beer and cocktail menus include local craft microbrews
in each market. We’ve partnered with Full Sail Brewing Company and Breckenridge Brewing for our own Bad Daddy’s Amber
Ale. We offer a cocktail menu that uses fresh-squeezed house-made sours and fresh garnishes including the Bad Ass Margarita, Bad
Betty and Daddy’s Dragonberry.
Bad Daddy’s Burger Bar strives to
provide proprietary flavors and recipes available nowhere else with fresh, handcrafted quality throughout the menu, including rotating
chef specials with flavor profiles unique to Bad Daddy’s.
Good Times Burgers & Frozen Custard
The menu of a Good Times restaurant is
limited to all natural hamburgers, cheeseburgers, chicken sandwiches, chicken tenders, french fries, onion rings, fresh lemonades,
soft drinks and frozen custard products plus a breakfast menu consisting of breakfast burritos, breakfast sandwiches, orange juice
and coffee and a kid’s meal menu consisting of hamburgers, cheeseburgers, chicken tenders, mac n’ cheese, french fries,
and apple sauce. Each menu item is made to order at the time the customer places the order and is not pre-prepared.
Our hamburger patties are made with Meyer
all-natural, all-Angus beef. Our chicken products are sourced from Springer Mountain Farms, which provides all-natural, antibiotic
free, humanely-raised chicken. All-natural Angus beef and chicken are raised without the use of any hormones, antibiotics or animal
byproducts that are normally used in the open market. We believe that all-natural beef and chicken deliver a better tasting product
and, because of the rigorous protocols and testing that are a part of the Meyer all-natural, all-Angus Beef and Springer Mountain
Farms Chicken processes, may also minimize the risk of any food-borne bacteria-related illnesses. We also believe that the use
of premium, all-natural beef and chicken products help us to differentiate our concept in a crowded quick-service segment of the
restaurant industry.
Our fresh frozen custard is a premium ice
cream with a proprietary vanilla blend that is prepared from highly specialized equipment that minimizes the amount of air that
is added to the mix and that creates smaller ice crystals than other frozen dairy desserts The resulting product is
smoother, creamier and thicker than typical soft serve or hard-packed ice cream products. We serve the frozen custard
as vanilla and a flavor of the month in cups and cones and Spoonbenders, a mix of custard and toppings.
The breakfast menu is centered around Hatch
Valley Green Chile Burritos made with our own proprietary green chile recipe using roasted green chiles sourced exclusively from
Hatch Valley, New Mexico, eggs, potatoes, and cheese offered with the choice of bacon, sausage or chorizo. We also offer a premium
coffee made by Daz Bog, a Colorado-based coffee roaster, and pure 100% orange juice.
Marketing & Advertising
Bad Daddy’s Burger Bar
Our marketing strategy for Bad Daddy’s
Burger Bar focuses on iconic, in-store merchandising materials and local store marketing to the surrounding trade area around each
restaurant, including public relations and community-based events. We generally do not focus on market-wide promotions
or advertising, but on the in-store customer experience, building word-of-mouth reputation and recommendations and local public
relations based on prior and recent awards and recognitions received by Bad Daddy’s. We utilize social media, public relations,
and trade area specific direct mail materials, particularly in support of new restaurant openings, to drive trial and initial awareness.
We have developed an expanded menu of rotating chef specials featuring unique taste profiles and local ingredients for burgers,
salads, sandwiches and appetizers, supported by trade area specific beer offerings and bar promotions.
Good Times Burgers & Frozen Custard
Our marketing strategy for Good Times focuses
on: 1) driving same store restaurant sales through attracting new customers and increasing the frequency of visits by current customers;
2) communicating specific product news and attributes to build strong points of difference from competitors; and 3) communicating
a unique, strong and consistent brand personality.
Media is an important component of building
our brand awareness and distinctiveness. We spent most of our broadcast advertising dollars on cable television during
fiscal 2018 and on radio advertising during fiscal 2019. We augment our broadcast advertising with a social media presence
that affords us a higher level of engagement with current customers and an increased level of product giveaways to support high
sales opportunity products.
Operations
We maintain separate operating teams for
each of our concepts and have extensive operating, training and quality control systems in place.
Restaurant Management
Bad Daddy’s Burger Bar was developed
as a chef-driven concept and utilizes a team of four to six managers in our operations at each restaurant. Managers are trained
in back of the house skills (prep, kitchen positions and line management), front of the house service positions (host, server and
bar) and all management functions. As a full-service concept, the experience, qualifications and compensation differ from Good
Times and we maintain a separate operating team for Bad Daddy’s Burger Bar operations, with separate recruiting and training
functions. Our managers participate in a bonus pool for each restaurant based on a combination of restaurant sales, income, and
specific financial and operational objectives.
Each Good Times restaurant employs a general
manager, two to four assistant managers, up to four hourly shift managers and approximately 10 to 20 non-management employees,
most of whom work part-time during three shifts. An eight to ten-week training program is utilized to train restaurant managers
on all phases of the operation. Ongoing training is provided as necessary. We believe that incentive compensation of our restaurant
managers is essential to the success of our business. Accordingly, in addition to a salary, managerial employees may be paid a
bonus based upon proficiency in meeting financial, customer service and quality performance objectives tied to a monthly scorecard
of measures. Most of our managers participate in a bonus plan based on their performance against their monthly financial, operating,
customer and people development scorecard metrics.
Operational and Management Systems
and Processes
We have implemented highly-effective operating
systems and processes relative to those in the industry for both of our concepts. Detailed processes have been developed
for hourly, daily, weekly and monthly responsibilities that drive consistency across our system of restaurants and performance
against our standards within different day parts. We utilize a combination of industry-leading labor programs and proprietary
algorithms to determine optimal staffing needs of each restaurant based on its actual customer flow and demand. We also
employ several additional operational tools to continuously monitor and improve speed of service, food waste, food quality, sanitation,
financial performance and employee development. The order system at each Good Times restaurant is equipped with an internal
timing device that displays and records the time each order takes to prepare and deliver.
We use several sources of customer feedback
to evaluate each restaurant’s service and quality performance, including an extensive secret shopper program, telephone surveys,
website comments and a customer feedback tool that aggregates all social media comments as well as store by store surveys each
week for each restaurant. We believe that information will assist us in evaluating opportunities for improved execution of the
customer experience.
Training
We strive to maintain quality and consistency
in each of our restaurants for both Good Times and Bad Daddy’s through the careful training and supervision of all our employees
at all levels and the establishment of, and adherence to, high standards relating to personnel performance, food and beverage preparation
and maintenance of our restaurants. Each manager must complete an eight to ten-week training program, be certified on
several core processes and is then closely supervised to show both comprehension and capability before they are allowed to manage
autonomously. All of our training and development is based upon a “train, test, certify, re-train” cycle
around standards and operating processes at all levels. We have a defined weekly and monthly goal setting process around
service, employee development, financial management and store maintenance goals for every restaurant. Additionally,
we have a library of video training tools to drive training efficiencies and consistency at both brands.
Prior to opening a new restaurant, a training
and opening team travels to the new restaurant location to prepare for an intensive training program for all team members hired
for the new restaurant opening. Part of the training team remains on-site for a period after the opening of the restaurant while
an additional team provides several weeks of support following opening.
Recruiting and Retention
We seek to hire experienced restaurant
managers and operating partners. We support employees by offering competitive wages and benefits, including a 401(k)
plan, medical insurance, and incentive plans at every level that are tied to performance against key goals and objectives. We
motivate and prepare our employees by providing them with opportunities for increased responsibilities and advancement. We
also provide various other incentives, including paid time off, car allowances, monthly performance bonuses and referral bonuses. We
have implemented an online screening and hiring tool that has proven to reduce hourly employee turnover.
Franchising
For Bad Daddy’s Burger Bar, we have
prepared form of area rights and franchise agreements, and presently have one existing franchise agreement in-force. We anticipate
that a franchisee will typically pay a royalty of 4% to 5% of net sales and will participate in an advertising fund and local advertising
by contributing up to 2% of net sales. Initial development and franchise fees are projected to be $35,000 per
restaurant. We estimate that it will cost a Bad Daddy’s Burger Bar franchisee $590,000 to $1,382,000 to open a
3,500 to 4,000 square foot restaurant in an in-line or end-cap retail center, based on our knowledge of the development costs of
the existing Bad Daddy’s Burger Bar restaurants. We are not currently actively soliciting new franchisees but are assessing
potential future growth through the development of franchised Bad Daddy’s restaurants.
For Good Times, we have previously prepared
forms of area rights and franchise agreements and advertising material to be utilized in soliciting prospective franchisees. We
have historically sought to attract franchisees that are experienced restaurant operators, are well capitalized and have demonstrated
the ability to develop one to five restaurants. We review sites selected for franchises and monitor performance of franchise
units. Currently, we are not actively soliciting new franchisees.
We currently have one Bad Daddy’s
franchise agreement for one restaurant in South Carolina and a license agreement for a Bad Daddy’s location in the Charlotte
Douglas International Airport. We currently have six Good Times franchise agreements in the greater Denver metropolitan area and
two dual-branded franchised restaurants operate in Gillette and Sheridan, Wyoming. In addition, seven joint-venture
restaurants are operating in the Denver metropolitan area media market.
We actively work with and monitor our franchisees
to ensure successful franchise operations as well as compliance with our systems and procedures. We advise the franchisee
on menu, management training and marketing. On an ongoing basis we conduct standards reviews of all franchise restaurants
in key areas including product quality, service standards, restaurant cleanliness and sanitation and food safety.
Management Information Systems
The systems in our restaurants are designed
in a manner to minimize the amount of time our managers spend on administrative tasks. We utilize up-to-date versions of a leading
point-of-sale system in each of our company-owned restaurants that captures transaction-level data required to support information
about sales, product mix, and average check. All product-level information, including pricing, is programmed into each restaurant
system by staff at our home office.
We use a cloud-based back-office solution
across both brands that collects sales, labor and cash data from the restaurant point-of-sale system in near real-time and is the
primary source of capture for inventory and supply chain management information. This back-office solution directly
interfaces with our primary financial accounting systems and provides all levels of management with relevant daily, weekly and
monthly reports across substantially all store-level income and expense categories.
Food Preparation, Quality Control
& Purchasing
We believe that we have excellent food
quality standards relative to the industry. Our systems are designed to protect our food supply throughout the preparation
process. We inspect specific qualified manufacturers and work together with those manufacturers to provide specifications
and quality controls. Our operations management teams are trained in a comprehensive safety and sanitation course provided
by the National Restaurant Association. Minimum cook temperature requirements and line checks throughout the day ensure
the safety and quality of both burgers and other items we use in our restaurants.
We currently purchase 100% of the food
and paper supplies for our Good Times restaurants and the majority of the food and paper supplies for our Colorado Bad Daddy’s
restaurants from Food Services of America (“FSA”). Outside of Colorado, our Bad Daddy’s restaurants purchase
the majority of our food and paper supplies from US Foods. In addition, we maintain multiple approved suppliers for all key components
of our menu to mitigate risk and ensure supply. Suppliers are chosen based upon their ability to provide (i) a continuous
supply of product that meets all safety and quality specifications, (ii) logistics expertise and freight management, (iii) product
innovation and differentiation, (iv) customer service, (v) transparency of business relationships and (vi) competitive pricing. Specified
products are distributed to all restaurants through FSA or US Foods under negotiated contracts directly to our restaurants two
to four times per week depending on restaurant requirements. We do not believe that the current reliance on these distributors
will have any long-term material adverse effect since we believe that there are a sufficient number of other suppliers from which
food and paper supplies could be purchased with little or no interruption in service. We do not anticipate any difficulty
in continuing to obtain an adequate quantity of food and paper supplies of acceptable quality and at acceptable prices. We monitor
the primary commodities we purchase and extend contract positions when applicable in order to minimize the impact of fluctuations
in price and availability. However, certain commodities, primarily ground beef, remain subject to market price fluctuations.
Employees
At September 24, 2019, we had approximately
2,535 employees of which 2,212 are hourly employees and 323 are salaried employees working full time. We consider our employee
relations to be good. None of our employees are covered by a collective bargaining agreement.
Competition
The restaurant industry, including both
limited service and full-service segments, is highly competitive. Bad Daddy’s Burger Bar competes with both local, regional,
and national gourmet, “better burger” concepts as well as more legacy grill and bar concepts. As such, Bad
Daddy’s competes with both full service and limited service better burger restaurants. There are other burger-centric
fast casual concepts that operate at a lower average customer check than Bad Daddy’s Burger Bar and others in both fast casual
and full-service formats that operate with a higher average customer check. We believe that we offer sufficient price choice to
be able to compete effectively in the full range of such concepts. We believe that Bad Daddy’s Burger Bar has
an advantage in the premium quality of our ingredients, unparalleled ability for guest to customize their order, distinctiveness
of its atmosphere and uniqueness of its menu offerings. Nevertheless, Bad Daddy’s Burger Bar may be at a competitive
disadvantage to other restaurant chains with greater name recognition and operating mass.
Good Times competes with many other hamburger-oriented
quick-service restaurants in the areas in which it operates. Many of these restaurants are owned and operated by regional and national
restaurant chains, many of which have greater financial resources and experience than we do. In-N-Out, a California-based, burger-focused
quick-service restaurant concept, announced its intention to begin expansion into the Colorado market, including Colorado Springs
and Denver, and has begun development of at least three restaurants in Denver and surrounding front range communities. Double drive-through
restaurant chains such as Rally’s Hamburgers and Checker’s Drive-In Restaurants, which currently operate a total of
over 850 double drive-through restaurants in various markets in the United States, are not currently operating in Colorado. We
are aware of only two significant competitors offering frozen custard as a primary menu item operating in the Denver and Colorado
Springs markets and both have a significant presence in Midwestern markets that may be targeted for expansion. Additional “fast
casual” hamburger restaurants are being developed in the Colorado market; however, these generally do not have drive-through
service and generate an average per person check that is meaningfully higher than the average check at a Good Times restaurant.
We believe that Good Times may have a competitive
advantage in terms of quality of product compared to traditional quick-service hamburger chains. Early development of
our double drive-through concept in Colorado has given us an advantage over other double drive-through chains that may seek to
expand into Colorado because of our brand awareness and present restaurant locations. Nevertheless, we may be at a competitive
disadvantage to other restaurant chains with greater name recognition and marketing capability. Furthermore, most of
our competitors in the fast-food business operate more restaurants, have been established longer, and have greater financial resources
and name recognition than we do. There is also active competition for management personnel, as well as for attractive
commercial real estate sites suitable for restaurants.
Intellectual Property
We have registered our marks “Bad
Daddy’s Burger Bar” and “Good Times” with the United States Patent and Trademark Office. We
received approval of our federal registration of “Bad Daddy’s Burger Bar” in 2011 and “Good Times”
in 2003. Additionally, we own trademarks or service marks that have been registered with the United States Patent and
Trademark Office including, but not limited to, “Bad Daddy’s Burger Bar EST. 2007”, “Big Daddy Bacon Cheeseburger,”
“Chicken Dunkers,” and “Happiness Made To Order”. The registration for our “Bad Daddy’s
Burger Bar” mark expires in 2020. The registration for our “Good Times” mark expires in 2028. We
intend to maintain our marks and renew registrations on a timely basis.
Government Regulation
Each of our restaurants is subject to the
regulations of various health, sanitation, safety and fire agencies in the jurisdiction in which the restaurant is located. Difficulties
or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new restaurant. Federal
and state environmental regulations have not had a material effect on our operations. More stringent and varied requirements of
local governmental bodies with respect to zoning, land use and environmental factors could delay or prevent development of new
restaurants in particular locations. We are subject to the Fair Labor Standards Act, which governs such matters as minimum
wages, overtime, and other working conditions. In addition, we are subject to the Americans with Disabilities Act, which
requires restaurants and other facilities open to the public to provide for access and use of facilities by the handicapped. Management
believes that we are in compliance with the Americans with Disabilities Act. Beginning in 2015, we became subject to the Affordable
Care Act which requires us to have the required health insurance benefits for eligible employees.
We are also subject to federal and state
laws regulating franchise operations, which vary from registration and disclosure requirements in the offer and sale of franchises
to the application of statutory standards regulating franchise relationships. Many state franchise laws impose restrictions on
the franchise agreements, including limitations on non-competition provisions and the termination or non-renewal of a franchise.
Some states require that franchise materials be registered before franchises can be offered or sold in that state.
In addition, each Bad Daddy’s Burger
Bar restaurant requires a liquor license and adherence to the attendant laws and requirements regulating the serving and consumption
of alcohol. Alcoholic beverage control regulations govern various aspects of these restaurants’ daily operations,
including the minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing and inventory control,
handling and storage. Typically, licenses to sell alcoholic beverages will require annual renewal and may be suspended
or revoked at any time for cause, the definition of which varies by locality.
Segment Reporting
We operate as two reportable business segments:
Good Times Burgers and Frozen Custard restaurants and Bad Daddy’s Burger Bar restaurants. Refer to Note 9, Segment Reporting,
in the notes to our consolidated financial statements for more information.
Available Information
Our Internet website address is goodtimesburgers.com.
We make available free of charge through our website’s investor relations information section our Annual Reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed with or furnished
to the Securities and Exchange Commission (“SEC”) under applicable securities laws as soon as reasonably practical
after we electronically file such material with, or furnish it to, the SEC. Our website information is not part of or incorporated
by reference into this Annual Report on Form 10-K.
Special Note About Forward-Looking Statements
This Form 10-K may include “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such statements are subject
to the safe harbors created thereby. A forward-looking statement is neither a prediction nor a guarantee of future events. We try,
whenever possible, to identify these forward-looking statements by using words such as "anticipate," "assume,"
"believe," "estimate," "expect," "intend," "plan," "project," "may,"
"will," "would," and similar expressions. Certain forward-looking statements are included in this Form 10-K,
principally in the sections captioned "Business," and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Forward-looking statements are related to, among other things:
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business objectives and strategic plans;
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our ability to open and operate additional
restaurants profitably and the timing of such openings;
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expectations that most, if not all, of
the Company’s unit growth will be through the development of additional Bad Daddy’s Burger Bar locations;
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restaurant and franchise acquisitions;
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anticipated price increases;
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expected future revenues and earnings,
comparable and non-comparable restaurant sales, results of operations, and future restaurant growth (both company-owned and franchised);
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estimated costs of opening and operating
new restaurants, including general and administrative, marketing, franchise development and restaurant operating costs;
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anticipated selling, general and administrative
expenses and restaurant operating costs, including commodity prices, labor and energy costs;
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future capital expenditures;
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our expectation that we will have adequate
cash from operations and credit facility borrowings to meet all future debt service, capital expenditure and working capital requirements
in fiscal year 2020;
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the sufficiency of the supply of commodities
and labor pool to carry on our business;
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success of advertising and marketing activities;
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the absence of any material adverse impact
arising out of any current litigation in which we are involved;
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impact of the adoption of new accounting
standards and our financial and accounting systems and analysis programs;
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expectations regarding competition and
our competitive advantages;
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impact of our trademarks, service marks,
and other proprietary rights; and
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effectiveness of our internal control
over financial reporting.
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Although we believe that the expectations
reflected in our forward-looking statements are based on reasonable assumptions, such expectations may prove to be materially incorrect
due to known and unknown risks and uncertainties.
In some cases, information regarding certain
important factors that could cause actual results to differ materially from any forward-looking statements appears together with
such statement. In addition, the factors described under Critical Accounting Policies and Estimates in Part II, Item 7, and Risk
Factors in Part I, Item 1A, as well as other possible factors not listed, could cause actual results to differ materially from
those expressed in forward-looking statements, including, without limitation, the following: concentration of restaurants in certain
markets and lack of market awareness in new markets; changes in disposable income; consumer spending trends and habits; increased
competition in the quick-service restaurant market; costs and availability of food and beverage inventory; our ability to attract
qualified managers, employees, and franchisees; changes in the availability of capital or credit facility borrowings; costs and
other effects of legal claims by employees, franchisees, customers, vendors, Stockholders and others, including settlement of those
claims; effectiveness of management strategies and decisions; weather conditions and related events in regions where our restaurants
are operated; and changes in accounting standards, policies and practices or related interpretations by auditors or regulatory
entities.
All forward-looking statements speak only
as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by the cautionary statements. Except as required by law, we undertake no obligation to
update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence
of anticipated or unanticipated events or circumstances.
You should consider carefully the following
risk factors before making an investment decision with respect to our securities. You are cautioned that the risk factors discussed
below are not exhaustive.
Risk Related to the Company
We have accumulated losses and expect
losses in the future.
We have incurred losses in 28 of our 32
years since inception. As of September 24, 2019, we had an accumulated deficit of $30,551,000. We expect
to have a loss for the fiscal year ending September 29, 2020.
If we are unable to continue to increase
same store sales at existing restaurants, our ability to attain profitability may be adversely affected.
We have increased same-store sales for
eight of the past nine years at Good Times. We have operated Bad Daddy’s for a shorter period of time, but in
the most recent year had slightly negative same store sales for that concept. Same-store sales increases will depend in part on
the success of our advertising and promotion of new and existing menu items and consumer acceptance. We cannot assure
that our advertising and promotional efforts will in fact be successful. If our same-store sales decrease, and our other
operating costs increase, our ability to attain profitability will be adversely affected.
New restaurants, when and if opened,
may not be profitable, if at all, for several months.
We anticipate that our new restaurants,
when and if opened, will generally take several months to reach normalized operating levels due to inefficiencies typically associated
with new restaurants, including lack of market awareness, the need to hire and train a sufficient number of employees, operating
costs which are often materially greater during the first several months of operation than thereafter, preopening costs and other
factors. In addition, restaurants opened in new markets may open at lower average weekly sales volumes than restaurants
opened in existing markets and may have higher restaurant level operating expense ratios than in existing markets. Sales
at restaurants opened in new markets may take longer to reach average annual company-owned restaurant sales, if at all, thereby
affecting the profitability of these restaurants.
Our operations are susceptible to
the cost of and changes in food availability which could adversely affect our operating results.
Our profitability depends in part on our
ability to anticipate and react to changes in food costs. Various factors beyond our control, including adverse weather
conditions, governmental regulation, production, availability, recalls of food products and seasonality may affect our food costs
or cause a disruption in our supply chain. We enter into annual contracts with our chicken and other miscellaneous suppliers. Our
contracts for chicken are fixed price contracts. Our contracts for beef are generally based on current market prices
plus a processing fee. Changes in the price or availability of our all-natural chicken or beef supply or other commodities
could materially adversely affect our profitability. We cannot predict whether we will be able to anticipate and react
to changing food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our
operating results. In addition, we may not be able to pass along higher costs through price increases to our customers.
Macroeconomic conditions could affect
our operating results.
If the economy experiences an economic
downturn or there are uncertainties regarding economic recovery, consumer spending and the unemployment rate may be affected, which
may adversely affect our sales in the future. A proliferation of heavy discounting by our major competitors may also
negatively affect our sales and operating results.
Price increases may impact customer
visits.
We may make price increases on selected
menu items in order to offset increased operating expenses we believe will be recurring. Although we have not experienced
significant consumer resistance to our past price increases, future price increases may deter customers from visiting our restaurants
or affect their purchasing decisions.
The hamburger restaurant market is
highly competitive.
The hamburger restaurant market is highly
competitive. Our competitors in the quick-service restaurant segment include many recognized national and regional fast-food
hamburger restaurant chains, such as McDonald’s, Burger King, Wendy’s, Carl’s Jr., Sonic, Jack in the Box, Freddy’s
and Culver’s. In-N-Out has announced plans to expand into the state of Colorado, the primary state in which we operate and
is moving forward with development of at least three restaurants. We also compete with small regional and local hamburger and other
fast-food restaurants, many of which feature drive-through service. Most of our competitors have greater financial resources, marketing
programs and name recognition than we do. Discounting by our quick-service restaurant competitors may adversely affect the revenues
and profitability of our restaurants.
While Bad Daddy’s Burger Bar operates
in the “better burger” restaurant segment, it offers a relatively broad menu and also competes with other full-service
restaurants in the bar and grill segment. Additionally, customers of both our Good Times restaurants and Bad Daddy’s
Burger Bar restaurants are also customers of fast casual hamburger restaurants. Further, changes in customer taste preferences,
dietary trends, and preference for delivery and/or carry-out options often affect the restaurant business. If we are unable to
continue to compete effectively with other restaurant concepts, our traffic, sales, and restaurant-level profitability could be
negatively affected.
Sites for new restaurants may be
difficult to acquire.
Locating our restaurants in high-traffic
and readily accessible areas is an important factor for our success. We intend to continue to locate Bad Daddy’s
Burger Bar restaurants in leased in-line and end-cap retail locations. Since suitable locations are in great demand,
in the future we may not be able to obtain optimal sites for either of our restaurant concepts at a reasonable cost or at all. In
addition, we cannot assure you that the sites we do obtain will be successful.
Our franchisees could take actions
that could harm our business.
Franchisees are independent contractors
and are not our employees. We provide training and support to franchisees; however, franchisees operate their restaurants
as independent businesses. Consequently, the quality of franchised restaurant operations may be diminished by any number
of factors beyond our control. Moreover, franchisees may not successfully operate restaurants in a manner consistent with
our standards and requirements or may not hire and train qualified managers and other restaurant personnel. Our image
and reputation, and the image and reputation of other franchisees, may suffer materially, and system-wide sales could significantly
decline, if our franchisees do not operate successfully.
We depend on key management employees.
We believe our current operations and future
success depend largely on the continued services of our management employees, in particular Ryan Zink our Acting President and
Chief Executive Officer; Chief Financial Officer and Treasurer; Susan Knutson, our Controller and Corporate Secretary and Scott
LeFever, our Vice President of Operations for Good Times Burgers & Frozen Custard. Although we have entered into employment
agreements with Messrs. Zink, LeFever and Ms. Knutson, they may voluntarily terminate their employment with us at any time. In
addition, we do not currently maintain key-person insurance on the lives of Messrs. Zink, LeFever or Ms. Knutson. The loss of Messrs.
Zink’s, LeFever’s and Ms. Knutson’s services, or other key management personnel, could have a material adverse
effect on our financial condition and results of operations.
Labor shortages could slow our growth
or harm our business.
Our success depends in part upon our ability
to attract, motivate and retain a sufficient number of qualified, high-energy employees. Qualified individuals needed
to fill these positions are in short supply in some areas. The inability to recruit and retain these individuals may
delay the planned openings of new restaurants or result in high employee turnover in existing restaurants, which could harm our
business. Additionally, competition for qualified employees could require us to pay higher wages to attract enough employees,
which could result in higher labor costs. Most of our employees are paid market wages on an hourly basis that are influenced
by applicable minimum wage regulations. Accordingly, any increase in the minimum wage, whether state or federal, could
have a material adverse impact on our business.
Security breaches of confidential
customer information in connection with our electronic processing of credit and debit card transactions may adversely affect our
business.
The majority of our restaurant sales are
by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information
of their customers has been stolen. We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent
transactions arising out of the actual or alleged theft of our customers’ credit or debit card information. In addition,
most states have enacted legislation requiring notification of security breaches involving personal information, including credit
and debit card information. Any such claim, proceeding, or mandatory notification could cause us to incur significant unplanned
expenses, which could have an adverse impact on our financial condition and results of operations. Further, adverse publicity resulting
from these allegations may have a material adverse effect on us and our restaurants.
We are subject to extensive government
regulation that may adversely hinder or impact our ability to govern various aspects of our business including our ability to expand
and develop our restaurants.
The restaurant industry is subject to various
federal, state and local government regulations, including those relating to the sale of food. Our failure to maintain necessary
governmental licenses, permits and approvals, including food licenses, could adversely affect our operating results. Difficulties
or failures in obtaining the required licenses and approvals could delay, or result in our decision to cancel, the opening of new
restaurants. Local authorities may suspend or deny renewal of our food licenses if they determine that our conduct does
not meet applicable standards or if there are changes in regulations. In addition, any adverse food safety event could result in
regulatory and other investigations, and/or fines and penalties, any of which could disrupt our operations, increase our costs,
require us to respond to findings from regulatory agencies that may divert resources and assets, and result in potential fines
and penalties as well as other gal action, any of which could materially adversely affect our financial performance.
Various federal, state and labor laws govern
our relationship with our employees and affect operating costs. These laws govern minimum wage requirements, overtime
pay, meal and rest breaks, unemployment tax rates, workers’ compensation rates, citizenship or residency requirements, child
labor regulations and sales taxes. Additional government-imposed increases in minimum wages, overtime pay, paid leaves
of absence and mandated health benefits may increase our operating costs. Several states and cities, including the city of Denver
and the state of Colorado, where many of our restaurants are located, have legislation passed which provides for annual increases
in their respective minimum wage. Additional states may raise their respective minimum wage in the future. This could impact
the profitability of existing restaurants as well as impact development opportunities in those states.
The federal Americans with Disabilities
Act prohibits discrimination on the basis of disability in public accommodations and employment. Although our restaurants
are designed to be accessible to the disabled, we could be required to make modifications to our restaurants to provide service
to, or make reasonable accommodations for, disabled persons.
We are also subject to federal and state
laws that regulate the offer and sale of franchises and aspects of the licensor-licensee relationship. Many state franchise
laws impose restrictions on the franchise agreement, including limitations on non-competition provisions and the termination or
non-renewal of a franchise. Some states require that franchise materials be registered before franchises can be offered
or sold in the state.
Our Bad Daddy’s Burger Bar restaurants
are also subject to state and local laws that regulate the sale of alcoholic beverages. Alcoholic beverage control regulations
govern various aspects of these restaurants’ daily operations, including the minimum age of patrons and employees, hours
of operation, advertising, wholesale purchasing and inventory control, handling and storage. Typically, licenses to
sell alcoholic beverages require annual renewal and may be suspended or revoked at any time for cause, the definition of which
varies by locality. The failure of any of our Bad Daddy’s Burger Bar restaurants to timely obtain and maintain
any required licenses, permits or approvals to serve alcoholic beverages could delay or prevent the opening of a new restaurant
or prevent regular day-to-day operations, including the sale of alcoholic beverages, at a restaurant that is already operating,
any of which would adversely affect our business.
Concerns relating to food safety,
food-borne illness, pandemics and other diseases could reduce customer traffic to our restaurants, or cause us to be the target
of litigation, which could materially adversely affect our financial performance.
We face food safety risks, including the
risk of food-borne illness and food contamination (including allergen cross contamination), which are common both in the restaurant
industry and the food supply chain. While we dedicate substantial resources and provide training to ensure the safety and quality
of the food we serve, these risks cannot be completely eliminated. Additionally, we rely on our network of suppliers to properly
handle, store and transport our ingredients for delivery to our restaurants. Any failure by our suppliers, or their suppliers,
could cause our ingredients to be contaminated, which could be difficult to detect and put the safety of our food in jeopardy.
Like other restaurant chains, consumer
preferences could be affected by health concerns about the avian influenza, also known as bird flu, or the consumption of beef,
the key ingredient in many of our menu items, or negative publicity concerning food quality, illness and injury generally, such
as negative publicity concerning E. coli, “mad cow” or “foot-and-mouth” disease, publication of government
or industry findings concerning food products served by us, or other health concerns or operating issues stemming from one restaurant
or a limited number of restaurants. This negative publicity may adversely affect demand for our food and could result
in a decrease in customer traffic to our restaurants. If we react to the negative publicity by changing our concept
or our menu, we may lose customers who do not prefer the new concept or menu, and we may not be able to attract a sufficient new
customer base to produce the revenue needed to make our restaurants profitable. In addition, we may have different or
additional competitors for our intended customers as a result of a concept change and may not be able to compete successfully against
those competitors. A decrease in customer traffic to our restaurants as a result of these health concerns or negative
publicity or as a result of a change in our menu or concept could materially harm our business. Additionally, if our customers
or staff members become infected with a pathogen which was actually or claimed to be contracted at our restaurants, customers may
avoid our restaurants and/or it may become difficult to adequately staff our restaurants. Any adverse food safety occurrence may
result in litigation against us. The negative publicity associated with such an event could damage our reputation and materially
adversely affect our financial performance.
If we are unable to protect
our reputation, the value of our brands and sales at our restaurants may be negatively impacted, which may materially
adversely affect our financial performance.
One of our largest
assets is the value of our brands, which is directly linked to our reputation. We must protect our reputation in order to continue
to be successful and to grow the value of our brands. Negative publicity directed at any of our brands, regardless of factual
basis, such as, relating to food quality, restaurant facilities, customer complaints or litigation alleging injury or food-borne
illnesses, food tampering or contamination or poor health inspection scores, sanitary or other issues with respect to food processing
by us or our suppliers, the condition of our restaurants, labor relations, any failure to comply with applicable regulations or
standards, allegations of harassment, or other negative publicity, could damage our reputation. Negative publicity about us could
harm our reputation and damage the value of our brands, which could materially and adversely affect our financial performance.
Our ability to succeed with the Bad
Daddy’s Burger Bar restaurant concept will require significant capital expenditures and management attention.
We believe that new openings of Bad Daddy’s
Burger Bar restaurants are likely to serve as the primary contributor of our new unit growth and increased profitability over the
longer term based on the unit economics of that concept. Our ability to succeed with this concept will require significant
capital expenditures and management attention and is subject to certain risks in addition to those of opening a new Good Times
restaurant, including customer acceptance of and competition with the Bad Daddy’s Burger Bar concept. If the “ramp-up”
period for new Bad Daddy’s Burger Bar restaurants does not meet our expectations, our operating results may be adversely
affected. There can be no assurance that we will be able to successfully develop and grow the Bad Daddy’s Burger
Bar concept to a point where it will become profitable or generate positive cash flow. We may not be able to attract
enough customers to meet targeted levels of performance at new Bad Daddy’s Burger Bar restaurants because potential customers
may be unfamiliar with the concept or the atmosphere or menu might not be appealing to them. If we cannot successfully
execute our growth strategies for Bad Daddy’s Burger Bar, our business and results of operations may be adversely affected.
Our growth, including the development
of Bad Daddy’s Burger Bar restaurants, may strain our management and infrastructure.
Any growth of our business would increase
our operating complexity and place increased demands on our management and infrastructure, including our current restaurant management
systems, financial and management controls, and information systems. If our infrastructure is insufficient to support
our growth, our ability to open new restaurants, including the development of the Bad Daddy’s Burger Bar concept, would be
adversely affected.
Bad Daddy’s Burger Bar is subject
to all of the risks of a relatively new business, including competition, and there is no guarantee of a return on our capital investment.
The Bad Daddy’s Burger Bar concept
has been in existence for approximately twelve years. Existing restaurants are currently located in Colorado, Georgia, Oklahoma,
North Carolina, South Carolina, and Tennessee. Because of the small number of existing Bad Daddy’s Burger Bar
restaurants and the relatively short period of time that they have been in operation, there is substantial uncertainty that additional
restaurants in other locations will be successful. There is no guarantee that we will be successful in offering Bad
Daddy’s Burger Bar franchises throughout the U.S. or that, if and when such franchises are granted, the restaurants developed
by franchisees will be successful. There is also substantial uncertainty that the franchising business will be successful
in view of the facts that we have sold only two Bad Daddy’s Burger Bar restaurant franchises to date and that the restaurant
franchising business is very competitive.
We do not have a proven track record
of operating in the “small box” better burger casual dining segment.
We have historically operated in the quick-service
restaurant segment, while BDBB operates in the “small box” better burger casual dining segment. We have operated a
limited number of Bad Daddy’s Burger Bar restaurants since February 2014 and thus do not have a proven track record of operating
in the “small box” better burger casual dining. Realizing the contemplated benefits from expanding into a new segment
of casual dining may take significant time and resources and may depend upon our ability to successfully develop familiarity in
the “small box” better burger casual dining segment.
Risks Related to the Ownership of Our Common Stock
Our business could be negatively
affected as a result of significant stockholders or potential stockholders attempting to effect changes or acquire control over
our company, which could cause us to incur significant expense, hinder execution of our business strategy and impact the trading
value of our securities.
Stockholders may from time to time attempt
to effect changes, engage in proxy solicitations or advance shareholder proposals. Responding to proxy contests and other actions
by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of our board of
directors and senior management from the pursuit of business strategies. Any of these impacts could materially and adversely affect
our business and operating results. Further, the market price of our common stock could be subject to significant fluctuation or
otherwise be adversely affected by the events, risks and uncertainties described above.
Future changes in financial accounting
standards may cause adverse unexpected operating results and affect our reported results of operations.
Changes in accounting standards can have
a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective.
See Note 1 to our Consolidated Financial Statements for further discussion. New pronouncements and varying interpretations of pronouncements
have occurred and may occur in the future. Changes to existing rules or differing interpretations with respect to our current practices
may adversely affect our reported financial results.
Compliance with changing regulation
of corporate governance and public disclosure may result in additional expenses.
Keeping abreast of, and in compliance
with, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley
Act of 2002, new SEC regulations and The NASDAQ Market rules, has required an increased amount of management attention and expense.
We remain committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest
all reasonably necessary resources to comply with evolving standards, and this investment has resulted in and will continue to
result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating
activities to compliance activities.
If our internal controls are not
adequate, we may discover errors in our financial and other reporting that will require significant resources to remedy and could
subject us to additional fines.
Public companies in the United States are
required to review their internal controls as set forth in the Sarbanes-Oxley Act of 2002. It should be noted that any system of
controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of
future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will
succeed in achieving our stated goals under all potential future conditions, regardless of how remote. If the internal controls
put in place by us are not adequate or in conformity with the requirements of the Sarbanes-Oxley Act of 2002, and the rules and
regulations promulgated by the SEC, we may be forced to restate our financial statements and take other actions which will take
significant financial and managerial resources, as well as be subject to fines and other government enforcement actions.
Because we currently qualify as a “smaller reporting
company,” our non-financial and financial information are less than is required by non-smaller reporting companies.
Currently we qualify as a “smaller
reporting company.” The “smaller reporting company” category includes companies that 1) have a common equity
public float of less than $250 million or 2) have less than $100 million in annual revenues and either no common equity public
float or common equity public float of less than $700 million. A smaller reporting company prepares and files SEC reports and registration
statements using the same forms as other SEC reporting companies, though the information required to be disclosed may differ and
be less comprehensive. Regulation S-X contains the SEC requirements for financial statements, while Regulation S-K contains
the non-financial disclosure requirements.
To locate the scaled disclosure requirements,
smaller reporting companies will refer to the special paragraphs labeled “smaller reporting companies” in Regulation
S-K. As an example, smaller reporting companies are not required to include risk factor disclosure in Item 1A of Form 10-K. Other
disclosure required by non-smaller reporting companies can be omitted in Form 10-K and Form 10-Q by smaller reporting companies.
We cannot predict whether investors will
find our common stock less attractive because of our reliance on any of the reduced disclosure requirements available to smaller
reporting companies. If some investors find our common stock less attractive as a result, there may be a less active trading market
for our common stock and our stock price may be more volatile.
The price of our common stock may
fluctuate significantly.
The trading price of our shares of common
stock has from time-to-time fluctuated widely and, in the future may be subject to similar fluctuations. This volatility may affect
the price at which you could sell your common stock. The market price of our common stock is likely to continue to be volatile
and may fluctuate significantly in response to many factors, including:
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·
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operating results that vary from the expectations of management, securities
analysts and investors;
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·
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developments in our business;
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·
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the operating and securities price performance of companies that investors
consider to be comparable to us;
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·
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announcements of implementation of strategic transactions or developments
and other material events by us or our competitors;
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·
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negative economic conditions that adversely affect the economy, commodity
prices, the job market and other factors that may affect the markets in which we operate;
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·
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publication of research reports about us or the sectors in which we
operate generally;
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·
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changes in market valuations of similar companies;
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·
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additions or departures of key management personnel;
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·
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actions by institutional stockholders;
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·
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speculation in the press or investment community; and
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·
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the realization of any of the other risk factors included in this
Annual Report on Form 10-K.
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Holders of our common stock will be subject
to the risk of volatile and depressed market prices of our common stock. In addition, many of the factors listed above are beyond
our control. These factors may cause the market price of our common stock to decline, regardless of our financial condition, results
of operations, business or prospects. It is impossible to assure investors in our common stock that the market price of our common
stock will not fall in the future.
Sales of a substantial number of shares of our common
stock in the public market by our existing Stockholders could cause our stock price to fall.
Sales of a substantial number of shares
of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our
common stock and could impair our ability to raise adequate capital through the sale of additional equity securities. We are unable
to predict the effect that sales may have on the prevailing market price of our common stock.
There may be future sales or other
dilution of our equity, which may adversely affect the market price of the shares of our common stock and/or dilute the value of
shares of our common stock.
We are not restricted from issuing, and
shareholder approval is not required in order to issue, additional shares of common stock, including securities that are convertible
into or exchangeable for, or that represent the right to receive, shares of common stock, except any shareholder approval required
by The NASDAQ Capital Markets. We have in the past, and may in the future, sell such equity and equity-linked securities. Sales
of a substantial number of shares of our common stock or other equity-related securities in the public market could depress the
market price of our shares of common stock. We cannot predict the effect that future sales of our common stock or other equity-related
securities would have on the market price of our shares of common stock. The market price of our common stock may be adversely
affected if we issue additional shares of our common stock.
You may not receive dividends on
the shares of our common stock.
Holders of our common stock are only entitled
to receive such dividends as our board of directors may declare out of funds legally available for such payments. We have no plans
to pay cash dividends on our common stock in the foreseeable future. For additional information, see “Dividend Policy”
in Part II, Item 5 of this Form 10-K.
Provisions in our articles of incorporation
and bylaws and provisions of Nevada law may prevent or delay an acquisition of our company, which could decrease the trading price
of our common stock.
We are subject to anti-takeover laws for
Nevada corporations. These anti-takeover laws prevent a Nevada corporation from engaging in a business combination with
any shareholder, including all affiliates and associates of the shareholder, who is the beneficial owner of 10% or more of the
corporation’s outstanding voting stock, for two years following the date that the shareholder first became the beneficial
owner of 10% or more of the corporation’s voting stock, unless specified conditions are met. If those conditions
are not met, then after the expiration of the two-year period the corporation may not engage in a business combination with such
shareholder unless certain other conditions are met.
Our articles of incorporation and our bylaws
contain several provisions that may deter or impede takeovers or changes of control or management. These provisions:
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authorize our board of directors to establish
one or more series of preferred stock the terms of which can be determined by the board of directors at the time of issuance;
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·
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do not allow for cumulative voting in
the election of directors unless required by applicable law. Under cumulative voting a minority shareholder holding
a sufficient percentage of a class of shares may be able to ensure the election of one or more directors;
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·
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state that special meetings of our stockholders
may be called only by the chairman of the board of directors, the president or any two directors and must be called by the president
upon the written request of the holders of 25% of the outstanding shares of capital stock entitled to vote at such special meeting;
and
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·
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provide that the authorized number of directors is no more than five,
as determined by our board of directors.
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These provisions, alone or in combination
with each other, may discourage transactions involving actual or potential changes of control, including transactions that otherwise
could involve payment of a premium over prevailing market prices to stockholders for their common stock.
We may issue debt and equity securities
or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and liquidation.
In the future, we may issue debt or equity
securities or securities convertible into or exchangeable for equity securities, or we may enter debt-like financing that is unsecured
or secured by any or all of our properties. Such securities may be senior to our common stock with respect to distributions. In
addition, in the event of our liquidation, our lenders and holders of our debt and preferred securities would receive distributions
of our available assets before distributions to the holders of our common stock.
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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None.
We currently lease approximately 8,568
square feet of space for our executive offices in Lakewood, Colorado for approximately $191,000 per year under a lease agreement
which expires in February 2021. Most of our existing Good Times restaurants are a combination of free-standing structures containing
approximately 880 to 1,000 square feet for the double drive thru format and approximately 2,100 to 2,400 square feet for those
locations with a 45 to 70 seat dining room. We do not own any of the land underlying these restaurants and either lease the land
or the land and building. In addition, we have several restaurants that are conversions from other concepts in various sizes ranging
from 1,700 square feet to 3,500 square feet. The buildings are situated on lots of approximately 18,000 to 50,000 square feet.
Certain restaurants serve as collateral for the underlying debt financing arrangements as discussed in the Notes to Consolidated
Financial Statements included in this report. We intend to acquire new sites both through ground leases and purchase agreements
supported by mortgage and leasehold financing arrangements and through sale-leaseback agreements.
Our Bad Daddy’s restaurants are leased
spaces of approximately 3,000 to 4,000 square feet in retail developments located in Alabama, Colorado, Georgia, Oklahoma, North
Carolina, Tennessee and South Carolina. We intend to lease additional in-line and end-cap spaces in retail developments for new
Bad Daddy’s locations.
All of the restaurants are regularly maintained
by our repair and maintenance staff as well as by outside contractors, when necessary. We believe that all of our properties are
in good condition and that there will be a need for periodic capital expenditures to maintain the operational and aesthetic integrity
of our properties for the foreseeable future, including recurring maintenance and periodic capital improvements. All of our properties
are covered up to replacement cost under our property and casualty insurance policies and in the opinion of management are adequately
covered by insurance.
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ITEM 3.
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LEGAL PROCEEDINGS
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We are not involved in any material legal
proceedings. We are subject, from time to time, to various lawsuits in the normal course of business. These lawsuits are not expected
to have a material impact.
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ITEM 4.
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MINE SAFETY DISCLOSURES
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Not applicable.
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
CURRENT LIABILITIES:
|
|
|
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Current maturities of long-term debt and capital lease obligations
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$
|
-
|
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|
$
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17
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|
Accounts payable
|
|
|
3,774
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|
|
|
3,774
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|
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Deferred income
|
|
|
79
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|
|
|
92
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Other accrued liabilities
|
|
|
5,375
|
|
|
|
4,452
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Total current liabilities
|
|
|
9,228
|
|
|
|
8,335
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|
|
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LONG-TERM LIABILITIES:
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|
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Maturities of long-term debt and capital lease obligations due after
one year
|
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|
12,850
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|
|
|
7,472
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Deferred and other liabilities
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|
|
8,907
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|
|
|
7,922
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Total long-term liabilities
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|
21,757
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|
|
|
15,394
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COMMITMENTS AND CONTINGENCIES (NOTE
5)
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STOCKHOLDERS’ EQUITY:
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Good Times Restaurants Inc. stockholders’ equity:
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Preferred stock, $.01 par value;
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5,000,000 shares authorized, 0 shares issued and outstanding, and
outstanding as of Sept 24, 2019 and Sept 25, 2018, respectively
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|
-
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|
-
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Common stock, $.001 par value; 50,000,000 shares authorized
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12,541,082 and 12,481,162 shares issued and outstanding
as of September 24, 2019 and September 25, 2018, respectively
|
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|
13
|
|
|
|
12
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Capital contributed in excess of par value
|
|
|
57,936
|
|
|
|
59,385
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Accumulated deficit
|
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(30,551
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)
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|
|
(25,414
|
)
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Total Good Times Restaurants Inc. stockholders' equity
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|
27,398
|
|
|
|
33,983
|
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Non-controlling interests
|
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|
1,522
|
|
|
|
3,238
|
|
|
Total stockholders’ equity
|
|
|
28,920
|
|
|
|
37,221
|
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
59,905
|
|
|
$
|
60,950
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|
See accompanying notes to consolidated
financial statements
Good Times Restaurants Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share data)
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Fiscal
|
|
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|
|
2019
|
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|
2018
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|
NET REVENUES:
|
|
|
|
|
|
|
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Restaurant sales
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|
$
|
109,800
|
|
|
$
|
98,564
|
|
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Franchise revenues
|
|
|
958
|
|
|
|
1,007
|
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Total net revenues
|
|
|
110,758
|
|
|
|
99,571
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|
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RESTAURANT OPERATING COSTS:
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|
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|
|
|
|
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Food and packaging costs
|
|
|
32,471
|
|
|
|
30,256
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|
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Payroll and other employee benefit costs
|
|
|
41,221
|
|
|
|
35,653
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|
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Restaurant occupancy costs
|
|
|
8,355
|
|
|
|
7,261
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|
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Other restaurant operating costs
|
|
|
11,470
|
|
|
|
9,283
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|
|
Preopening costs
|
|
|
1,774
|
|
|
|
2,784
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Depreciation and amortization
|
|
|
4,345
|
|
|
|
3,705
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|
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Total restaurant operating costs
|
|
|
99,636
|
|
|
|
88,942
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative costs
|
|
|
9,461
|
|
|
|
7,857
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|
|
Advertising costs
|
|
|
2,352
|
|
|
|
2,322
|
|
|
Franchise costs
|
|
|
38
|
|
|
|
41
|
|
|
Asset impairment costs
|
|
|
2,771
|
|
|
|
72
|
|
|
Gain on restaurant asset sale
|
|
|
(5
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
(3,495
|
)
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3
|
|
|
|
4
|
|
|
Interest expense
|
|
|
(756
|
)
|
|
|
(392
|
)
|
|
Other expense
|
|
|
-
|
|
|
|
(1
|
)
|
|
Total other expenses, net
|
|
|
(753
|
)
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(4,248
|
)
|
|
$
|
(17
|
)
|
|
Income attributable to non-controlling interests
|
|
$
|
(889
|
)
|
|
$
|
(1,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(5,137
|
)
|
|
$
|
(1,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER SHARE:
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(.41
|
)
|
|
$
|
(.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
12,522,728
|
|
|
|
12,463,760
|
|
See accompanying notes to consolidated
financial statements
Good Times Restaurants Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Period from September 27, 2017 thru September 24, 2019
(In thousands, except share and per share data)
|
|
|
Common Stock
|
|
|
Capital
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
Issued
Shares
|
|
|
Par
Value
|
|
|
Contributed
in Excess of
Par Value
|
|
|
Controlling
Interest In
Partnerships
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
BALANCES, September 27, 2017
|
|
|
12,427,280
|
|
|
$
|
12
|
|
|
$
|
58,939
|
|
|
$
|
2,713
|
|
|
$
|
(24,380
|
)
|
|
$
|
37,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
|
Restricted stock unit vesting
|
|
|
44,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Stock option exercise
|
|
|
9,397
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
Income attributable to non-controlling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,017
|
|
|
|
|
|
|
|
1,017
|
|
Distributions to unrelated limited
partners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,425
|
)
|
|
|
|
|
|
|
(1,425
|
)
|
Contributions from unrelated limited
partners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
933
|
|
|
|
|
|
|
|
933
|
|
Net loss attributable to Good Times
Restaurants Inc and comprehensive
loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(1,034
|
)
|
|
|
(1,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES, September 25, 2018
|
|
|
12,481,162
|
|
|
$
|
12
|
|
|
$
|
59,385
|
|
|
$
|
3,238
|
|
|
$
|
(25,414
|
)
|
|
$
|
37,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
|
719
|
|
|
Restricted stock unit vesting
|
|
|
59,253
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
Stock option exercise
|
|
|
667
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Income attributable to non-controlling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
889
|
|
|
|
|
|
|
|
889
|
|
Distributions to unrelated limited
partners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,837
|
)
|
|
|
|
|
|
|
(1,837
|
)
|
Contributions from unrelated limited
partners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
20
|
|
|
Purchase of non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
(2,171
|
)
|
|
|
(788
|
)
|
|
|
|
|
|
|
(2,959
|
)
|
Net loss attributable to Good Times
Restaurants Inc and comprehensive
loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(5,137
|
)
|
|
|
(5,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES, September 24, 2019
|
|
|
12,541,082
|
|
|
$
|
13
|
|
|
$
|
57,936
|
|
|
$
|
1,522
|
|
|
$
|
(30,551
|
)
|
|
$
|
28,920
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited)
Good Times Restaurants Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
Fiscal
|
|
|
|
|
2019
|
|
|
2018
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,248
|
)
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,590
|
|
|
|
3,951
|
|
|
Accretion of deferred rent
|
|
|
604
|
|
|
|
653
|
|
|
Amortization of lease incentive obligation
|
|
|
(514
|
)
|
|
|
(431
|
)
|
|
Recognition of deferred gain on sale of restaurant building
|
|
|
(37
|
)
|
|
|
(35
|
)
|
|
Loss on disposal of restaurant assets
|
|
|
58
|
|
|
|
-
|
|
|
Asset impairment costs
|
|
|
2,771
|
|
|
|
72
|
|
|
Stock based compensation expense
|
|
|
719
|
|
|
|
417
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
925
|
|
|
|
(1,161
|
)
|
|
Inventories
|
|
|
(124
|
)
|
|
|
(157
|
)
|
|
Deposits and other assets
|
|
|
(133
|
)
|
|
|
111
|
|
|
(Decrease) increase in:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
317
|
|
|
|
194
|
|
|
Deferred liabilities
|
|
|
903
|
|
|
|
1,932
|
|
|
Accrued and other liabilities
|
|
|
940
|
|
|
|
975
|
|
|
Net cash provided by operating activities
|
|
|
6,771
|
|
|
|
6,504
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Payments for the purchase of property and equipment
|
|
|
(8,079
|
)
|
|
|
(10,444
|
)
|
|
Proceeds from sale leaseback transactions
|
|
|
-
|
|
|
|
1,397
|
|
|
Payment for the purchase non-controlling interest
|
|
|
(3,009
|
)
|
|
|
-
|
|
|
Proceeds from the sale of fixed assets
|
|
|
8
|
|
|
|
-
|
|
|
Payments received on loans to franchisees and to others
|
|
|
21
|
|
|
|
13
|
|
|
Net cash used in investing activities
|
|
|
(11,059
|
)
|
|
|
(9,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Principal payments on notes payable, capital leases, and long-term debt
|
|
|
(2,980
|
)
|
|
|
(1,617
|
)
|
|
Borrowings on notes payable and long-term debt
|
|
|
8,350
|
|
|
|
3,750
|
|
|
Proceeds from stock option exercises
|
|
|
3
|
|
|
|
29
|
|
|
Contributions from non-controlling interests
|
|
|
20
|
|
|
|
933
|
|
|
Distributions to non-controlling interests
|
|
|
(1,837
|
)
|
|
|
(1,425
|
)
|
|
Net cash provided by financing activities
|
|
|
3,556
|
|
|
|
1,670
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(732
|
)
|
|
|
(860
|
)
|
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
|
3,477
|
|
|
|
4,337
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
|
$
|
2,745
|
|
|
$
|
3,477
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
666
|
|
|
$
|
320
|
|
|
Non-cash additions of property and equipment
|
|
$
|
(317
|
)
|
|
$
|
269
|
|
See accompanying notes to consolidated
financial statements
Good Times Restaurants Inc. and Subsidiaries
Notes to Consolidated Financial statements
(Tabular dollar amounts in thousands, except share and per share data)
|
|
1.
|
Organization and Summary of Significant Accounting Policies:
|
Organization – Good Times
Restaurants Inc. (Good Times or the Company) is a Nevada corporation. The Company operates through its wholly owned subsidiaries
Good Times Drive Thru, Inc. (“Drive Thru”), BD of Colorado, LLC (“BD of Colo”), Bad Daddy’s Franchise
Development, LLC (“BDFD”), and Bad Daddy’s International, LLC (“BDI”).
Drive Thru commenced operations in 1986
and as of September 24, 2019, operates nineteen Company-owned and seven joint venture drive-thru fast food hamburger restaurants
under the name Good Times Burgers & Frozen Custard. Drive Thru’s restaurants are located in Colorado. In addition, Drive
Thru has eight franchises, with six operating in Colorado and two in Wyoming.
BD of Colo commenced operations in 2013
and as of September 24, 2019, operates thirteen Company-owned full-service upscale casual dining restaurants under the name Bad
Daddy’s Burger Bar, twelve of which are located in Colorado and one located in Norman, Oklahoma.
BDI and BDFD were acquired on May 7, 2015.
As of September 24, 2019, BDI operates seventeen Company-owned and five joint venture full-service upscale casual dining restaurants,
also under the name Bad Daddy’s Burger Bar, fourteen of which are located in North Carolina, four are located in Georgia,
two in Tennessee and one each are located in and South Carolina and Alabama. BDFD has one franchise operating in South Carolina.
We follow accounting standards set by the
Financial Accounting Standards Board, commonly referred to as the “FASB”. The FASB sets generally accepted accounting
principles (GAAP) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows.
Fiscal Year – The Company’s
fiscal year is a 52/53-week year ending on the last Tuesday of September. In a 52-week fiscal year, each of the Company’s
quarterly periods comprise 13 weeks. The additional week in a 53-week fiscal year is added to the first quarter, making such quarter
consist of 14 weeks. Neither 2018 or 2019 had a quarter with 14 weeks.
Fiscal year 2019 began September 26, 2018
and ended September 24, 2019; Fiscal year 2018 began September 27, 2017 and ended September 25, 2018.
Principles of Consolidation –
The consolidated financial statements include the accounts of Good Times, its subsidiaries, one limited partnership in which the
Company exercises control as general partner, and five limited liability companies, in which the Company exercises control as managing
member. The Company owns an approximate 54% interest in the Drive Thru limited partnership, is the sole general partner, and receives
a management fee prior to any distributions to the limited partner. Because the Company owns an approximate 54% interest in the
partnership and exercises complete management control over all decisions for the partnership, except for certain veto rights, the
financial statements of the partnership are consolidated into the Company’s financial statements. The Company owns an approximate
50% to 75% interest in four of the Bad Daddy’s limited liability companies and a 23% interest in one. The Company is the
managing member and receives a royalty fee and management fee prior to any distributions to the other members. Because the Company
exercises complete management control over all decisions for the five companies, except for certain veto rights, the financial
statements of the limited liability companies are consolidated into the Company’s financial statements. The equity interests
of the unrelated limited partner and members are shown on the accompanying consolidated balance sheet in the stockholders’
equity section as a non-controlling interest and is adjusted each period to reflect the limited partners’ and members’
share of the net income or loss as well as any cash distributions to the limited partners and members for the period. The limited
partners’ or members’ share of the net income or loss in the entities is shown as non-controlling interest income or
expense in the accompanying consolidated statement of operations. All inter-company accounts and transactions are eliminated in
consolidation.
Advertising Costs – We utilize
Advertising Funds to administer certain advertising programs for both the Bad Daddy’s and Good Times brands that benefit
both us and our franchisees. We and our franchisees are required to contribute a percentage of gross sales to the fund.
As such the contributions to these funds are designated and segregated for advertising. We consolidate the Advertising Funds into
our financial statements whereby contributions from franchisees, when received, are recorded and included as a component of franchise
revenues. As we intend to utilize all of the advertising contributions towards advertising expenditures, we recognize costs
equal to franchisee contributions to the advertising funds on an annual basis. Contributions to the Advertising Funds from
our franchisees were $313,000 and $331,000 for the fiscal years ended September 24, 2019 and September 25, 2018, respectively.
Accounting Estimates – The
preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles requires management
to make estimates of and assumptions related to the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during
the reporting period. Examples include provisions for bad debts and inventory reserves, accounting for business combinations, valuation
of reporting units for purposes of assessing goodwill and other indefinite-lived intangible assets for impairment, valuation of
asset groups for impairment testing, accruals for employee benefits, and certain contingencies. We base our estimates on historical
experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed
to be reasonable under the circumstances. Actual results could differ from those estimates.
Cash and Cash Equivalents –
The Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash
equivalents. The Company maintains cash and cash equivalents at financial institutions with balances that generally exceed the
Federal Deposit Insurance Corporation (“FDIC”) insured limits of up to $250,000. The Company has not experienced
any losses related to such accounts and management believes that the Company is not exposed to any significant risks on these accounts.
Certain of the Company’s accounts exceeded the FDIC insured limits as of September 24, 2019.
Accounts Receivable – Accounts
receivable include uncollateralized receivables from our franchisees, due in the normal course of business, generally requiring
payment within thirty days of the invoice date. Additionally, accounts receivable includes payments due from property landlords
related to tenant improvement allowances. On a periodic basis the Company monitors all accounts for delinquency and provides for
estimated losses of uncollectible accounts. There were no allowances for unrecoverable accounts receivable at September 24, 2019
or September 25, 2018.
Inventories – Inventories
are stated at the lower of cost or net realizable value, determined by the first-in first-out method, and consist of restaurant
food items and related packaging supplies.
Property and Equipment – Property
and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the related
assets, generally three to eight years. Property and equipment under capital leases are stated at the present value of minimum
lease payments and are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives
of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the term of the lease or
the estimated useful life of the asset.
Maintenance and repairs are charged to
expense as incurred, and expenditures for major improvements are capitalized. When assets are retired, or otherwise disposed of,
the property accounts are relieved of costs and accumulated depreciation with any resulting gain or loss credited or charged to
income.
Trademarks – Trademarks have
been determined to have an indefinite life. We evaluate our trademarks for impairment annually and on an interim basis as events
and circumstances warrant by comparing the fair value of the trademarks with their carrying amount. No trademark impairment charges
were recognized during 2019 or 2018.
Goodwill – Goodwill represents
the excess of cost over fair value of the assets of businesses the Company acquired. Goodwill is not amortized; but rather, the
Company is required to test goodwill for impairment on an annual basis or whenever indications of impairment arise. The Company
considers its operations to be comprised of two reporting units: (1) Good Times restaurants and (2) Bad Daddy’s restaurants.
As of September 24, 2019, the Company had $96,000 of goodwill associated with the Good Times reporting unit and $15,054,000 of
goodwill associated with its Bad Daddy’s reporting unit. No goodwill impairment charges were recognized during 2019 or 2018.
Impairment of Long-Lived Assets
– We review our long-lived assets including land, property and equipment for impairment when there are factors that indicate
that the carrying amount of an asset may not be recoverable. We assess recovery of assets at the individual restaurant level and
typically include an analysis of historical cash flows, future operating plans, and cash flow projections in assessing whether
there are indicators of impairment. Recoverability of assets to be held and used is measured by comparing the net book value of
the assets of an individual restaurant to the fair value of those assets. This impairment process involves significant judgment
in the use of estimates and assumptions pertaining to future projections and operating results.
On January 30, 2018 the Company closed
one Good Times restaurant in Aurora, Colorado. A non-cash impairment charge of $219,000 related to this restaurant was previously
taken in the fiscal year ended September 26, 2017 and no additional loss from disposal of assets has been subsequently recognized
in the current year, nor is any additional loss expected. We recorded accretion expense recognized as non-cash rent of approximately
$48,000 in the fiscal year ended September 25, 2018, and approximately $73,000 in the fiscal year ended September 24, 2019, reflecting
the expected fair value of future lease costs, net of sublease income, associated with the closing of this restaurant. In the fiscal
fourth quarter of 2019, the Company entered into a sublease agreement whereby the Company, upon lease commencement subject to due
diligence provisions, will receive sublease income substantially equal to its cash lease costs associated with this location.
Given the results of our analysis at March
27, 2018, we identified one restaurant where the expected future cash flows would not be sufficient to recover the carrying value
of the associated assets. This restaurant, an additional Good Times restaurant in Aurora, Colorado, was closed on April 22, 2018.
We recorded a non-cash charge of $72,000 related to the impairment of this restaurant during the quarter ending March 27, 2018.
No additional loss from disposal of assets is expected associated with this property. Prior to its closure, on April 6, 2018, the
Company entered into a sublease of this property, the terms of which will provide sublease income substantially equal to the lease
costs over the approximate five remaining years of the lease.
Given the results of our analysis at September
24, 2019, we identified five restaurants where the expected future cash flows would not be sufficient to recover the carrying value
of the associated assets.
Two of these restaurants are Good Times
restaurants in the greater Denver metropolitan area. We recorded a non-cash charge of $391,000, related to the impairment of these
restaurants in the fiscal quarter ending September 24, 2019. In July of 2019, the Company entered into a sublease agreement for
one of these two restaurants whereby the Company, upon lease commencement subject to due diligence provisions, will receive sublease
income substantially equal to its cash lease costs associated with this location. We will continue to operate the restaurant until
the commencement of the sublease, which is expected to be in mid fiscal 2020.
Three of these restaurants are Bad Daddy’s
restaurants, two in the Denver/front-range communities of Colorado and Greenville, South Carolina. We recorded non-cash charges
of $2,380,000 related to the impairment of these restaurants during the fiscal quarter ending September 24, 2019.
Deferred Liabilities – Rent
expense is reflected on a straight-line basis over the term of the lease for all leases containing step-ups in base rent. An obligation
representing future payments (which totaled $2,881,000 as of September 24, 2019) is reflected in the accompanying consolidated
balance sheet as a deferred liability.
Lease incentives are recorded as a deferred
liability when received and subsequently credited to rent expense on a straight-line basis over the life of the lease. The balance
of the lease incentive obligations at September 24, 2019 was $5,698,000 and is reflected in the accompanying consolidated balance
sheet as a deferred liability. Also included in the $8,907,000 deferred and other liabilities balance are other long-term liabilities
of $8,000 and a $320,000 deferred gain on the sale of the building and improvements of two Company-owned Good Times restaurants
in sale leaseback transactions. The building and improvements were subsequently leased back from the third-party purchaser. The
gain will be recognized in future periods in proportion to the rents paid on the twenty-year lease.
Revenue – In May 2014, the
Financial Accounting Standards Board issued Revenue from Contracts with Customers (“Topic 606), which was subsequently amended
by several Accounting Standards Updates. These new or updated standards expanded the disclosure requirements related to revenue
and revenue recognition. The Company adopted Topic 606 in the first quarter of its 2019 fiscal year and applied the guidance retrospectively
to the prior periods presented. Topic 606 primarily impacts the accounting presentation of the Company’s advertising contribution
funds. Because advertising expenses are incurred within the respective year in which contributions are recorded, there was no change
to the consolidated balance sheet, however for fiscal 2018 franchise revenues and advertising costs are each $331,000 greater than
originally presented, and for fiscal 2019 franchise revenues and advertising costs are each $313,000 greater than would have been
reflected under the former presentation.
Revenue Recognition
Revenues consist primarily of sales from
restaurant operations and franchise revenue, which includes franchisee royalties and contributions to advertising funds. Revenues
associated with gift card breakage are immaterial to our financials. The Company recognizes revenue, pursuant to the new and updated
standards, when it satisfies a performance obligation by transferring control over a product or service to a customer, typically
a restaurant customer or a franchisee/licensee.
The Company recognizes revenues in the
form of restaurant sales at the time of the sale when payment is made by the customer, as the Company has completed its performance
obligation, namely the provision of food and beverage, and the accompanying customer service, during the customer’s visit
to the restaurant. The Company sells gift cards to customers and recognizes revenue from gift cards primarily in the form of restaurant
revenue. Gift Card breakage, which is recognized when the likelihood of a gift card being redeemed is remote, is determined based
upon the Company’s historic redemption patterns, and is immaterial to our overall financial statements.
Revenues we receive from our franchise
and license agreements include sales-based royalties, and from our franchise agreements also may include advertising fund contributions,
area development fees, and franchisee fees. We recognize sales-based royalties from franchisees and licensees as the underlying
sales occur. We similarly recognize advertising fund contributions from franchisees as the underlying sales occur. The Company
also provides its franchisees with services associated with opening new restaurants and operating them under franchise and development
agreements in exchange for area development and franchise fees. The Company would capitalize these fees upon receipt from the franchisee
and then would amortize those over the contracted franchise term as the services comprising the performance obligations are satisfied.
We have not received material development or franchise fees in the years presented, and the primary performance obligations under
existing franchise and development agreements have been satisfied prior to the earliest period presented in our financial statements.
Preopening Costs – Restaurant
opening costs are expensed as incurred.
Income Taxes – We account
for income taxes under the liability method whereby deferred tax asset and liability account balances are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value. The deferred tax assets are reviewed periodically for recoverability,
and valuation allowances are adjusted as necessary. We believe it is more likely than not that the recorded deferred tax assets
will be realized.
The Company is subject to U.S. federal
income tax and income tax in multiple U.S state jurisdictions. The Company continues to remain subject to examination by federal
authorities and state jurisdictions generally for fiscal years after 2015. The Company believes that its income tax filing positions
and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect
on the Company's financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions
have been recorded. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax
expense. No accrual for interest and penalties was considered necessary as of September 24, 2019.
Net Income (Loss) Per Common Share
– Basic Earnings per Share is calculated by dividing the income (loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common stock. Options and restricted stock units for
703,164 and 784,261 shares of common stock were not included in computing diluted EPS for the annual periods ending September 24,
2019 and September 25, 2018, respectively, because their effects were anti-dilutive.
Financial Instruments and Concentrations
of Credit Risk – Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties
failed completely to perform as contracted. Concentrations of credit risk (whether on or off-balance sheet) that arise from financial
instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Financial instruments
with off-balance-sheet risk to the Company include lease liabilities whereby the Company is contingently liable as a guarantor
of certain leases that were assigned to third parties in connection with various sales of restaurants to franchisees. see Note
5 for additional information.
Financial instruments potentially subjecting
the Company to concentrations of credit risk consist principally of receivables. At September 24, 2019 notes receivable totaled
$25,000 and is due from two entities. Additionally, the Company has other current receivables totaling $810,000, which includes
$63,000 of franchise receivables, $505,000 related to lease incentives, and $242,000 for miscellaneous receivables which are all
due in the normal course of business. The Company believes it will collect fully on all notes and receivables.
The Company purchases most of its restaurant
food and paper from two vendors. The Company believes a sufficient number of other suppliers exist from which food and paper could
be purchased to prevent any long-term, adverse consequences.
The Company operates in two industry segments,
quick service restaurants and casual dining restaurants. A geographic concentration exists because the Company’s customers
are generally located in Colorado and the Southeast region of the U.S., most significantly in North Carolina.
Stock-Based Compensation –
Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an
expense over the requisite service period (generally the vesting period of the grant). See Note 7 for additional information.
Variable Interest Entities –
Once an entity is determined to be a variable interest entity (VIE), the party with the controlling financial interest, the primary
beneficiary, is required to consolidate it. The Company has two franchisees with notes payable to the Company. These franchisees
are VIE’s; however, the owners of the franchise operations are the primary beneficiaries of the entities, not the Company.
Therefore, they are not required to be consolidated.
Fair Value of Financial Instruments
– Fair value, is defined under a framework for measuring fair value under generally accepted accounting principles and
enhances disclosures about fair value measurements. 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. Valuation techniques
used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs.
The following three levels of inputs may
be used to measure fair value and require that the assets or liabilities carried at fair value are disclosed by the input level
under which they were valued.
|
|
Level
1:
|
Quoted market prices in active markets for identical assets and liabilities.
|
|
|
Level
2:
|
Observable inputs other than defined in Level 1, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
|
|
|
Level
3:
|
Unobservable inputs that are not corroborated by observable market data.
|
Non-controlling Interests - The
equity interests of the unrelated limited partners and members are shown on the accompanying consolidated balance sheet in the
stockholders’ equity section as a non-controlling interest and is adjusted each period to reflect the limited partners’
and members’ share of the net income or loss as well as any cash distributions or contributions to the limited partners and
members for the period. The limited partners’ and members’ share of the net income or loss in the partnership is shown
as non-controlling interest income or expense in the accompanying consolidated statement of operations. All inter-company accounts
and transactions are eliminated.
Our non-controlling interests currently
consist of one joint venture partnership involving Good Times restaurants and five joint venture partnerships involving five Bad
Daddy’s restaurants, including three Bad Daddy’s restaurants opened during fiscal 2018.
Recent Accounting Pronouncements
– In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This update
was issued to replace the current revenue recognition guidance, creating a more comprehensive five-step model. In March 2016, the
FASB issued No. ASU 2016-04, “Liabilities – Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid
Stored-Value Products.” This pronouncement provides guidance for the derecognition of prepaid stored-value product liabilities,
consistent with the breakage guidance in Topic 606. These amendments are effective for fiscal years beginning after December 15,
2017 and interim periods within those fiscal years. We adopted these ASUs effective as of September 26, 2018. The adoption of these
new standards did not have a material impact to our revenue recognition related to Company-owned restaurant sales, recognition
of royalty fees from our franchise agreement, or impact from recognition of gift card breakage. As discussed above and further
described below, the adoption of this standard did have an impact on the presentation of advertising fund contributions from our
franchises. Prior to the adoption of these new standards, we accounted for advertising expenses net of advertising contributions
from our franchisees. As described in Note 1, we now account for franchisee advertising contributions as a component of franchise
revenue. Because advertising expenses are incurred within the respective year in which contributions are recorded, there was no
change to the consolidated balance sheet, however for fiscal year 2018 franchise revenues and advertising costs are each $331,000
greater than originally presented, and for fiscal 2019 franchise revenues and advertising costs are each $313,000 greater than
would have been reflected under the former presentation.
In February 2016, the Financial Accounting
Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)"
and additional clarifications and improvements throughout fiscal year 2018. This update requires a lessee to recognize on the balance
sheet the right-of-use assets and lease liabilities for leases with a lease term of more than 12 months. This update also requires
additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. This standard is effective
for interim and annual periods beginning after December 15, 2018. We have adopted this standard effective September 25, 2019, the
first day of fiscal year 2020. We have elected the optional transition method to apply the standard as of the effective date and
therefore, we will not apply the standard to the comparative periods presented in our consolidated financial statements. We will
elect the transition package of three practical expedients permitted within the standard, which eliminates the requirement to reassess
the conclusions about historical lease identifications, lease classifications, and initial direct costs. We will not elect the
hindsight practical expedient, which permits the use of hindsight when determining lease terms and impairments of right-of-use
assets. Additionally, we will elect the short-term lease exception policy, permitting us to not apply the recognition requirements
of this standard to leases with a term of 12 months or less.
The adoption of ASU 2016-02 will have a
significant impact on the Company’s consolidated balance sheet as we will recognize the right-of-use assets and liabilities
for our restaurant operating leases as well as our corporate office lease. We expect to record lease liabilities of approximately
$50 to $53 million based on the present value of the remaining minimum rental payments using discount rates as of the effective
date. We also expect to record corresponding right-of-use assets of approximately $42 to $44 million, based on the operating lease
liabilities adjusted for unamortized deferred rent and lease incentives. We expect to remove net liabilities currently on the consolidated
balance sheets of approximately $9 million associated with unamortized deferred rent and lease incentives. The Company is currently
evaluating a potential impairment of the right-of-use assets at adoption, which would be recorded to retained earnings at the effective
date. In preparation for the adoption of the guidance, the Company is currently finalizing the impact to our accounting policies,
processes, disclosures and internal control over financial reporting and has implemented upgrades to its existing lease administration
system.
In January 2017, the FASB issued ASU No.
2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment,”
which eliminates Step 2 from the impairment test applied to goodwill. Under the new standard, goodwill impairment tests will compare
the fair value of a reporting unit with its carrying amount. An impairment charge will be recognized for the amount by which the
carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill. This pronouncement is
effective for annual and interim periods beginning after December 15, 2019 and should be applied on a prospective basis. We adopted
this ASU effective as of the quarter-end March 26, 2019. The adoption of the new standard did not have a material impact on our
financial position or results from operations.
|
|
2.
|
Goodwill and Intangible Assets:
|
The following table presents goodwill and
intangible assets as of September 24, 2019 and September 25, 2018 (in thousands):
|
|
|
September 24, 2019
|
|
|
September 25, 2018
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Intangible assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise rights
|
|
|
116
|
|
|
|
(104
|
)
|
|
|
12
|
|
|
|
116
|
|
|
|
(81
|
)
|
|
|
35
|
|
|
Non-compete agreements
|
|
|
65
|
|
|
|
(26
|
)
|
|
|
39
|
|
|
|
15
|
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
|
$
|
181
|
|
|
$
|
(130
|
)
|
|
$
|
51
|
|
|
$
|
131
|
|
|
$
|
(96
|
)
|
|
$
|
35
|
|
Indefinite-lived intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
3,900
|
|
|
$
|
-
|
|
|
$
|
3,900
|
|
|
$
|
3,900
|
|
|
$
|
-
|
|
|
$
|
3,900
|
|
|
Intangible assets, net
|
|
$
|
4,081
|
|
|
$
|
(130
|
)
|
|
$
|
3,951
|
|
|
$
|
4,031
|
|
|
$
|
(96
|
)
|
|
$
|
3,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
15,150
|
|
|
$
|
-
|
|
|
$
|
15,150
|
|
|
$
|
15,150
|
|
|
$
|
-
|
|
|
$
|
15,150
|
|
The Company had no goodwill impairment
losses in the periods presented in the above table or any prior periods.
In February 2019 the Company acquired all
of the membership interests of three joint venture entities to which the Company was already a party to and the transaction resulted
in an increase to non-compete agreements of $50,000. See Note 7 for additional information.
There were no impairments to intangible
assets during the fiscal years ended September 24, 2019 and September 25, 2018. The aggregate amortization expense related to intangible
assets subject to amortization was $34,000 and $25,000 in each of the fiscal years ended September 24, 2019 and September 25, 2018,
respectively.
The estimated aggregate future amortization
expense as of September 24, 2019 is as follows (in thousands):
|
2020
|
|
$
|
28
|
|
|
2021
|
|
|
17
|
|
|
2022
|
|
|
6
|
|
|
|
|
$
|
51
|
|
|
|
3.
|
Debt and Capital Leases:
|
|
|
|
2019
|
|
|
2018
|
|
|
Cadence Bank credit facility
|
|
|
12,850
|
|
|
|
7,450
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable with Ally Financial with payments of principal and interest
(approximately 5%) due monthly. The loans were secured by vehicles.
|
|
|
-
|
|
|
|
39
|
|
|
|
|
|
12,850
|
|
|
|
7,489
|
|
|
Less current portion
|
|
|
-
|
|
|
|
(17
|
)
|
|
Long term portion
|
|
$
|
12,850
|
|
|
$
|
7,472
|
|
Cadence Credit Facility
The Company maintains a credit agreement
with Cadence Bank (“Cadence”) pursuant to which, as amended, Cadence agreed to loan the Company up to $17,000,000 with
a maturity date of December 31, 2021 (the “Cadence Credit Facility”). On February 21, 2019 the Cadence Credit Facility
was amended, in connection with the RGWP Repurchase (see Note 7 to the financial statements), to retroactively attribute EBITDA
previously attributed to non-controlling interests to the Company for purposes of certain financial covenants. On December 9, 2019
the Cadence Credit Facility was amended in connection with the separation of the Company’s former CEO, to amend the definition
of “Consolidated EBITDA” for the purposes of financial covenants, to require certain installment payments, and to permit
the company to make certain “Restricted Payments” (as defined in the Cadence Credit Facility). As amended by the various
amendments, the Cadence Credit Facility accrues commitment fees on the daily unused balance of the facility at a rate of 0.25%.
All borrowings under the Cadence Credit Facility, as amended, bear interest at a variable rate based upon the Company’s election
of (i) 2.5% plus the base rate, which is the highest of the (a) Federal Funds Rate plus 0.5%, (b) the Cadence bank publicly-announced
prime rate, and (c) LIBOR plus 1.0%, or (ii) LIBOR, with a 0.250% floor, plus 3.5%. Interest is due at the end of each calendar
quarter if the Company selects to pay interest based on the base rate and at the end of each LIBOR period if it selects to pay
interest based on LIBOR. As of September 24, 2019, the weighted average interest rate applicable to borrowings under the Cadence
Credit Facility was 5.6733%.
The Cadence Credit Facility, as amended,
contains certain affirmative and negative covenants and events of default that the Company considers customary for an agreement
of this type, including covenants setting a maximum leverage ratio of 5.35:1, a minimum fixed charge coverage ratio of 1.25:1 and
minimum liquidity of $2,000,000. As of September 24, 2019, the Company was in compliance with the covenants under the Cadence Credit
Facility.
As a result of entering into the Cadence
Credit Facility and the various amendments, the Company paid loan origination costs including professional fees of approximately
$232,000 and is amortizing these costs over the term of the credit agreement.
The obligations under the Cadence Credit
Facility are collateralized by a first-priority lien on substantially all of the Company’s assets.
As of September 24, 2019, the outstanding
balance on borrowings against the facility was $12,850,000. Availability of the Cadence Credit Facility for borrowings is reduced
by the outstanding face value of any letters of credit issued under the facility. As of September 24, 2019, the outstanding face
value of such letters of credit was $157,500.
Principal payments on the Cadence Credit
Facility are required beginning on March 31, 2020 in $250,000 installments on the last business day each of March, June, September,
and December in each calendar year. The total loan commitment is permanently reduced by the corresponding amount of each such repayment
on such date. New borrowings are permitted up to the amount of the loan commitment. The note matures and is due in
its entirety on December 31, 2021.
Total interest expense on notes payable
and capital leases was $755,000 and $392,000 for fiscal 2019 and fiscal 2018, respectively.
|
|
4.
|
Other Accrued Liabilities:
|
Other accrued liabilities consist of the following:
|
|
|
September 24,
2019*
|
|
|
September 25,
2018
|
|
|
Wages and other employee benefits
|
|
$
|
2,636
|
|
|
$
|
2,075
|
|
|
Taxes, other than income tax
|
|
|
1,670
|
|
|
|
1,516
|
|
|
Other
|
|
|
1,069
|
|
|
|
861
|
|
|
Total
|
|
$
|
5,375
|
|
|
$
|
4,452
|
|
*The above amounts include costs associated with the subsequent
termination of the Company’s CEO pursuant to a severance and separation agreement totaling $731,000.
|
|
5.
|
Commitments and Contingencies:
|
As of September 24, 2019, the Company had
total commitments outstanding of $221,000 related to a construction contract for one Bad Daddy’s restaurant currently under
development. We anticipate these commitments will be funded out of existing cash or future borrowings against the Cadence Bank
credit facility.
The Company’s office space and the
land and buildings related to the Drive Thru and Bad Daddy’s restaurant facilities are classified as operating leases and
expire over the next 18 years. Some leases contain escalation clauses over the lives of the leases. Most of the leases contain
one to three five-year renewal options at the end of the initial term. Certain leases include provisions for additional contingent
rent payments if sales volumes exceed specified levels. The Company paid $32,000 and $83,000 in contingent rentals for fiscal 2019
and fiscal 2018, respectively.
Following is a summary of operating lease
activity for the fiscal years ended September 24, 2019 and September 25, 2018:
|
|
|
2019
|
|
|
2018
|
|
|
Minimum rentals
|
|
$
|
6,671
|
|
|
$
|
5,972
|
|
|
Less sublease rentals
|
|
|
(239
|
)
|
|
|
(404
|
)
|
|
Net rent expense paid
|
|
$
|
6,432
|
|
|
$
|
5,568
|
|
As of September 24, 2019, future minimum rental commitments
required under the Company’s operating leases that have initial or remaining non-cancellable lease terms in excess of one
year are as follows:
|
Years Ending September
|
|
|
|
|
|
|
|
2020
|
|
$
|
7,256
|
|
|
2021
|
|
|
6,884
|
|
|
2022
|
|
|
6,677
|
|
|
2023
|
|
|
6,348
|
|
|
2024
|
|
|
5,928
|
|
|
Thereafter
|
|
|
18,988
|
|
|
|
|
|
52,081
|
|
|
Less sublease rentals
|
|
|
(1,058
|
)
|
|
|
|
$
|
51,023
|
|
The Company is contingently liable on the
sublease rentals disclosed above. The subleased and assigned leases expire between 2020 and 2025. In the past the Company has never
been required to pay any significant amount in connection with its guarantees. Currently we have not been notified nor are we aware
of any leases in default by the franchisees; however, there can be no assurance that there will not be such defaults in the future
which could have a material effect on our future operating results.
Deferred tax assets (liabilities) are comprised of the following
at the period end:
|
|
|
2019
Long Term
|
|
|
2018
Long Term
|
|
|
Deferred income tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Tax effect of net operating loss carry-forward
|
|
|
4,631
|
|
|
|
3,605
|
|
|
General business credits
|
|
|
3,065
|
|
|
|
2,264
|
|
|
Partnership/joint venture basis differences
|
|
|
(58
|
)
|
|
|
(63
|
)
|
|
Deferred revenue
|
|
|
89
|
|
|
|
111
|
|
|
Property and Equipment basis differences
|
|
|
(1,315
|
)
|
|
|
(1,444
|
)
|
|
Intangibles basis differences
|
|
|
(1,107
|
)
|
|
|
(803
|
)
|
|
Other accrued liability and asset difference
|
|
|
1,335
|
|
|
|
1,183
|
|
|
Deferred tax assets
|
|
|
6,640
|
|
|
|
4,853
|
|
|
Less valuation allowance
|
|
|
(6,640
|
)
|
|
|
(4,853
|
)
|
|
Net deferred tax asset (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has net operating loss carry-forwards
available for future periods, as discussed below, of approximately $3,694,000 from 2019, $4,538,000 from 2018, and $10,229,000
from 2017 and prior for income tax purposes. The net operating loss carry-forwards from periods prior to 2019 expire between 2025
and 2038. Based on the change in control, which occurred in 2011, the utilization of the loss carry-forwards incurred for periods
prior to 2012 is limited to approximately $160,000 per year. The Company has general business tax credits of $3,065,000 from 2015
through 2019 which expire from 2034 through 2039.
The Company continually reviews the realizability
of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary
differences, and tax planning strategies. The Company assessed whether a valuation allowance should be recorded against its deferred
tax assets based on consideration of all available evidence using a "more likely than not" standard. In assessing the
need for a valuation allowance, the company considered both positive and negative evidence related to the likelihood of realization
of deferred tax assets. In making such assessment, more weight was given to evidence that could be objectively verified, including
recent cumulative losses. Future sources of taxable income were also considered in determining the amount of the recorded valuation
allowance. Based on the Company's review of this evidence, management determined that a full valuation allowance against all of
the Company's deferred tax assets was appropriate.
The following table summarizes the components of the provision
for income taxes (in thousands):
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Current income tax benefit (expense)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Deferred income tax benefit (expense)
|
|
|
-
|
|
|
|
-
|
|
|
Total income tax benefit (expense)
|
|
$
|
-
|
|
|
$
|
-
|
|
Total income tax expense for the years ended September 24, 2019
and September 25, 2018 differed from the amounts computed by applying the U.S. Federal statutory tax rate to pre-tax income as
follows:
|
|
|
2019
|
|
|
2018
|
|
|
Total benefit computed by applying statutory federal rate
|
|
$
|
(1,079
|
)
|
|
$
|
(299
|
)
|
|
State income tax, net of federal tax benefit
|
|
|
(153
|
)
|
|
|
(41
|
)
|
|
FICA/WOTC tax credits
|
|
|
(702
|
)
|
|
|
(612
|
)
|
|
Tax Reform Impact
|
|
|
-
|
|
|
|
1,305
|
|
|
Effect of change in valuation allowance
|
|
|
1,787
|
|
|
|
(565
|
)
|
|
Permanent differences
|
|
|
87
|
|
|
|
78
|
|
|
Other
|
|
|
60
|
|
|
|
134
|
|
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
On December 22, 2017, the Tax Cuts and
Jobs Act (“TCJA”) was signed into law, significantly impacting several sections of the Internal Revenue Code. The enactment
date occurred prior to the end of the second quarter of fiscal 2018 and therefore the federal statutory tax rate changes stipulated
by the TCJA were reflected in the second quarter. Effective January 1, 2018, the U.S. corporate federal statutory income tax rate
was reduced from 35% to 21%. The Company’s statutory federal income tax rate is 28.1% for fiscal year 2018 representing a
blended tax rate for the current fiscal year based on the number of days in the fiscal year before and after the effective date.
For the fiscal year ended September 26, 2017, the Company’s statutory federal tax rate was 35.0% and will be 21.0% for fiscal
year 2019 and thereafter.
The Company remeasured its existing deferred
tax assets and liabilities at the rate the Company expected to be in effect when those deferred taxes would be realized. The Company
has assessed a full valuation allowance against the deferred taxes, and therefore applied the 21% tax rate applicable to fiscal
years 2019 and beyond. The impact of this remeasurement was tax expense of $1.3 million, exclusive of the assessment of a valuation
allowance.
In December 2017, the Securities and Exchange
Commission provided guidance allowing registrants to record provisional amounts, during a specified measurement period, when the
necessary information is not available, prepared, or analyzed in reasonable detail to account for the impact of the TCJA. Due to
the continued determination that a full valuation allowance was appropriate to the Company’s deferred tax assets and liabilities,
these changes were offset by equal and offsetting change in the valuation allowance. As of September 24, 2019, we have completed
our analysis of the revaluation of our deferred tax assets and liabilities, the discrete impact of such as identified above. We
continue to assess the impacts of the TCJA on future fiscal years and monitor the Internal Revenue Service guidance intended to
interpret the most complex provisions of the TCJA.
Preferred Stock
The Company has the authority to issue
5,000,000 shares of preferred stock. The Board of Directors has the authority to issue such preferred shares in series and determine
the rights and preferences of the shares as may be determined by the Board of Directors.
Common Stock
The Company has the authority to issue
50,000,000 shares of common stock, par value $.001, as of September 24, 2019 there were 12,541,082 shares outstanding.
Stock Plans
The Company has an Omnibus Equity Incentive
Compensation Plan (the “2008 Plan”), approved by Stockholders in fiscal 2008, which is the successor equity compensation
plan to the Company’s 2001 Stock Option Plan (the “2001 Plan”). Pursuant to stockholder approval in September
2012, February 2014 and February 2016 the total number of shares available for issuance under the 2008 Plan was increased to 1,500,000.
The 2008 Plan expired in 2018 and the Company established a new plan, the 2018 Omnibus Equity Incentive Plan (the “2018 Plan”),
during the third fiscal quarter of 2018, pursuant to shareholder approval. Under the 2018 Plan, the total number of shares available
for issuance was set at 750,000 shares. As of September 24, 2019, 239,797 shares were available for future grants of nonqualified
stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares,
performance units and stock-based awards.
The 2018 Plan serves as the successor to
our 2008 Plan, as amended (the “Predecessor Plan”), and no further awards shall be made under the Predecessor Plan
from and after the effective date of the 2018 Plan. All outstanding awards under the Predecessor Plan continue to be governed by
the Predecessor Plan, each such award shall continue to be governed solely by the terms and conditions of the instrument evidencing
such grant or issuance, and, except as otherwise expressly provided in the 2018 Plan or by the Committee that administers the 2008
and 2018 Plans, no provision of either Plan shall affect or otherwise modify the rights or obligations of holders of such incorporated
awards.
Stock-based compensation is measured at
the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period
(generally the vesting period of the grant). The Company recognizes the impact of forfeitures as forfeitures occur.
The Company recorded $719,000 and $417,000
in total stock option and restricted stock compensation expense during fiscal years 2019 and 2018, respectively, that was classified
as general and administrative costs. The amount for fiscal 2019 includes stock compensation cost associated with the subsequent
termination of the Company’s CEO pursuant to a severance and separation agreement totaling $277,000.
Stock Option Awards
The Company measures the compensation
cost associated with stock option awards by estimating the fair value of the award as of the grant date using the Black-Scholes
pricing model. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions
are appropriate in calculating the fair values of the Company’s stock options and stock awards granted during fiscal 2019
and fiscal 2018. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the
employees who receive equity awards.
During the fiscal year ended September
24, 2019, the Company granted a total of 99,832 incentive stock options, from available shares under its 2018 Plan, with exercise
prices between $4.66 and $5.00 and per-share weighted average fair values between $2.68 and $3.16.
During the fiscal year ended
September 25, 2018, the Company granted a total of 18,274 incentive stock options, from available shares under its 2008 Plan, as
amended, with exercise prices between $2.70 and $2.73 and per-share weighted average fair values between $1.65 and $1.95. Additionally,
during the fiscal year ended September 25, 2018, the Company granted a total of 129,381 incentive and non-statutory stock options,
from available shares under its 2018 Plan, with an exercise prices between $3.55 and $4.25 and a per-share weighted average fair
value between $2.08 and $2.52.
Subsequent to receiving stockholder approval,
the Company completed a value-for-value stock option exchange program on July 23, 2018 ("Exchange Program"). The
Exchange Program was open to all associates of the Company who held qualified and non-qualified stock options with an exercise
prices ranging from $7.79 to $9.17 per share ("Eligible Awards"). Pursuant to the Exchange Program, 129,025 stock options
were canceled and replaced with 49,491 stock options ("Replacement Options") at an exercise price equal to the Company's
closing stock price on the grant date (July 23, 2018), which was $4.25. The exchange ratio was calculated such that the value
of the Replacement Options would approximately equal the value of the canceled Eligible Awards, determined in accordance with the
Black-Scholes option valuation model, with no incremental cost incurred by the Company. The estimate of fair value for options
granted as part of the Exchange program was $2.08, calculated using an expected volatility of 53.71% and a risk-free interest rate
of 2.83%, and a five-year expected term. On the exchange date of July 23, 2018 all of the Eligible Awards were 100% vested and
the Replacement Options were issued as 100% vested as of July 23, 2018 with a ten-year exercisable life beginning on the date of
grant. The other terms and conditions of each Replacement Option grant are substantially similar to those of the tendered Eligible
Awards it replaced. Each Replacement Option was granted under the 2018 Plan. Of the 129,025 tendered Eligible Awards, 129,025 shares
were canceled in the 2008 Plan.
In addition to the exercise and grant date
prices of the stock option awards, certain weighted average assumptions that were used to estimate the fair value of stock option
grants are listed in the following table:
|
|
|
Incentive and Non-Statutory Stock Options
|
|
|
|
Fiscal Year
|
|
|
|
2019
|
|
2018*
|
|
Expected term (years)
|
|
7.5
|
|
7.5
|
|
Expected volatility
|
|
70.65% to 70.80%
|
|
75.09% to 80.70%
|
|
Risk-free interest rate
|
|
3.01% to 3.10%
|
|
1.49% to 2.80%
|
|
Expected dividends
|
|
0
|
|
0
|
*Excluding options issued in the exchange
program
We estimate expected volatility based on
historical weekly price changes of our common stock for a period equal to the current expected term of the options. The risk-free
interest rate is based on the United States treasury yields in effect at the time of grant corresponding with the expected term
of the options. The expected option term is the number of years we estimate that options will be outstanding prior to exercise
considering vesting schedules and our historical exercise patterns.
The following table summarizes stock option activity for fiscal
year 2019 under all plans:
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Life (Yrs.)
|
|
|
Outstanding-beg of year
|
|
|
634,647
|
|
|
$
|
3.36
|
|
|
|
|
|
|
Options granted (1)
|
|
|
99,832
|
|
|
$
|
4.76
|
|
|
|
|
|
|
Options exercised
|
|
|
(667
|
)
|
|
$
|
4.41
|
|
|
|
|
|
|
Forfeited
|
|
|
(13,445
|
)
|
|
$
|
3.65
|
|
|
|
|
|
|
Expired
|
|
|
(17,203
|
)
|
|
$
|
4.41
|
|
|
|
|
|
|
Outstanding Sept 24, 2019
|
|
|
703,164
|
|
|
$
|
3.53
|
|
|
|
6.1
|
|
|
Exercisable Sept 24, 2019
|
|
|
455,710
|
|
|
$
|
3.25
|
|
|
|
4.9
|
|
As of September 24, 2019, the aggregate
intrinsic value of the outstanding and exercisable options was $8,000. Only options whose exercise price is below the current market
price of the underlying stock are included in the intrinsic value calculation.
As of September 24, 2019, the total remaining
unrecognized compensation cost related to non-vested stock options was $350,000 and is expected to be recognized over a weighted
average period of approximately 2.19 years.
There were 667 stock options exercised during the
fiscal year ended September 24, 2019 with proceeds of approximately $3,000. There were 9,397 stock options exercised during the
fiscal year ended September 25, 2018 with proceeds of $29,000.
Restricted Stock Units
During the fiscal year ended September
24, 2019, the Company granted a total of 79,988 restricted stock units from available shares under its 2018 Plan. The shares were
issued with a grant date fair market value of $3.95 which is equal to the closing price of the stock on the date of the grant.
The restricted stock units vest over three years following the grant date.
During the fiscal year 2018, the Company
granted a total of 37,037 restricted stock units from available shares under its 2008 Plan, as amended. The shares were issued
with a grant date fair market value of $2.70 which is equal to the closing price of the stock on the date of the grant. Additionally,
the Company granted a total of 60,507 shares of restricted stock during the fiscal year 2018 from available shares under its 2018
Plan. The shares were issued with grant date fair market value of $3.55 which is equal to the closing price of the stock on the
date of the grants. All restricted stock units issued under both Plans during the fiscal year 2018 vest over three years following
the grant date.
A summary of the status of non-vested restricted
stock as of September 24, 2019 and changes during fiscal 2018 is presented below:
|
|
|
Shares
|
|
|
Grant Date Fair
Value Per Share
|
|
|
Non-vested shares at beg of year
|
|
|
149,614
|
|
|
|
$2.70 to $4.18
|
|
|
Granted
|
|
|
79,988
|
|
|
$
|
3.95
|
|
|
Vested
|
|
|
(64,326
|
)
|
|
|
$2.70 to $4.18
|
|
|
Non-vested shares at Sept 24, 2019
|
|
|
165,276
|
|
|
|
$2.70 to $3.95
|
|
As of September 24, 2019, there was $287,000
of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a weighted
average period of approximately 1.33 years.
Non-controlling Interests
Non-controlling interests are presented
as a separate item in the stockholders’ equity section of the condensed consolidated balance sheet. The amount of consolidated
net income or loss attributable to non-controlling interests is presented on the face of the condensed consolidated statement of
operations. Changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions,
while changes in ownership interest that do result in deconsolidation of a subsidiary require gain or loss recognition based on
the fair value on the deconsolidation date.
The equity interests of the unrelated limited
partners and members are shown on the accompanying consolidated balance sheet in the stockholders’ equity section as a non-controlling
interest and is adjusted each period to reflect the limited partners’ and members’ share of the net income or loss
as well as any cash distributions to the limited partners and members for the period. The limited partners’ and members’
share of the net income or loss in the partnership is shown as non-controlling interest income or expense in the accompanying consolidated
statement of operations. All inter-company accounts and transactions are eliminated.
On February 6, 2019, the Company concurrently
entered into and closed on a Membership Interest Purchase Agreement with RGWP, LLC (the “RGWP Repurchase”), pursuant
to which the Company agreed to acquire all of the remaining membership interests of three entities to which the Company is already
a party to and already owned a controlling interest: Bad Daddy’s Burger Bar of Seaboard LLC, Bad Daddy’s Burger Bar
of Cary, LLC, and BDBB of Olive Park NC, LLC. The purchase price was approximately $3.0 million. These entities own and operate
three Bad Daddy’s Burger Bar restaurants in the greater Raleigh, NC market. The purchase agreement contains various representations,
warranties, and covenants of the Seller that are customary in transactions of this nature.
The RGWP Repurchase resulted in a $788,000
reduction in non-controlling interests, an increase to non-compete agreements of $50,000 and a $2,171,000 reduction in additional
paid in capital.
The following table summarizes the activity
in non-controlling interests during the year ended September 24, 2019 (in thousands):
|
|
|
Good Times
|
|
|
Bad Daddy’s
|
|
|
Total
|
|
|
Balance at September 25, 2018
|
|
$
|
377
|
|
|
$
|
2,861
|
|
|
$
|
3,238
|
|
|
Income attributable to non-controlling interests
|
|
$
|
381
|
|
|
$
|
508
|
|
|
$
|
889
|
|
|
Net Distributions to unrelated limited partners
|
|
$
|
(426
|
)
|
|
$
|
(1,391
|
)
|
|
$
|
(1,817
|
)
|
|
Purchase of non-controlling interest
|
|
$
|
-
|
|
|
$
|
(788
|
)
|
|
$
|
(788
|
)
|
|
Balance at September 24, 2019
|
|
$
|
332
|
|
|
$
|
1,190
|
|
|
$
|
1,522
|
|
Our non-controlling interests consist of
one joint venture partnership involving Good Times restaurants and eight joint venture partnerships involving five Bad Daddy’s
restaurants, including three Bad Daddy’s restaurants that opened during fiscal 2018.
The Company sponsors a qualified defined
contribution 401(k) plan for employees meeting certain eligibility requirements. Under the plan, employees are entitled
to make contributions on both a pre-tax basis or on an after-tax basis (Roth Contributions). In fiscal 2015 the Company modified
the plan to include a provision to make a Safe Harbor Matching Contribution to all participating employees. The Company will
match, on a dollar-for-dollar basis, the first 3% of eligible pay contributed by employees. The Company will also match 50% of
each dollar contributed between 3% and 5% of eligible pay contributed by employees. The Company may, at its discretion, make
additional contributions to the Plan or change the matching percentage. The Company’s matching contribution expense in fiscal
2019 and 2018 was $225,000 and $201,000, respectively. The matching contribution typically is contributed to the plan in
the fiscal year subsequent to the year in which the expense is recognized.
All of our Good Times Burgers and Frozen
Custard restaurants (Good Times) compete in the quick-service drive-through dining industry while our Bad Daddy’s Burger
Bar restaurants (Bad Daddy’s) compete in the full-service upscale casual dining industry. We believe that providing this
additional financial information for each of our brands will provide a better understanding of our overall operating results. Income
(loss) from operations represents revenues less restaurant operating costs and expenses, directly allocable general and administrative
expenses, and other restaurant-level expenses directly associated with each brand including depreciation and amortization, pre-opening
costs and losses or gains on disposal of property and equipment. Unallocated corporate capital expenditures are presented below
as reconciling items to the amounts presented in the consolidated financial statements.
The following tables present information
about our reportable segments for the respective periods:
|
|
|
Fiscal Year
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Revenues
|
|
|
|
|
|
|
|
Good Times
|
|
$
|
30,635
|
|
|
$
|
31,779
|
|
|
Bad Daddy’s
|
|
|
80,123
|
|
|
|
67,792
|
|
|
|
|
$
|
110,758
|
|
|
$
|
99,571
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
Good Times
|
|
$
|
704
|
|
|
$
|
496
|
|
|
Bad Daddy’s
|
|
|
(2,788
|
)
|
|
|
281
|
|
|
Corporate
|
|
|
(1,411
|
)
|
|
|
(405
|
)
|
|
|
|
$
|
(3,495
|
)
|
|
$
|
372
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
Good Times
|
|
$
|
993
|
|
|
$
|
342
|
|
|
Bad Daddy’s
|
|
|
7,016
|
|
|
|
10,082
|
|
|
Corporate
|
|
|
70
|
|
|
|
20
|
|
|
|
|
$
|
8,079
|
|
|
$
|
10,444
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Equipment, net
|
|
|
|
|
|
|
|
|
|
Good Times
|
|
$
|
4,890
|
|
|
$
|
5,234
|
|
|
Bad Daddy’s
|
|
|
30,479
|
|
|
|
29,642
|
|
|
Corporate
|
|
|
308
|
|
|
|
369
|
|
|
|
|
$
|
35,677
|
|
|
$
|
35,245
|
|
CEO Termination
On October 8, 2019, Boyd Hoback’s
employment as Chief Executive Officer of Good Times Restaurants Inc. ended by mutual agreement between the Company and Mr. Hoback.
Mr. Hoback also resigned from the Company’s Board of Directors. At the same time, the Company appointed the Company’s
current Chief Financial Officer, Ryan M. Zink, as acting Chief Executive Officer to serve until such point in time a permanent
CEO is named.
Under the terms of a Severance and General
Release Agreement dated October 8, 2019 (the “Severance Agreement”) between the Company and Mr. Hoback, Mr. Hoback
will receive $629,828.00 in severance payments (the “Severance”), in addition to his accrued rights (compensation,
paid time off and expense reimbursement). The Company is also providing Mr. Hoback, among other things, 90 days’ salary ($61,880.00)
and employer’s portion of health insurance premiums, in lieu of advance notice of termination. In the event of a change in
control of the Company on or before October 8, 2020, Mr. Hoback will also be entitled to $652,112.97 of additional compensation.
All payments under the Severance Agreement are subject to applicable withholding. The Severance Agreement contains a customary
mutual release of claims by each party thereto, an indemnity in favor of Mr. Hoback and certain post-employment covenants applicable
to Mr. Hoback in respect of confidential information and certain other matters.
Under the terms of the Repurchase Option
Agreement, Mr. Hoback received 40,697 shares of Common Stock in settlement of Mr. Hoback’s unvested Restricted Stock Units
granted under the Company’s 2008 Omnibus Equity Incentive Compensation Plan or its 2018 Omnibus Equity Incentive Plan and,
through a cashless exercise, 2,413 shares of Common Stock in respect of all stock options to acquire shares of Common Stock at
an exercise price of less than $1.75 per share. The Company granted Mr. Hoback the right to sell to the Company up to 43,110 shares
of Common Stock at a price per share of $1.75 (the “Option”) on or before January 3, 2020, subject to any applicable
restrictions under the Company’s credit facilities. The Option may only be exercised to effect one sale of shares Common
Stock to the Company at one time (i.e., it may not be exercised more than once). The Repurchase Option Agreement is in full satisfaction
of any “put” rights of Mr. Hoback under Section 7(f) of his Employment Agreement. Mr. Hoback and the Company made certain
customary representations and warranties as more fully set forth in the Repurchase Option Agreement.
Although the termination occurred subsequent
to the balance sheet date, the Company assessed it as probable of occurring as of the balance sheet date because certain key elements
of the Severance Agreement were agreed to by all parties prior to September 24, 2019, and consistent with various accounting standards,
recognized compensation cost of $1,012,000 associated with the event during fiscal 2019, including $277,000 of non-cash stock compensation
cost.
Amendment to the Cadence Credit Agreement
On December 9, 2019 the Company Amended
the Cadence Credit Agreement, effective September 24, 2019, modifying the credit agreement as follows: (a) amending the definition
of “Consolidated EBITDA” for purposes of certain financial covenants contained in the Credit Agreement; (b) providing
for repayment of certain loans outstanding under the Credit Agreement in consecutive quarterly installments equal to $250,000 on
the last business day of each of March, June, September and December, commencing on March 31, 2020; and (c) permit the Company,
under certain circumstances, to make Restricted Payments (as defined in the Credit Agreement) in the form of repurchases or redemptions
of certain equity interests of the Company from former directors and officers of the Company in an aggregate amount not to exceed
$100,000.
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