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 31, 2020 (the last business day of our most recently
completed second fiscal quarter), the aggregate market value of the 9,805,344 shares of common stock held by non-affiliates of
the registrant was $5,687,100.
As of December 11, 2020, the registrant had 12,629,400 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 2021 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 29, 2020.
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 premium brand within its
respective segment of the industry. Bad Daddy’s operates in the full-service dining segment as a premium burger bar concept
and Good Times operates in the quick-service restaurant segment as a high-quality drive-thru focused concept.
Through our subsidiaries, as of December
11, 2020, 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 United
States. 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-two total Good Times restaurants. Of these restaurants, thirty 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.
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.
Fiscal year 2020 had a quarter with 14 weeks. Our discussion for fiscal years 2020 and 2019, which ended on September 29, 2020
(“fiscal 2020”) and September 24, 2019 (“fiscal 2019”), respectively, cover periods of 53 full calendar
weeks in fiscal 2020 and 52 full calendar weeks in fiscal 2019.
Fiscal 2020 Financial & Brand Highlights
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We adopted ASU 2016-02 Leases (Topic 842)
at the start of fiscal 2020. This update requires us to recognize right-of-use assets and lease liabilities on our balance sheet.
See Notes 1 and 6 to our financial statements for further information.
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We recognized impairment charges to goodwill
and long-lived assets in fiscal 2020 totaling approximately $15.6 million. Of this amount, $10 million was an impairment of goodwill
related to the impact from closures and significant capacity reduction of Bad Daddy’s dining rooms resulting from the COVID-19
pandemic. The remaining approximate $5.6 million impairment was an impairment long-loved assets related to six Bad Daddy’s
restaurants and one Good Times restaurant which were identified as having a carrying value exceeding expected future cash flows.
See Note 1 to our financial statements for further information.
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Our net revenues for fiscal 2020 decreased
by $897,000 (-0.8%) to $109,858,000 from $110,755,000 in fiscal year 2019, primarily due to the negative impact of our Bad Daddy’s
dining room closures due to the COVID-19 pandemic. This negative impact was partially offset by increased Good Times revenues,
an extra operating week in fiscal 2020, and the opening of two new Bad Daddy’s restaurants during the first fiscal quarter
of 2020.
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The Bad Daddy’s brand had a 17.7%
decrease in same store sales for fiscal 2020.
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The Good Times brand had a 7.9% increase
in same store sales for fiscal 2020.
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One company-owned Good Times restaurant
closed during fiscal 2020.
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We ended fiscal 2020 with $11.5 million
in cash and a $17.1 million balance in notes payable.
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Recent Developments
COVID-19 Pandemic: The global crisis
resulting from the spread of COVID-19 had a substantial impact on our restaurant operations during the third and fourth fiscal
quarters of 2020. During portions of the month of March 2020 through late May 2020, all of the Company’s Bad Daddy’s
Burger Bar restaurants were open only for delivery and carry-out service, with dining rooms closed by government orders. Beginning
in late May 2020, we began to re-open dining rooms at Bad Daddy’s as local regulations allowed. By early June, we had re-opened
all the dining rooms at Bad Daddy’s, which remained open through the end of the fiscal year. Although our dining rooms were
open, all were operating at some reduction of capacity, whether driven by explicit capacity reductions under government orders,
or due to social distancing protocols that are either mandated by the same government orders, or which we abide by as under our
own internal protocols designed to maintain a safe foodservice environment, both for our employees and for our customers.
Our operating results substantially depend
upon our ability to drive traffic to our restaurants, and for our Bad Daddy’s Burger Bar restaurants, to serve guests in
our dining rooms. We cannot currently estimate the duration of the impact of the COVID-19 pandemic on our business; neither are
we able to predict how the pandemic will evolve nor how various government entities will respond to its evolution. In November
2020 all of our dining rooms in Colorado closed again due to government requirements, which we expect to result in lower average
weekly sales for those restaurants. Should additional dining room closures occur, our business would be adversely affected. All
of our Bad Daddy’s restaurants have outdoor seating options which are currently open for seating, including under current
Colorado COVID-19 guidelines. Should outdoor seating be restricted similar to the way dining rooms have, our business would also
be adversely affected. Even without government orders, customers may choose to reduce or eliminate in-restaurant dining because
of increasing numbers of COVID-19 cases, hospitalizations, or deaths.
Additionally, in connection with spread
of COVID-19, there have been disruptions in various food supply chains in the United States. Our operating results substantially
depend upon our ability to obtain sufficient quantities of products such as beef, bacon, and other products used in the production
of items served and sold to our guests. Ongoing impacts of the COVID-19 pandemic could result in product shortages and in turn
could require us to serve a limited menu, restrict number of items purchased per guest, or close some or all of our restaurants
for an indeterminate period of time. Ongoing material adverse impacts from the COVID-19 pandemic could result in reduced revenue
and cash flow and could affect our assessments of impairment of intangible assets, long-lived assets, or goodwill.
We took extraordinary actions to increase
our liquidity in response to COVID-19, including temporarily reducing employee pay, reductions in force, and obtaining Paycheck
Protection Program (the “PPP”) loans. The PPP is sponsored by the Small Business Administration (the “SBA”).
The PPP is part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). We have since significantly
increased employment levels and restored pay to employees as of the date of this report. Although we currently have a meaningful
cash balance and generated significant cash flow from operations during the fourth fiscal quarter, should business decline significantly
as a result of the pandemic we would not likely be able to take some of the same actions without negatively impacting the long-term
viability of the business. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets,
and more specifically to those borrowers operating in the full-service dining segment, and there can be no guarantee that additional
liquidity will be available on favorable terms, or at all, especially the longer the COVID-19 pandemic lasts or if it were to reoccur.
The impact on our operating results as
well as the operational and financial measures we have implemented in response to the COVID-19 pandemic have been included throughout
this report.
Debt: We previously entered into
a credit agreement with Cadence Bank (the “Cadence Credit Facility”) 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 Cadence Credit Facility 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 additional amendment 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).
On April 14, 2020, the Company entered
into a Consent and Forbearance Agreement effective March 31, 2020 (the “Forbearance Agreement”) with respect to the
Cadence Credit Facility. The Company informed Cadence that certain events of default may occur as a result of Company’s failure
to comply with certain financial covenants for the fiscal quarter ended on or about March 31, 2020 (collectively, the “Potential
Events of Default”). Pursuant to the terms of the Forbearance Agreement, from March 31, 2020 through 11:59 p.m. (Eastern
time) on June 30, 2020 (the “Forbearance Period”), Cadence agreed to forbear from exercising any available rights and
remedies under the Cadence Credit Facility to the extent such rights and remedies arise exclusively as a result of the Potential
Events of Default. Further, Cadence agreed to consent to the Company’s request to defer the principal payment (the “Payment
Deferral”) on the loans due on June 30, 2020 until the maturity date. The forbearance period (the “Forbearance Period”)
expired at 11:59 p.m. (Eastern time) on June 30, 2020. The Company has been in compliance with all financial covenants since the
expiration of the Forbearance Period.
On May 7, 2020 we entered into entered
into unsecured loans (the “PPP Loans”)in the aggregate principal amount of $11,645,000 with Cadence Bank, N.A. (the
“Lender”) pursuant to the Paycheck Protection Program (the “PPP”), which is sponsored by the Small Business
Administration (the “SBA”). The PPP is part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES
Act”). The PPP Loans are evidenced by individual promissory notes executed on May 7, 2020 (together, the “Notes”)
in favor of the Lender which Notes bear interest at the rate of 1.00% per annum. All or a portion of the Loans may be forgiven
by the SBA upon application by the borrowers accompanied by documentation of expenditures in accordance with SBA requirements under
the PPP, which includes employees being kept on the payroll for eight weeks after the date of the PPP Loans and the proceeds of
such PPP Loans being used for payroll, rent, mortgage interest or utilities. We believe we are in compliance with all such requirements
but, in the absence of definitive guidance, cannot give assurance that the PPP Loans will indeed be forgiven. See “Item 1A
Risk Factors”.
Concepts
Bad Daddy’s Burger Bar
Bad Daddy’s Burger Bar is a full-service,
casual dining small box “better burger” concept. 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 from our competition:
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”True Scratch Cooking.” The menu consists of chef-inspired burgers, sandwiches, main-course
salads, and appetizers carefully crafted in-house with high-quality ingredients to deliver bold flavor profiles along with portion
sizes and presentations that are unrivaled in the casual dining segment of the industry. Beyond simply assembling finished ingredients
on a plate, many of our sauces, dressings, and even our housemade American cheese are prepared from scratch in our restaurant kitchens.
We offer our guests an unparalleled ability to customize their burgers and salads, including Create Your Own Burgers and Salads,
restricted only by the ingredients available in the kitchen, which include a variety of different protein options including bison,
turkey, chicken, salmon, and plant-based protein.
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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 have historically accounted for approximately 15% of sales in
our Bad Daddy’s restaurants. This decreased to 12% of sales in Fiscal 2020 as a result of COVID-19 closures and an increase
in off-premise sales. 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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“Over the Top” 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 an 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.
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While clearly available for on-premises
customers, all three of these elements are available for our off-premises guests as well, as we (1) offer the same customization
on our off-premises ordering platforms as we offer in-restaurant, (2) where allowable by state or local regulation, we also provide
our alcoholic beverages in an off-premises format for those customers who are ordering their meal for carryout or delivery, and
(3) we offer the same level of hospitality to our carry-out guests and tightly manage our delivery service providers to a similar
expectation of over-the-top service.
This brand positioning results in transactions
that generate an average per person check of approximately $19. The lunch daypart (open until 2pm) represents approximately 36%
and the happy hour and dinner dayparts (2pm until close) represent approximately 64% of restaurant sales. Off-premise sales, including
take-out, delivery and curbside pickup, accounted for approximately 30% of all system-wide sales in Fiscal 2020, an increase of
19% over Fiscal 2019. This change in off- to on-premise sales was a result of COVID-19 closures and capacity reductions. Off-premise
sales average $27 per transaction while on-premise sales average $30 per transaction.
A typical Bad Daddy’s restaurant
is approximately 3,500-4,000 square feet with an enclosed patio, smaller than most other chain casual dining restaurants. Fiscal
2020 average restaurant sales were projected to be approximately $2.6 million based upon historical performance and planned new
restaurant openings, which would have resulted in average sales per square foot of approximately $684. We believe this is a key
metric indicating the strength and expansion potential of the concept. COVID-19 has affected our average unit volumes, however,
resulting in actual Fiscal 2020 average annual restaurants sales of $2.0 million, generating average sales per square foot of approximately
$556.
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.
In November 2020 the Company launched an
all-new virtual brand, Bad Mama’s Chicken. This concept currently utilizes twenty-four existing Bad Daddy’s Burger
Bar kitchens and staff and is available only on major third-party delivery platforms. The limited menu includes fresh jumbo chicken
wings and hand-battered fresh chicken tenders with multiple unique dipping sauces and sides including crispy tater tots, housemade
potato chips and creamy, scratch-made mac and cheese. The Company is assessing expanding the virtual concept beyond the select
locations in Alabama, Colorado, Georgia and Oklahoma, North Carolina, South Carolina and Tennessee.
Good Times Burgers & Frozen Custard
Good Times is an upscale, quick-service
restaurant concept offering fresh, 100% all-natural, hand-crafted products. We own and operate 24 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 consistently prompt service. We support our quality position by using only all-natural beef and chicken. Sandwiches
and sides are made to order to assure they are fresh and hot. Our All Natural Frozen Custard is made fresh throughout the day.
These quality commitments help Good Times challenge quick-serve restaurant norms and match quality found at fast casual restaurants.
Our focus on speed of service keeps our customers happy as most of our sales come from the drive thru. With menu innovation, we
strive to create flavor profiles unique to Good Times. We have rotating limited time menu items and custard flavors. Our customers
appreciate that we support local causes and do not take ourselves too seriously. Good Times is able to communicate these advantages
and promotions through the use of radio and digital advertising.
Our average per person check is approximately
$9.61, 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 quick-service chains, choosing to define our value proposition based on quality ingredients with a specific focus on all-natural
beef and chicken and products spanning a range of price choices within each of our menu categories. We have shifted our focus to
a blend of quality and speed while slightly reducing the number of items on the menu.
Good Times is primarily a drive-through
concept, as all our restaurants have at least one drive-through lane and generally have a walk-up window where customers may additionally
place orders. 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. Prior to the COVID-19 pandemic, even in our restaurants
that feature dine-in seating, a majority of our sales were conducted through the drive-thru lane. All of our company-owned Good
Times restaurants dining rooms are closed currently and have been since late March 2020. Customers are able to enter restaurants
with dining rooms to place orders and are able to place orders at the walk-up windows in those locations without dining rooms.
Our patios are currently open for outdoor dining as allowed under current Colorado COVID-19 restaurant guidelines.
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 2020’s same store sales increased 7.9% preceded by a minimal same store sales decline
of (0.4%) in fiscal 2019 and comparable sales growth of 4.2% in fiscal 2018 and 2.1% in fiscal 2017.Compound annual same store
sales growth over the last five fiscal years was 3.9%.
Our Business Strengths
Our Brands Are Complementary.
While operating in different segments of
the restaurant industry, our two brands complement each other in both their similarities and differences:
Each has a value proposition primarily
driven by quality and higher-touch service that deliver an exceptional experience to each guest. The menu contains chef-inspired
items with many made from scratch in our kitchens. Bad Daddy’s resonates with consumers by consistently executing high-quality
menu items with bold flavors delivered in a high-energy environment with a slightly irreverent brand personality. The appeal of
Bad Daddy’s supersedes a purely on-premise customer experience however, as the focus we place on bold, unique flavors; superior
ingredients; and scratch cooking in each kitchen translates into significant off-premise adoption, both through traditional customer
carry-out and delivery by third party delivery service providers.
We believe Good Times is the only quick-service
chain in our region with an all-natural platform. We do not offer a low-priced menu as many national quick-service chains do, choosing
to compete on a market position emphasizing quality with a specific focus on all-natural beef and chicken, and with a variety of
price points across the menu with quick-service restaurant speed of service. The quick-service, and in particular, drive-thru format
of our Good Times concept offers a balancing effect to business cycles that are common in the full-service segment of the restaurant
industry.
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 core values and four dimensions of our business:
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Core Values. Each brand focuses
on developing behaviors and expectations around our core values, which we have recently revisited and updated. Our updated values
are: 1) Respect and Care for Others, 2) Integrity, 3) Service Orientation and Hospitality, and 4) Entrepreneurship and Innovation.
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Dimensions of the Business:
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Individual Fulfillment. Our first value speaks directly to people, whether that is fellow
team members or our customers. Specific to our team members, we seek to hire people with aligned values and the appropriate knowledge
and skills throughout the organization, provide them with comprehensive training programs, and provide a framework for self-directed,
company-supported continuous development, as we believe that the individual fulfillment achieved from self-actualized team members
with aligned values will deliver consistently superior products and service. We maintain incentive programs at all levels of management
based on balanced metrics addressing performance related to people development and retention, consistent, strong operations, and
superior economic value creation.
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Our Guests’ Emotional Connection. Rather than merely being a feeding trough for the
masses, we strive to differentiate our concepts in a way that creates an emotional connection by the guest to each brand. This
emotional connection drives loyalty and long-term strength in same-store-sales.
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Operational Excellence. We are content with neither mediocrity nor the status quo, even
if it is “good enough.” Rather we strive for excellence in execution, whether that is within the operations of our
restaurants, or the operations of our shared services capabilities. We: (1) do things the right way, (2) take pride in our
work, (3) take pride in our facilities, and (4) take pride in our brand. The pride that is shared by all of us drives us towards
excellence in all of our activities.
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Financial Discipline and Strength. While growth is important, it needs to be sensible and
bounded by financial strength. We want to achieve both growth in unit volumes and growth in number of units, but at the same time
maintain a low debt load.
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Our Brands Have Growth Potential.
We believe both of our brands are well
positioned to take advantage of consumers’ changing demands for restaurants, whether regarding the quality of the ingredients,
the ability to customize their order exactly to their liking, or the ability to eat their food in a restaurant dining room,
on a patio, in their car, or to either pick it up or have it delivered so they can eat it at their home or office. 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. It is our goal
to primarily grow our Bad Daddy’s brand and to do so relatively contiguously from our existing restaurants 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 Senior
Leadership Team with Significant Experience.
Each of the members of our senior leadership
team have more than fifteen years of relevant experience in their field of expertise, and nearly all 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 brand is operated with distinct operations
teams led by its own operations leader, while utilizing shared support capabilities in administration, finance, accounting, human
resources, development, marketing and information technology, each capability led by its own qualified leader with many years of
functional and leadership experience. We believe we have people with the right expertise as well as capable processes and systems
in place to support both concepts and targeted future growth of the Bad Daddy’s concept.
We Have Maintained Operating Momentum.
Same-store sales at Good Times have increased
nine of the past ten years. Same-store sales increased for fiscal 2020 primarily due to an extra operating week in the first fiscal
quarter of 2020 and price increases of approximately 4.0%. Our compound annual same-store sales growth rate was approximately 5.5%
from fiscal 2014 to fiscal 2020. 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 with a laser focus on speed
and accuracy in execution, 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 by a qualified chef and was initially expanded in partnership with a serial restaurant entrepreneur
who remains a non-controlling partner in a five of our Bad Daddy’s restaurants. Sales of the Bad Daddy’s restaurants
which were open for at least 18 months averaged $2.0 million for fiscal 2020, which was severely impacted by dining room closures
and reduced dining room capacities resulting from the COVID-19 pandemic. We opened two restaurants in fiscal 2020 and four in fiscal
2019. The magnitude of our sales returns in the third and fourth fiscal quarters upon reopening of dining rooms gives us confidence
in the strength of the Bad Daddy’s concept and the ability for us to deliver upon our pre-pandemic model in a post-pandemic
world, such that we expect significant expansion potential, both in our existing markets and in new markets.
Business Strategies
We are focused on continuing to grow same
store sales and improve the profitability of the Good Times concept while continuing targeted unit growth of the Bad Daddy’s
Burger Bar concept in domestic 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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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, all-natural brand positioning at Good Times with targeted
merchandising around each of our menu categories and a targeted focus on speed and accuracy in execution instead of deep discounts
or exotic, limited-reach menu items. We also expect to continue various advertising programs, shifting the media mix periodically
as we determine appropriate to maximize advertising effectiveness and efficiency. At Bad Daddy’s, during the COVID-19
pandemic-induced restrictions, we intend to maximize merchandising of off-premise sales at affected restaurants, while offering
on-premises service to the greatest extent allowed by local regulations. As we emerge from the restrictions and limitations posed
on us, we intend to continue to highlight our ease of access to our concept whether the dining occasion is an on-premise or off-premise
format, through continued partnerships with delivery service providers, and identifying innovative ways to better reach all potential
customers. We further intend to increase Bad Daddy’s same store sales through ongoing menu engineering around bold flavors
and unique, concept-appropriate menu items that we believe drive increased customer visits as well as elevated per person average
check. Bad Daddy’s advertising has traditionally targeted individual trade areas, community involvement and in-store,
“four-wall” marketing activities that focus on optimizing the guests’ food, bar and service experience. We have
enhanced those efforts by leveraging third parties who specialize in social and digital media advertising design.
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Improve operational capabilities. We continue to focus on managing our expenses in the operation
of our restaurants, 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 implement programs to mitigate the impact of
these external factors and continue to explore other opportunities to improve efficiency of general and administrative costs. We
placed an elevated level of focus in managing overhead costs and gaining further efficiencies in supervision and support services
costs and believe that those costs will be relatively stable, though we expect to invest in modern human resource and financial
planning systems that will provide improved abilities for our restaurant leaders and support capability leaders to best create
value for the business.
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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 identified two potential
new restaurant locations in the southeast U.S. market. Development of these sites began in mid-2020 but has been significantly
delayed due to the COVID-19 pandemic. We expect development of at least one of these sites during fiscal 2021. 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. Consistent with our business dimension of Financial Discipline and Strength, we expect that
growth in company-owned restaurants will be more modest than it has been in the past and will stem from operating cash flow rather
than through the use of significant debt financing to drive more rapid growth.
|
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 use specialized
software to create a sales forecast for each site and have continued to update the data in that site forecasting software even
as we have reduced growth during 2020. We expect to utilize this software as one component of decision making in the selection
of site for future Bad Daddy’s restaurant locations.
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 the majority 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 continue to refine the economic model of our primarily drive-thru business. 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 would involve a new prototype restaurant design focused primarily
on drive-thru with an outside patio but without any enclosed dining room.
We currently lease either the land or the
land and building for all of our Good Times restaurants. If we were to develop additional sites, a lease/buy decision
would be based upon the economics of the property and our long-term point of view on the underlying real estate and do not have
an explicit preference for leasing in the case of future Good Times restaurants. 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 11, 2020, 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-two Good Times restaurants.
Company-Owned/Co-Developed/Joint-Venture
|
|
|
Bad Daddy’s
Burger Bar
|
|
|
Good Times Burgers
& Frozen Custard
|
|
|
Total
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Alabama
|
|
|
1
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
1
|
|
|
Colorado
|
|
|
12
|
|
|
|
12
|
|
|
|
24
|
|
|
|
26
|
|
|
|
36
|
|
|
|
38
|
|
|
Georgia
|
|
|
4
|
|
|
|
4
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4
|
|
|
|
4
|
|
|
North Carolina
|
|
|
14
|
|
|
|
14
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14
|
|
|
|
14
|
|
|
Oklahoma
|
|
|
1
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
1
|
|
|
South Carolina
|
|
|
3
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3
|
|
|
|
3
|
|
|
Tennessee
|
|
|
2
|
|
|
|
2
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
2
|
|
|
Total
|
|
|
37
|
|
|
|
37
|
|
|
|
24
|
|
|
|
26
|
|
|
|
61
|
|
|
|
63
|
|
One company-owned Good Times restaurant closed, and the property
was subleased during fiscal 2020. Additionally, one company-owned Good Times restaurant closed subsequent to September 29, 2020
that the Company intends to sublease to a non-affiliated entity.
We opened two company-owned Bad Daddy’s restaurants during
the first fiscal quarter of 2020.
Franchise/License
|
|
|
Bad Daddy’s
Burger Bar
|
|
|
Good Times Burgers
& Frozen Custard
|
|
|
Total
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Colorado
|
|
|
0
|
|
|
|
0
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
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
|
|
|
|
8
|
|
|
|
10
|
|
|
|
10
|
|
Menu
Bad Daddy’s Burger Bar
The Bad Daddy's Burger Bar menu offers
our guests a culinary-driven menu consisting of our own unique blend of high quality and handcrafted Angus beef burgers with creative,
scratch-made toppings including buttermilk-fried bacon, housemade American cheese, creamy ale queso made in-house with our Bad
Daddy’s Amber Ale, and our specialty signature Bad Daddy’s sauce. The customizable menu options also include
a variety of proteins including black bean, salmon, turkey, buffalo and chicken. Additionally, we offer giant chopped salads,
a full gluten-friendly menu, appetizers including hand-cut fries and housemade potato chips, hand-spun ice cream milk shakes and
our scratch-made "southern-style" banana pudding. We feature a variety of craft beers from local breweries and
a full bar serving spirits, innovative cocktails, and wines including our signature Red and White pours.
Our
signature recipes include the Bad Ass Burger; Sam I Am Burger and Emilio’s Chicken Sandwich. Signature Chopped Salads
include the Texican Chicken Salad and the Stella’s Greek Salad. The Bad Daddy’s Create Your Own menu allows full customization
of burgers and salads offering over sixty topping options. We’ve partnered with Full Sail Brewing, Breckenridge Brewing,
and Stone Brewery to make our Bad Daddy's draft brews including Bad Daddy’s Amber Ale, IPA, and Blonde. Our creative cocktail
menu uses fresh-squeezed housemade sours and fresh garnishes in our signature Bad Ass Margaritas and features creative and timeless
options including the Daddy’s Dragonberry and a Peanutbutter Old Fashioned.
Bad
Daddy’s Burger Bar strives to provide proprietary flavors and recipes available nowhere else with fresh, handcrafted quality
throughout the menu paired with genuine and warm hospitality. We also commit to making occasional changes to keep our menu fresh
for our guests while still maintaining the spirited flavor profiles that distinguish us from others. In addition, we have rotating
chef specials with flavor profiles unique to Bad Daddy's. At times we also feature a burger with local ingredients with a giveback
to a local charity.
Good Times Burgers & Frozen Custard
The menu of each Good Times restaurant
is focused primarily on hamburgers, cheeseburgers, chicken sandwiches and chicken tenders that are fresh, never frozen, and using
only all-natural beef and chicken. This menu is supplemented by side selections including two types of french fries, jalapeno potato
poppers, and onion rings. Beverages include typical soft drinks and fresh lemonades, with a selection of frozen custard products.
We have a limited breakfast menu consisting of breakfast burritos, orange juice and coffee and a kid’s meal menu featuring
a choice of main item, side, drink, and a wooden nickel that can be redeemed for a free kid’s cup or cone of custard.
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 large media buys or
“traditional” 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 have recently supplemented
this with additional investments in social and digital media using third party resources who specialize in highly targeted advertisements
on social media and digital platforms. We additionally use public relations, and trade area specific direct mail materials, particularly
in support of new restaurant openings, to drive trial and initial awareness.
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 radio advertising during
fiscal 2020 and 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.
As with Bad Daddy’s, we have recently supplemented our legacy advertising approach with additional investments in social
and digital media using third party resources who specialize in highly targeted advertisements on social media and digital platforms.
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 three or four managers in our operations at most restaurants. Managers are
cross-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, however each manager is assigned one or more specific areas of responsibility over
which they have “ownership” and direct accountability for results. Our managers at each restaurant participate in a
bonus pool for each restaurant based on a combination of restaurant sales, income, and specific financial and operational objectives.
As a full-service concept, our operating leadership structure for Bad Daddy’s Burger Bar operations is distinct and separate,
including a separate operations leader, from our Good Times operations team as the experience, qualifications and compensation
of team members are significantly different between the quick service and full service segments of the industry. Although this
is the case, we have combined recruiting into a single shared services capability and believe that long-term our training capabilities
for the brands will similarly be combined into single shared services capability
Each Good Times restaurant employs a general
manager, generally one two three hourly assistant managers, up to four hourly shift managers and approximately 10 to 20 non-management
team members, most of whom work part-time during three shifts. Most of our shift managers, assistant managers, and general managers
are internally promoted from team member positions, and in order to become a shift manager, an eight- to ten-week program over
which the team member becomes fully capable on all phases of the operation, is used to train a new shift manager. Ongoing training
and development is provided as necessary. We believe that incentive compensation of our restaurant managers is essential to the
success of our business. Accordingly, our general managers and assistant managers in each restaurant participate in a bonus program
based upon meeting financial, customer service and quality performance objectives tied to a monthly scorecard of measures.
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 all 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 our restaurant
leadership team members 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. 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
At Bad Daddy’s we seek to 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 of management 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 forms 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 but are assessing potential future growth through the development
of franchised Good Times restaurants.
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 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. Configuration of restaurant point-of-sales systems is performed by our technology
share service capability.
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 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 nationally recognized comprehensive safety and
sanitation course specific to food service. Minimum cook temperature requirements, periodic line checks throughout the
day, and daily facilities checklists 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 Bad Daddy’s restaurants
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 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 29, 2020, we had approximately
2,318 employees of which 2,109 are hourly team members and 209 are salaried managers who working full time. Our set of values includes
Respect and Care for people, including all of our employees, and one of the dimensions of our business is Individual
Fulfillment. We strive to provide competitive salary and benefits, strong development opportunities, and a meaningful job or
career for all of our employees and believe that this has translated into good employee relations. None of our employees are covered
by a collective bargaining agreement.
COVID-19 Response
We took early action regarding employee
well-being in response to the COVID-19 pandemic, implementing comprehensive protocols to protect the health and safety of our employees
and guests. Remote work for corporate management and staff was adopted ahead of state and county requirements. We limited reductions
in scheduled hours for employees in our company-operated restaurants. For employees of our company-operated restaurants, we also
enhanced our benefits programs to offer expanded supplemental paid sick leave ahead of mandates in the majority of the state and
county mandates and in counties where sick leave is not mandated, waived employee cost-sharing for COVID-19 testing and moved our
tele-med offerings from telephone only to include virtual visits at the same copay cost. We believe that employee sentiment regarding
our response to the pandemic is very favorable.
Due to the COVID-19 pandemic, staffing
levels for each concept were adjusted to meet guest traffic determined by the then current state orders closing on-premise dining
and/or limiting occupancy.
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 guests to customize their order, distinctiveness
of its atmosphere and the bold, unique flavors of our scratch-made, chef-inspired 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, has expanded into the Colorado market. Double drive-through restaurant chains such as Rally’s
Hamburgers and Checker’s Drive-In Restaurants, which currently operate 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 Colorado market 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 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 will be renewed prior to September 2021. The registration for our “Good Times” mark will be
renewed prior to August 2022. 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 10, 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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our expectations as to the ongoing impact
of the COVID-19 pandemic on our business;
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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. Additionally, in the context of the ongoing global COVID-19 pandemic, future facts and circumstances could change and
impact assumptions relied upon in our forward-looking statements.
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.
Risks Related to Our Business
The outbreak of, and local, state
and federal governmental responses to, the COVID-19 pandemic have significantly disrupted and will continue to disrupt our business,
which has and could continue to materially affect our financial condition and operating results for an extended period of time.
The global crisis resulting from the spread
of COVID-19 had a substantial impact on our restaurant operations in fiscal 2020. During portions of the month of March 2020 through
late May 2020, all of the Company’s Bad Daddy’s Burger Bar restaurants were open only for delivery and carry-out service,
with dining rooms closed by government orders. Beginning in late May 2020, we began to re-open dining rooms at Bad Daddy’s
as local regulations allowed. By early June, we had re-opened all the dining rooms at Bad Daddy’s. Although our dining rooms
were open, all operated at some reduction of capacity, whether driven by explicit capacity reductions under government orders,
or due to social distancing protocols that were either mandated by the same government orders, or which we abide by under our own
internal protocols designed to maintain a safe foodservice environment, both for our employees and for our customers. In November
2020, due to increased incidence and positivity rates in certain counties, all of our Bad Daddy’s Burger Bar restaurants
in Colorado again closed dining rooms per government orders, and will remain closed for an indeterminate period of time, though
at this time the outdoor patios at those restaurants remain open and available for customer seating.
Our operating results substantially depend
upon our ability to drive traffic to our restaurants, and for our Bad Daddy’s Burger Bar restaurants, to serve guests in
our dining rooms. We cannot currently estimate the duration of the impact of the COVID-19 pandemic on our business; neither are
we able to predict how the pandemic will evolve nor how various government entities will respond to its evolution. Should governments
choose to re-close additional dining rooms, our business would be adversely affected. Even without government orders, customers
may choose to reduce or eliminate in-restaurant dining because of increasing numbers of COVID-19 cases, hospitalizations, or deaths.
Additionally, in connection with spread
of COVID-19, there have been disruptions in various food supply chains in the United States. Our operating results substantially
depend upon our ability to obtain sufficient quantities of products such as beef, bacon, and other products used in the production
of items served and sold to our guests. Ongoing impacts of the COVID-19 pandemic could result in product shortages and in-turn
could require us to serve a limited menu, restrict number of items purchased per guest, or close some or all of our restaurants
for an indeterminate period of time. Ongoing material adverse impacts from the COVID-19 pandemic could result in reduced revenue
and cash flow and could affect our assessments of impairment of intangible assets, long-lived assets, or goodwill.
We took extraordinary actions to manage
our liquidity position in response to COVID-19, including temporarily reducing employee pay, reductions in force, and obtaining
PPP loans under the CARES Act. We have since significantly increased employment levels and restored pay to employees. Although
we currently have a meaningful cash balance and generated significant cash flow from operations during this quarter, should business
decline significantly as a result of the pandemic we would not likely be able to take some of the same actions without negatively
impacting the long-term viability of the business. The COVID-19 pandemic is adversely affecting the availability of liquidity generally
in the credit markets, and there can be no guarantee that additional liquidity will be available on favorable terms, or at all,
especially the longer the COVID-19 pandemic lasts or if it were to reoccur.
The equity markets in the United States
have been extremely volatile due to the COVID-19 outbreak and our stock price has fluctuated.
We have incurred indebtedness under
the CARES Act which may be subject to audit, may not be forgivable and may eventually have to be repaid.
The PPP Loans are subject to forgiveness
under the PPP upon the Company’s request to the extent that the proceeds are used to pay expenses permitted by the PPP, including
payroll costs, covered rent and mortgage obligations, and covered utility payments.
The U.S. Department of the Treasury has
announced that it will conduct audits for PPP loans that exceed $2 million. Should we be audited or reviewed by the U.S. Department
of the Treasury or the SBA as a result of the PPP Loans or filing an application for forgiveness or otherwise, such audit or review
could result in the diversion of management’s time and attention, generate negative publicity and cause us to incur legal
and reputational costs. If we were to be audited and receive an adverse outcome in such an audit, we could be required to return
the full amount of the PPP Loan and may potentially be subject to civil and criminal fines and penalties. We may not have the resources
to repay the PPP Loans if required to do so by the federal government.
The Company cannot provide assurance that
the principal and interest amounts under the PPP Loans will be forgiven. If all or substantially all of the PPP Loans are not forgiven
or it is subsequently determined that they must be repaid, we may be required to repay the PPP Loans. Any such repayment of the
PPP Loans will reduce the funds available to us for working capital and other corporate purposes and may limit our ability to obtain
additional financing. Additionally, though we believe we are eligible for the PPP Loans under the PPP, our receipt of the PPP Loans
could result in negative publicity, or expose us to liability under the federal False Claims Act, which prohibits the known filing
of a false claim or the known use of false statements to obtain payment from the federal government, if it is determined that we
were in fact not eligible to take the PPP Loans in the first instance.
We have accumulated losses and expect
losses in the future.
We have incurred losses in 29 of our 33
years since inception. As of September 29, 2020, we had an accumulated deficit of $44,467,000. Especially
in light of the uncertainty of the COVID-19 pandemic, we cannot reasonably predict whether we will produce income or again generate
a loss for the fiscal year ending September 28, 2021.
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
nine of the past ten years at Good Times. We have operated Bad Daddy’s for a shorter period of time and have had
negative same store sales for that concept in the last two fiscal years. 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 and could be greatly impacted by
future effects of the COVID-19 pandemic. We cannot assure that our advertising and promotional efforts will in fact
be successful, nor that sales volumes will be fully restored after COVID-19 subsides. 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. Lastly, the opening of any new restaurants has been significantly delayed because
of the effects of the COVID-19 pandemic, and it is unknown when development activities will be fully restored.
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, seasonality and COVID-19-related factors
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 Good Times contracts for chicken are fixed price contracts. Our Bad
Daddy’s contracts for chicken and all 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.
General economic conditions, including
economic downturns related to the COVID-19 pandemic, have adversely affected our results of operations and may continue to do so.
If the economy experiences a more significant 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 expanded into the state of Colorado, the primary state in which we operate, and is continuing
to expand in the market. 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 President, Chief Executive
Officer, Principal Financial Officer and Treasurer; Susan Knutson, our Controller and Corporate Secretary and Scott LeFever, our
Vice President of Operations 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.
In addition to the novel coronavirus that
causes COVID-19, consumer preferences could be affected by health concerns about outbreaks of other viruses, including various
strains of influenza; 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, Alabama, 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.
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.
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” under SEC rules. 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.
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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the impact of the ongoing COVID-19 pandemic on our business;
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operating results that vary from the expectations of management, securities
analysts and investors;
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developments in our business;
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the operating and securities price performance of companies that investors
consider to be comparable to us;
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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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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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publication of research reports about us or the sectors in which we
operate generally;
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changes in market valuations of similar companies;
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additions or departures of key management personnel;
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actions by institutional stockholders;
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speculation in the press or investment community; and
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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.
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:
|
|
·
|
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;
|
|
|
·
|
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;
|
|
|
·
|
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
|
|
|
·
|
provide that the authorized number of directors is no more than five,
as determined by our board of directors.
|
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.
|
|
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
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. We expect to enter a new lease, either at our existing office location or in a nearby office building
prior to the expiration of our current office lease. 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 3,500 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.
|
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
The Company is the defendant party to a
lawsuit, White Winston Select Asset Funds, LLC and GT Acquisition Group, Inc. v. Good Times Restaurants, Inc., initially filed
on September 24, 2019 in Delaware Chancery Court arising from the failed negotiations between plaintiffs and the Company for the
sale of the Good Times Drive Thru division to plaintiffs. The Company removed the case to federal court in the District of Delaware
on November 5, 2019. Plaintiffs assert claims for breach of contract and promissory estoppel claiming that the parties, in fact,
had an enforceable agreement for the sale of the division to plaintiffs and seek specific performance of the unexecuted contract
in connection with the failed transaction. In the alternative, Plaintiffs seek money damages of no less than $332,638.84 suffered
from the alleged breach of the agreement. On November 12, 2019, the Company moved to dismiss the case, and the Court denied the
motion on September 8, 2020, initiating discovery in the case. Trial is set for March 7, 2022. While the Company continues to believe
that plaintiffs’ claims based on an unexecuted contract are meritless and that the probability of plaintiffs’ success
and any material impact on the Company are extremely low, the Company, in consultation with counsel, has made an assessment that
disclosure of the case is warranted in light of the commencement of fact discovery. Company intends to continue to vigorously defend
the lawsuit. The Company has concluded that a loss, or range of loss, from this matter is not determinable, and therefore we have
not recorded a liability related to the litigation. The Company will continue to evaluate this matter based on new information
as it becomes available. We are otherwise subject, from time to time, to various lawsuits in the normal course of business. These
lawsuits are not expected to have a material impact on us.
|
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
6,242
|
|
|
$
|
-
|
|
|
Accounts payable
|
|
|
2,581
|
|
|
|
3,774
|
|
|
Deferred income
|
|
|
69
|
|
|
|
79
|
|
|
Operating lease liabilities, current
|
|
|
4,689
|
|
|
|
-
|
|
|
Other accrued liabilities
|
|
|
5,055
|
|
|
|
5,375
|
|
|
Total current liabilities
|
|
|
18,636
|
|
|
|
9,228
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Maturities of long-term debt due after one year
|
|
|
10,903
|
|
|
|
12,850
|
|
|
Operating lease liabilities, net of current portion
|
|
|
53,731
|
|
|
|
-
|
|
|
Deferred and other liabilities
|
|
|
1,440
|
|
|
|
8,907
|
|
|
Total long-term liabilities
|
|
|
66,074
|
|
|
|
21,757
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
Good Times Restaurants Inc. stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value;
|
|
|
|
|
|
|
|
|
5,000,000 shares authorized, 0 shares issued and outstanding, and
outstanding as of Sept 29, 2020 and Sept 24, 2019, respectively
|
|
|
-
|
|
|
|
-
|
|
|
Common stock, $.001 par value; 50,000,000 shares authorized
|
|
|
|
|
|
|
|
|
12,612,852 and 12,541,082 shares issued and outstanding as of
September 29, 2020 and September 24, 2019, respectively
|
|
|
13
|
|
|
|
13
|
|
|
Capital contributed in excess of par value
|
|
|
58,219
|
|
|
|
57,936
|
|
Treasury stock, at cost; 43,110 and 0 shares as of September 29, 2020
and September 24, 2019, respectively
|
|
|
(75
|
)
|
|
|
-
|
|
|
Accumulated deficit
|
|
|
(44,467
|
)
|
|
|
(30,551
|
)
|
|
Total Good Times Restaurants Inc. stockholders' equity
|
|
|
13,690
|
|
|
|
27,398
|
|
|
Non-controlling interests
|
|
|
1,293
|
|
|
|
1,522
|
|
|
Total stockholders’ equity
|
|
|
14,983
|
|
|
|
28,920
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
99,693
|
|
|
$
|
59,905
|
|
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)
|
|
|
Fiscal
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(53 Weeks)
|
|
|
(52 Weeks)
|
|
|
NET REVENUES:
|
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
$
|
109,078
|
|
|
$
|
109,800
|
|
|
Franchise revenues
|
|
|
780
|
|
|
|
955
|
|
|
Total net revenues
|
|
|
109,858
|
|
|
|
110,755
|
|
|
RESTAURANT OPERATING COSTS:
|
|
|
|
|
|
|
|
|
|
Food and packaging costs
|
|
|
31,395
|
|
|
|
32,471
|
|
|
Payroll and other employee benefit costs
|
|
|
38,442
|
|
|
|
41,221
|
|
|
Restaurant occupancy costs
|
|
|
8,877
|
|
|
|
8,353
|
|
|
Other restaurant operating costs
|
|
|
13,351
|
|
|
|
11,862
|
|
|
Preopening costs
|
|
|
1,031
|
|
|
|
1,774
|
|
|
Depreciation and amortization
|
|
|
4,129
|
|
|
|
4,345
|
|
|
Total restaurant operating costs
|
|
|
97,225
|
|
|
|
100,026
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative costs
|
|
|
7,100
|
|
|
|
9,071
|
|
|
Advertising costs
|
|
|
1,993
|
|
|
|
2,349
|
|
|
Franchise costs
|
|
|
20
|
|
|
|
38
|
|
|
Impairment of goodwill
|
|
|
10,000
|
|
|
|
-
|
|
|
Impairment of long-lived assets
|
|
|
5,606
|
|
|
|
2,771
|
|
|
Gain on restaurant asset sale
|
|
|
(45
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(12,041
|
)
|
|
|
(3,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2
|
|
|
|
3
|
|
|
Interest expense
|
|
|
(755
|
)
|
|
|
(756
|
)
|
|
Total other expenses, net
|
|
|
(753
|
)
|
|
|
(753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(12,794
|
)
|
|
$
|
(4,248
|
)
|
|
Income attributable to non-controlling interests
|
|
$
|
(1,122
|
)
|
|
$
|
(889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(13,916
|
)
|
|
$
|
(5,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER SHARE:
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(1.10
|
)
|
|
$
|
(.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
12,594,952
|
|
|
|
12,522,728
|
|
See accompanying notes to consolidated
financial statements
Good Times Restaurants Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Period from September 25, 2018 thru September 29, 2020
(In thousands, except share and per share data)
|
|
|
Treasury Stock,
at cost
|
|
|
Common Stock
|
|
Capital
Contributed
|
|
|
Non-
Controlling
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Issued
Shares
|
|
|
|
Par
Value
|
|
|
in Excess of Par
Value
|
|
|
Interest In
Partnerships
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
BALANCES, September 25, 2018
|
|
|
0
|
|
|
$
|
0
|
|
|
|
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
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(5,137
|
)
|
|
|
(5,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES, September 24, 2019
|
|
|
0
|
|
|
$
|
0
|
|
|
|
12,541,082
|
|
|
$
|
13
|
|
|
$
|
57,936
|
|
|
$
|
1,522
|
|
|
$
|
(30,551
|
)
|
|
$
|
28,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
283
|
|
|
|
-
|
|
|
|
-
|
|
|
|
283
|
|
|
Restricted stock unit vesting
|
|
|
-
|
|
|
|
-
|
|
|
|
112,467
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Stock option exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
2,413
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Treasury shares purchased
|
|
|
43,110
|
|
|
|
(75
|
)
|
|
|
(43,110
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(75
|
)
|
Income attributable to non-controlling
interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,122
|
|
|
|
-
|
|
|
|
1,122
|
|
Distributions to unrelated limited
partners
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,373
|
)
|
|
|
-
|
|
|
|
(1,373
|
)
|
Contributions from unrelated limited
partners
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
22
|
|
Net loss attributable to Good Times
Restaurants Inc and comprehensive
loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(13,916
|
)
|
|
|
(13,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES, September 29, 2020
|
|
|
43,110
|
|
|
$
|
(75
|
)
|
|
|
12,612,852
|
|
|
$
|
13
|
|
|
$
|
58,219
|
|
|
$
|
1,293
|
|
|
$
|
(44,467
|
)
|
|
$
|
14,983
|
|
See accompanying notes to consolidated
financial statements
Good Times Restaurants Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
Fiscal
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(53 Weeks)
|
|
|
(52 Weeks)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(12,794
|
)
|
|
$
|
(4,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,313
|
|
|
|
4,590
|
|
|
Accretion of deferred rent
|
|
|
-
|
|
|
|
604
|
|
|
Amortization of lease incentive obligation
|
|
|
-
|
|
|
|
(514
|
)
|
|
Amortization of operating lease assets
|
|
|
4,025
|
|
|
|
-
|
|
|
Recognition of deferred gain on sale of restaurant building
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
Loss on disposal of restaurant assets
|
|
|
-
|
|
|
|
58
|
|
|
Impairment of goodwill
|
|
|
10,000
|
|
|
|
-
|
|
|
Impairment of long-lived assets
|
|
|
5,606
|
|
|
|
2,771
|
|
|
Stock based compensation expense
|
|
|
283
|
|
|
|
719
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
Receivables and prepaids
|
|
|
492
|
|
|
|
925
|
|
|
Inventories
|
|
|
35
|
|
|
|
(124
|
)
|
|
Deposits and other assets
|
|
|
(163
|
)
|
|
|
(133
|
)
|
|
(Decrease) increase in:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(496
|
)
|
|
|
317
|
|
|
Deferred liabilities
|
|
|
-
|
|
|
|
903
|
|
|
Operating lease liabilities
|
|
|
(3,714
|
)
|
|
|
-
|
|
|
Accrued and other liabilities
|
|
|
819
|
|
|
|
940
|
|
|
Net cash provided by operating activities
|
|
|
8,369
|
|
|
|
6,771
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Payments for the purchase of property and equipment
|
|
|
(2,596
|
)
|
|
|
(8,079
|
)
|
|
Payment for the purchase of treasury stock
|
|
|
(75
|
)
|
|
|
-
|
|
|
Payment for the purchase of non-controlling interest
|
|
|
-
|
|
|
|
(3,009
|
)
|
|
Proceeds from the sale of fixed assets
|
|
|
55
|
|
|
|
8
|
|
|
Payments received on loans to franchisees and to others
|
|
|
12
|
|
|
|
21
|
|
|
Net cash used in investing activities
|
|
|
(2,604
|
)
|
|
|
(11,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Principal payments on notes payable, capital leases, and long-term debt
|
|
|
(12,650
|
)
|
|
|
(2,980
|
)
|
|
Borrowings on notes payable and long-term debt
|
|
|
16,945
|
|
|
|
8,350
|
|
|
Proceeds from stock option exercises
|
|
|
-
|
|
|
|
3
|
|
|
Contributions from non-controlling interests
|
|
|
22
|
|
|
|
20
|
|
|
Distributions to non-controlling interests
|
|
|
(1,373
|
)
|
|
|
(1,837
|
)
|
|
Net cash provided by financing activities
|
|
|
2,944
|
|
|
|
3,556
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
8,709
|
|
|
|
(732
|
)
|
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
|
2,745
|
|
|
|
3,477
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
|
$
|
11,454
|
|
|
$
|
2,745
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
694
|
|
|
$
|
666
|
|
|
Non-cash additions of property and equipment
|
|
$
|
(697
|
)
|
|
$
|
(317
|
)
|
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”).
BD of Colo was formed by Good Times Restaurants
Inc. in 2013 to develop Bad Daddy’s Burger Bar restaurants in the state of Colorado. Subsequently, BDI and BDFD were acquired
by Good Times Restaurants Inc. on May 7, 2015. Combined, these entities compose our Bad Daddy’s operating segment, which
as of September 29, 2020, operates thirty-two company-owned and five joint-venture full-service small-box casual dining restaurants
under the name Bad Daddy’s Burger Bar, primarily located in Colorado and in the Southeast region of the United States, franchises
one restaurant in South Carolina, and licenses the Bad Daddy’s brand for use at an airport Bad Daddy’s restaurant under
third-party operations and ownership.
Drive Thru commenced operations in 1986
and as of September 29, 2020, operates eighteen Company-owned and seven joint-venture drive-thru fast food hamburger restaurants
under the name Good Times Burgers & Frozen Custard, all of which are located in Colorado. In addition, Drive Thru has eight
franchisee-owned restaurants, with six operating in Colorado and two in Wyoming.
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.
COVID-19 Pandemic – The global
crisis resulting from the spread of COVID-19 had a substantial impact on our restaurant operations during the third and fourth
fiscal quarters of 2020. During portions of the month of March 2020 through late May 2020, all of the Company’s Bad Daddy’s
Burger Bar restaurants were open only for delivery and carry-out service, with dining rooms closed by government orders. Beginning
in late May 2020, we began to re-open dining rooms at Bad Daddy’s as local regulations allowed. By early June, we had re-opened
all the dining rooms at Bad Daddy’s, which remained open through the end of the fiscal year. Although our dining rooms were
open, all were operating at some reduction of capacity, whether driven by explicit capacity reductions under government orders,
or due to social distancing protocols that are either mandated by the same government orders, or which we abide by under our own
internal protocols designed to maintain a safe foodservice environment, both for our employees and for our customers.
Our operating results substantially depend
upon our ability to drive traffic to our restaurants, and for our Bad Daddy’s Burger Bar restaurants, to serve guests in
our dining rooms. We cannot currently estimate the duration of the impact of the COVID-19 pandemic on our business; neither are
we able to predict how the pandemic will evolve nor how various government entities will respond to its evolution. In November
2020 several of our dining rooms in Colorado closed again due to government requirements, which we expect to result in lower average
weekly sales for those restaurants. Should additional dining room closures occur, our business would be adversely affected. Even
without government orders, customers may choose to reduce or eliminate in-restaurant dining because of increasing numbers of COVID-19
cases, hospitalizations, or deaths.
Additionally, in connection with spread
of COVID-19, there have been disruptions in various food supply chains in the United States. Our operating results substantially
depend upon our ability to obtain sufficient quantities of products such as beef, bacon, and other products used in the production
of items served and sold to our guests. Ongoing impacts of the COVID-19 pandemic could result in product shortages and in turn
could require us to serve a limited menu, restrict number of items purchased per guest, or close some or all of our restaurants
for an indeterminate period of time. Ongoing material adverse impacts from the COVID-19 pandemic could result in reduced revenue
and cash flow and could affect our assessments of impairment of intangible assets, long-lived assets, or goodwill.
We took extraordinary actions to increase
our liquidity in response to COVID-19, including temporarily reducing employee pay, reductions in force, and obtaining Paycheck
Protection Program (the “PPP”) loans. The PPP is sponsored by the Small Business Administration (the “SBA”).
The PPP is part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). We have since significantly
increased employment levels and restored pay to employees as of the date of this report. Although we currently have a meaningful
cash balance and generated significant cash flow from operations during the fourth fiscal quarter, should business decline significantly
as a result of the pandemic we would not likely be able to take some of the same actions without negatively impacting the long-term
viability of the business. The COVID-19 pandemic is adversely affecting the availability of liquidity generally in the credit markets,
and there can be no guarantee that additional liquidity will be available on favorable terms, or at all, especially the longer
the COVID-19 pandemic lasts or if it were to reoccur.
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, which was the case in Fiscal 2020. Fiscal year 2020 began September 25, 2019 and ended September 29, 2020;
Fiscal year 2019 began September 26, 2018 and ended September 24, 2019.
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 consolidated 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 royalty and management fees 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 sheets 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 statements 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 $244,000 and $310,000 for the fiscal years ended September 29, 2020 and September 24, 2019, 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. Additionally, in the context of the
ongoing global COVID-19 pandemic, future facts and circumstances could change and impact our estimates.
Reclassification – Certain
prior year balances have been reclassified to conform to the current year’s presentation. Such reclassifications had no effect
on the net loss.
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 29, 2020.
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 29, 2020
or September 24, 2019.
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. 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 2020 or 2019.
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.
The following table presents goodwill associated
with each reporting unit as of September 29, 2020 and September 24, 2019 (in thousands):
|
|
|
September 29, 2020
|
|
|
September 24, 2019
|
|
|
Good Times
|
|
$
|
96
|
|
|
$
|
96
|
|
|
Bad Daddy’s
|
|
|
5,054
|
|
|
|
15,054
|
|
|
Total
|
|
$
|
5,150
|
|
|
$
|
15,150
|
|
In March 2020, the outbreak of the COVID-19
pandemic prompted authorities in most jurisdictions where the Company operates to issue stay-at-home orders, leading to an unexpected
significant disruption to the Company's business requiring the Company to close its restaurant dining rooms and operate its Bad
Daddy’s restaurants under a delivery and carry-out model. As such, the consequences of the outbreak of the COVID-19 pandemic
coupled with a sustained decline in the Company's stock price were determined to be indicators of impairment for its Bad Daddy’s
reporting unit. As such, using Level 3 inputs, the Company performed a quantitative goodwill impairment assessment using both the
discounted cash flow method and guideline public company method to determine the fair value of its reporting unit. Significant
assumptions and estimates used in determining fair value include future revenues, operating costs, working capital changes, capital
expenditures, and a discount rate that approximates the Company's weighted average cost of capital. Based on the quantitative assessment,
the Company determined that the fair value of its reporting unit was less than its carrying value and recognized a non-cash goodwill
impairment charge of $10.0 million in the fiscal quarter ending March 31,2020, equal to the excess of the Bad Daddy’s reporting
unit's carrying value above its fair value. No goodwill impairment charges were recognized related to goodwill attributable to
its Good Times reporting unit.
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.
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 Colorado. 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 the two restaurants
and the tenant took possession on January 1, 2020 and the sublease commenced in May 2020.
Three of these restaurants are Bad Daddy’s
restaurants, two in Colorado and one in 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.
Given the results of our analysis at March
31, 2020, we identified five additional restaurants where the expected future cash flows would not be sufficient to recover the
carrying value of the associated assets.
The restaurants are all Bad Daddy’s
restaurants, two in North Carolina and one each in Tennessee, Georgia and Colorado. We recorded non-cash charges of $4,359,000
related to the impairment of these restaurants during the quarter ending March 31, 2020.
Given the results of our analysis at June
30, 2020, we identified one additional Bad Daddy’s restaurant in Colorado where the expected future cash flows would not
be sufficient to recover the carrying value of the associated assets and recorded non-cash charges of $932,000 related to the impairment
of this restaurant during the quarter ending June 30, 2020.
Given the results of our analysis at September
29, 2020, we identified one additional Good Times restaurant where the expected future cash flows would not be sufficient to recover
the carrying value of the associated assets and recorded non-cash charges of $315,000 related to the impairment of this restaurant
during the quarter ending September 29, 2020.
Leases – On September 25,
2019, the first day of fiscal year 2020, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting
Standards Update ("ASU") 2016-02, "Leases (Topic 842)." As a result, the Company updated its significant accounting
policy for leases. For the impact of the adoption on the Company's consolidated financial statements see Note 6.
The Company determines if a contract contains
a lease at inception. The Company's material long-term operating lease agreements are for the land and buildings for our restaurants
as well as our corporate office. The lease term begins on the date that the Company takes possession under the lease, including
the pre-opening period during construction, when in most cases the Company is not making rent payments.
Operating lease assets and liabilities
are recognized at the lease commencement date for material leases with a term of greater than 12 months. Operating lease liabilities
represent the present value of future minimum lease payments. Since our leases do not provide an implicit rate, our operating lease
liabilities are calculated using our estimated incremental borrowing rate based on a collateralized borrowing over the term of
each individual lease. Minimum lease payments include only fixed lease components of the agreement, as well as variable rate payments
that depend on an index, initially measured using the index at the lease commencement date.
Operating lease assets represent our right
to use an underlying asset and are based upon the operating lease liabilities adjusted for prepaid or accrued lease payments, initial
direct costs and lease incentives. Lease incentives are recognized when earned and reduce our operating lease asset related to
the lease. They are amortized through the operating lease assets as reductions of rent expense over the lease term.
Operating lease expense is recognized on
a straight-line basis over the lease term. Certain of the Company’s operating leases contain clauses that provide for contingent
rent based on a percentage of sales greater than certain specified target amounts. Variable lease payments that do not depend on
a rate or index, escalation in the index subsequent to the initial measurement, payments associated with non-lease components such
as common area maintenance, real estate taxes and insurance, and short-term lease payments (leases with a term with 12 months or
less) are expensed as incurred or when the achievement of the specified target that triggers the contingent rent is considered
probable.
Deferred Liabilities – As
a result of the COVID-19 pandemic and pursuant to the CARES Act, the Company began deferring payment of applicable employment taxes
in April 2020 and will continue to do so as allowed under the CARES Act until December 31, 2020. The amount deferred as of September
29, 2020 is $1.2M. Under the CARES Act, 50% of the total deferred employment tax is to be repaid on December 31, 2021, with the
remaining amount due on December 31, 2022. As such, the Company has recorded the entirety of the deferred employment tax as a long-term
liability.
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
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), 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 the gift card when it is redeemed and
the performance obligation is completed, 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 29, 2020.
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
722,871 and 868,439 shares of common stock were not included in computing diluted EPS for the annual periods ending September 29,
2020 and September 24, 2019, 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 29, 2020 notes receivable totaled
$13,000 and is due from two entities. Additionally, the Company has other current receivables totaling $656,000, which includes
$77,000 of franchise receivables, $338,000 related to lease incentives, and $241,000 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 8 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 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 unrelated limited partners and members are shown on the accompanying consolidated balance sheets in the stockholders’
equity section as non-controlling interests and are 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 statements 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.
Recent Accounting Pronouncements
- The Company adopted ASU 2016-02 Leases (Topic 842) on September 25, 2019, the first day of fiscal year 2020. 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
twelve months. This update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising
from leases. This standard was effective for interim and annual periods beginning after December 15, 2018.
We elected the optional transition method
option 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. The adoption of this standard had a significant impact on the Company’s
consolidated balance sheets as we recognized the right-of-use assets and lease liabilities for our operating leases. The adoption
had an immaterial impact on the Company’s consolidated statements of operations, cash flows and overall liquidity.
We elected to utilize the 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 did 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 elected to utilize the short-term lease exception
policy, which allows us to not apply the recognition requirements of this standard to leases with a term of 12 months or less.
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.
The Company reviewed all other recently
issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact
on the Company’s consolidated financial statements.
|
|
2.
|
Goodwill and Intangible Assets:
|
The following table presents goodwill and
intangible assets as of September 29, 2020 and September 24, 2019 (in thousands):
|
|
|
September 29, 2020
|
|
|
September 24, 2019
|
|
|
|
|
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
|
|
|
Non-compete agreements
|
|
|
50
|
|
|
|
(28
|
)
|
|
|
22
|
|
|
|
65
|
|
|
|
(26
|
)
|
|
|
39
|
|
|
|
|
$
|
50
|
|
|
$
|
(28
|
)
|
|
$
|
22
|
|
|
$
|
181
|
|
|
$
|
(130
|
)
|
|
$
|
51
|
|
Indefinite-lived intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
3,900
|
|
|
$
|
-
|
|
|
$
|
3,900
|
|
|
$
|
3,900
|
|
|
$
|
-
|
|
|
$
|
3,900
|
|
|
Intangible assets, net
|
|
$
|
3,950
|
|
|
$
|
(28
|
)
|
|
$
|
3,922
|
|
|
$
|
4,081
|
|
|
$
|
(130
|
)
|
|
$
|
3,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
5,150
|
|
|
$
|
-
|
|
|
$
|
5,150
|
|
|
$
|
15,150
|
|
|
$
|
-
|
|
|
$
|
15,150
|
|
As previously discussed in Note 1, the
Company recorded a $10,000,000 impairment to goodwill in the second fiscal quarter of 2020 related to goodwill attributable to
its Bad Daddy’s reporting unit.
There were no impairments to intangible
assets during the fiscal year ended September 29, 2020. The aggregate amortization expense related to these intangible assets subject
to amortization was $28,000 for the fiscal year ended September 29, 2020. The Company’s franchise rights were fully amortized
at the end of the second fiscal quarter of 2020 and the intangible asset and the related accumulated amortization were written
off in the third fiscal quarter of 2020.
The estimated aggregate future amortization
expense as of September 29, 2020 is as follows (in thousands):
|
|
3.
|
Notes Payable and Long-Term Debt:
|
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 repurchase of minority interests related to three Bad Daddy’s restaurants, 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 29, 2020, the weighted
average interest rate applicable to borrowings under the Cadence Credit Facility was 3.75%.
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.
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 pre-distribution fixed charge coverage
ratio of 1.25:1, a minimum post-distribution fixed charge coverage ratio of 1.10:1 and minimum liquidity of $2.0 million. As of
September 29, 2020, the Company was in compliance with all covenants under the Cadence Credit Facility.
On April 14, 2020, the Company entered
into a Consent and Forbearance Agreement effective March 31, 2020 (the “Forbearance Agreement”) with respect to the
Cadence Credit Facility. The Company informed Cadence that certain events of default may occur as a result of Company’s
failure to comply with certain financial covenants for the fiscal quarter ended on or about March 31, 2020 (collectively, the “Potential
Events of Default”). Pursuant to the terms of the Forbearance Agreement, from March 31, 2020 through 11:59 p.m. (Eastern
time) on June 30, 2020 (the “Forbearance Period”), Cadence agreed to forbear from exercising any available rights and
remedies under the Cadence Credit Facility to the extent such rights and remedies arise exclusively as a result of the Potential
Events of Default. Further, Cadence agreed to consent to the Company’s request to defer the principal payment (the
“Payment Deferral”) on the loans due on June 30, 2020 until the maturity date. The forbearance period (the “Forbearance
Period”) expired at 11:59 p.m. (Eastern time) on June 30, 2020. The company has been in compliance with all financial
covenants since the expiration of the Forbearance Period.
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
$292,000 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 29, 2020, the outstanding
balance on borrowings against the facility was $5,500,000. 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 29, 2020, the
outstanding face value of such letters of credit was $157,500.
Paycheck Protection Program Loans
On May 7, 2020, Good Times and three of
its wholly-owned subsidiaries, BDI, Drive Thru, and BD Colo (each a “Borrower”), entered into unsecured loans in the
aggregate principal amount of $11,645,000 (the “Loans”) with Cadence Bank, N.A. (the “Lender”) pursuant
to the PPP.
The Loans are evidenced by individual promissory
notes of each of the Borrowers dated April 29, 2020 executed by each Borrower on May 7, 2020 (together, the “Notes”)
in favor of the Lender which Notes bear interest at the rate of 1.00% per annum. All or a portion of the Loans may be forgiven
by the SBA upon application by the Borrowers accompanied by documentation of expenditures in accordance with SBA requirements under
the PPP, which includes employees being kept on the payroll for twenty-four weeks after the date of the Loans and the proceeds
of such Loans being used for payroll, rent, mortgage interest or utilities. Congress subsequently passed the PPP Flexibility Act
which modified certain provisions of the PPP program, including expanding the original eight-week covered period to a period of
twenty-four weeks (the “Covered Period”). The SBA and the Treasury continue to develop and issue new and updated guidance
regarding the PPP loan application process, including guidance regarding required borrower certifications and requirements for
forgiveness of loans made under the PPP. The Company continues to track the guidance as it is released and assess and re-assess
various aspects of its application as necessary based on the guidance. The Company believes it qualifies for the PPP and is compliant
in all aspects with its use of PPP funds, and expects to apply for forgiveness during 2021. However, in the absence of definitive
guidance or regulations the Company cannot give any assurance that the Loans will be forgivable in whole or in part.
In the event that any portion of the Loans
are not forgiven in accordance with the PPP, the Company will be required to pay the Lender monthly payments of principal and interest
in an aggregate amount of $489,000 to repay the PPP Loans in full on or before April 29, 2022. The SBA has deferred loan payments
to either (1) the date the SBA remits our forgiveness to the lender, or (2) 10 months after the end of the Covered Period, which
would be in August 2021. However, as of the date of this report we have not yet received a decision from the SBA regarding forgiveness
of our PPP loans or communication regarding the official end date of our deferral period. The Loans may be prepaid by the Company
at any time prior to maturity with no prepayment penalties. The Notes contain certifications and agreements related to the PPP,
as well as customary default and other provisions. We reflect the full principal amount of the PPP loans as debt, accounting for
such loans under ASC 470, with current maturities of approximately $5.2 million pursuant to the current payment amortization schedule.
We intend to account for the forgiveness of such loans at the time such forgiveness is granted.
Total interest expense on notes payable
and capital leases was $754,000 and $755,000 for fiscal 2020 and fiscal 2019, respectively.
Components of Long-Term Debt
The components of long-term debt as reflected
on our consolidated balance sheets are as follows (in thousands):
|
|
|
September 29, 2020
|
|
|
September 24, 2019
|
|
|
Current Maturities
|
|
|
|
|
|
|
|
|
|
Cadence Credit Facility
|
|
$
|
1,000
|
|
|
|
-
|
|
|
PPP Loans
|
|
|
5,242
|
|
|
|
-
|
|
|
Total Current Maturities
|
|
$
|
6,242
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities due after One Year
|
|
|
|
|
|
|
|
|
|
Cadence Credit Facility
|
|
|
4,500
|
|
|
|
12,850
|
|
|
PPP Loans
|
|
|
6,403
|
|
|
|
-
|
|
|
Total Maturities after One Year
|
|
$
|
10,903
|
|
|
$
|
12,850
|
|
|
|
4.
|
Other Accrued Liabilities:
|
Other accrued liabilities consist of the following (in thousands):
|
|
|
September 29, 2020
|
|
|
September 24, 2019*
|
|
|
Wages and other employee benefits
|
|
$
|
2,056
|
|
|
$
|
2,636
|
|
|
Taxes, other than income tax
|
|
|
1,397
|
|
|
|
1,670
|
|
|
Other
|
|
|
1,602
|
|
|
|
1,069
|
|
|
Total
|
|
$
|
5,055
|
|
|
$
|
5,375
|
|
*The above amounts in 2019 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 29, 2020, the Company had
total commitments outstanding of $353,000 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.
There may be various claims in process,
matters in litigation, and other contingencies brought against the company by employees, vendors, customers, franchisees, or other
parties. Evaluating these contingencies is a complex process that may involve substantial judgment on the potential outcome of
such matters, and the ultimate outcome of such contingencies may differ from our current analysis. We regularly review the adequacy
of accruals and disclosures related to such contingent liabilities in consultation with legal counsel. While it is not possible
to predict the outcome of these claims with certainty, it is management’s opinion that any reasonably possible losses associated
with such contingencies would be immaterial to our financial statements.
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 $18,000 and $32,000 in contingent rentals for fiscal 2020
and fiscal 2019, respectively.
The Company determines if a contract contains
a lease at inception. The Company's material long-term operating lease agreements are for the land and buildings for our restaurants
as well as our corporate office. The initial lease terms range from 10 years to 20 years, most of which include renewal options
of 10 to 15 years. The lease term is generally the minimum of the noncancelable period or the lease term including renewal options
which are reasonably certain of being exercised up to a term of approximately 20 years.
Some of the leases provide for base rent,
plus additional rent based on gross sales, as defined in each lease agreement. The Company is also generally obligated to pay certain
real estate taxes, insurance and common area maintenance charges, and various other expenses related to properties, which are expensed
as incurred.
Components of operating lease costs in the consolidated statements
of operations for the fiscal year ended September 29, 2020 are as follows (in thousands):
|
|
|
Classification
|
|
Fiscal 2020
|
|
|
Operating lease cost
|
|
Occupancy, Other restaurant operating costs
and General and administrative expenses, net
|
|
$
|
7,204
|
|
|
Variable lease cost
|
|
Occupancy
|
|
|
80
|
|
|
Sublease income
|
|
Occupancy
|
|
|
(500
|
)
|
|
Total lease expense
|
|
|
|
$
|
6,784
|
|
Components of lease assets and liabilities on the consolidated
balance sheets as of September 29, 2020 are as follows (in thousands):
|
|
|
Classification
|
|
September 29, 2020
|
|
|
Right-of-use assets
|
|
Operating lease assets
|
|
$
|
49,252
|
|
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
Operating lease liability
|
|
$
|
4,689
|
|
|
Non-current lease liabilities
|
|
Operating lease liability, less current portion
|
|
|
53,731
|
|
|
Total lease liabilities
|
|
|
|
$
|
58,420
|
|
Supplemental cash flow disclosures for the fiscal year ended
September 29, 2020 (in thousands):
|
|
|
Fiscal 2020
|
|
|
Cash paid for operating lease liabilities
|
|
$
|
6,840
|
|
|
|
|
|
|
|
Non-cash operating lease assets obtained in exchange for operating lease
liabilities
|
|
$
|
2,390
|
|
Weighted average lease term and discount rate are as follows:
|
|
|
September 29, 2020
|
|
|
Weighted average remaining lease term (in years)
|
|
|
10.4
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
5.0
|
%
|
Future minimum rent payments for our operating leases for each
of the next five years as of September 29, 2020 are as follows (in thousands):
|
Fiscal year ending:
|
|
Total
|
|
|
2021
|
|
$
|
7,491
|
|
|
2022
|
|
|
7,489
|
|
|
2023
|
|
|
7,534
|
|
|
2024
|
|
|
7,382
|
|
|
2025
|
|
|
7,483
|
|
|
Thereafter
|
|
|
38,765
|
|
|
Total minimum lease payments
|
|
|
76,144
|
|
|
Less: imputed interest
|
|
|
(17,724
|
)
|
|
Present value of lease liabilities
|
|
$
|
58,420
|
|
The above future minimum rental amounts
exclude the amortization of deferred lease incentives, renewal options that are not reasonably assured of renewal, and contingent
rent. The Company generally has escalating rents over the term of the leases and records rent expense on a straight-line basis.
Deferred tax assets (liabilities) are comprised of the following
at the period end (in thousands):
|
|
|
September 29, 2020
Long Term
|
|
|
September 24, 2019
Long Term
|
|
|
Deferred income tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Tax effect of net operating loss carry-forward
|
|
$
|
2,686
|
|
|
$
|
4,631
|
|
|
General business credits
|
|
|
3,618
|
|
|
|
3,065
|
|
|
Partnership/joint venture basis differences
|
|
|
(2
|
)
|
|
|
(58
|
)
|
|
Deferred revenue
|
|
|
80
|
|
|
|
89
|
|
|
Property and Equipment basis differences
|
|
|
(1,866
|
)
|
|
|
(1,315
|
)
|
|
Intangibles basis differences
|
|
|
1,087
|
|
|
|
(1,107
|
)
|
|
ROU asset
|
|
|
(10,516
|
)
|
|
|
-
|
|
|
Long-term lease liability
|
|
|
12,549
|
|
|
|
-
|
|
|
Other accrued liability and asset difference
|
|
|
(232
|
)
|
|
|
1,335
|
|
|
Deferred tax assets
|
|
|
7,404
|
|
|
|
6,640
|
|
|
Less valuation allowance
|
|
|
(7,404
|
)
|
|
|
(6,640
|
)
|
|
Net deferred tax asset (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has net operating loss carry-forwards
available for future periods, as discussed below, of approximately $8,994,000 from 2019 and $1,686,000 from 2011 and prior for
income tax purposes. The net operating loss carry-forwards from periods prior to 2019 expire between 2030 and 2032. 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 $3,618,000 from 2015 through 2020 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):
|
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
|
Current income tax benefit (expense)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Deferred income tax benefit (expense)
|
|
|
-
|
|
|
|
-
|
|
|
Total income tax benefit (expense)
|
|
$
|
-
|
|
|
$
|
-
|
|
Total income tax expense for the years ended September 29, 2020
and September 24, 2019 differed from the amounts computed by applying the U.S. Federal statutory tax rate to pre-tax income as
follows (in thousands):
|
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
|
Total benefit computed by applying statutory federal rate
|
|
$
|
(2,922
|
)
|
|
$
|
(1,079
|
)
|
|
State income tax, net of federal tax benefit
|
|
|
(51
|
)
|
|
|
(153
|
)
|
|
FICA/WOTC tax credits
|
|
|
(550
|
)
|
|
|
(702
|
)
|
|
Effect of change in valuation allowance
|
|
|
763
|
|
|
|
1,787
|
|
|
Permanent differences
|
|
|
2,510
|
|
|
|
87
|
|
|
Other
|
|
|
250
|
|
|
|
60
|
|
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has adopted Accounting Standards
Update (ASU) No. 2015-17, Income Tax (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires that all deferred
tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The Company
will apply this ASU retrospectively to all periods presented.
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 with a par value of $.001. As of September 29, 2020 and September 24, 2019 there were 12,612,852
and 12,541,082 shares outstanding, respectively.
Stock Plans
The Company has traditionally maintained
incentive compensation plans that include provision for the issuance of equity-based awards. The Company established the 2008 Omnibus
Equity Incentive Compensation Plan in 2008 (the “2008 Plan”) and has outstanding awards that were issued under the
2008 Plan. Subsequently, 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. Future awards will
be issued under the 2018 plan.
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 $283,000 and $719,000
in total stock option and restricted stock compensation expense during fiscal years 2020 and 2019, 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 2020
and fiscal 2019. 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
29, 2020, there were no incentive stock options granted.
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.
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
|
|
Expected term (years)
|
|
7.5
|
|
Expected volatility
|
|
70.65% to 70.80%
|
|
Risk-free interest rate
|
|
3.01% to 3.10%
|
|
Expected dividends
|
|
0
|
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 2020 under all plans:
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Life (Yrs.)
|
|
Outstanding-beg of year
|
|
|
703,164
|
|
|
$
|
3.53
|
|
|
|
|
Options exercised
|
|
|
(15,646
|
)
|
|
$
|
1.48
|
|
|
|
|
Forfeited
|
|
|
(48,671
|
)
|
|
$
|
3.74
|
|
|
|
|
Expired
|
|
|
(8,579
|
)
|
|
$
|
3.45
|
|
|
|
|
Outstanding Sept 29, 2020
|
|
|
630,268
|
|
|
$
|
3.56
|
|
|
5.1
|
|
Exercisable Sept 29, 2020
|
|
|
473,051
|
|
|
$
|
3.38
|
|
|
4.3
|
As of September 29, 2020, the aggregate
intrinsic value of both the outstanding and exercisable options was $5,000. 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 29, 2020, the total remaining
unrecognized compensation cost related to non-vested stock options was $194,000 and is expected to be recognized over a weighted
average period of approximately 1.8 years.
There were 15,646 stock options exercised
that resulted in an issuance of 2,413 shares during fiscal 2020 with no proceeds in conjunction with the termination of the Company’s
CEO pursuant to a severance and separation agreement. There were 667 stock options exercised during fiscal 2019 with proceeds of
approximately $3,000.
Restricted Stock Units
During the fiscal year ended September
29, 2020, the Company granted a total of 60,336 restricted stock units from available shares under its 2018 Plan. 46,336 shares
were issued with a grant date fair market value of $1.54 which is equal to the closing price of the stock on the date of the grant.
These restricted stock units vest three years following the grant date. 14,000 shares were issued with a grant date fair market
value of $1.67 which is equal to the closing price of the stock on the date of the grant. These restricted stock units vested on
their grant date.
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.
A summary of the status of non-vested restricted
stock as of September 29, 2020 and changes during fiscal 2020 is presented below:
|
|
|
Shares
|
|
|
Grant Date Fair
Value Per Share
|
|
Non-vested shares at beg of year
|
|
|
165,275
|
|
|
$2.70 to $3.95
|
|
Granted
|
|
|
60,336
|
|
|
$1.54 to $1.67
|
|
Forfeited
|
|
|
(8,992
|
)
|
|
$3.55 to $3.95
|
|
Vested
|
|
|
(124,015
|
)
|
|
$1.67 to $3.95
|
|
Non-vested shares at Sept 29, 2020
|
|
|
92,604
|
|
|
$1.54 to $3.95
|
As of September 29, 2020, there was $159,000
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 .80 years.
Non-controlling Interests
Non-controlling interests are presented
as a separate item in the stockholders’ equity section of the consolidated balance sheets. The amount of consolidated net
income or loss attributable to non-controlling interests is presented on the face of the consolidated statements 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 sheets 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 contributions or distributions to or from the limited partners and members for the period. The limited partners’
and members’ share of the net income or loss in the subsidiary is shown as non-controlling interest income or expense in
the accompanying consolidated statements of operations. All inter-company accounts and transactions are eliminated.
The following table summarizes the activity
in non-controlling interests during the year ended September 29, 2020 (in thousands):
|
|
|
Bad Daddy’s
|
|
|
Good Times
|
|
|
Total
|
|
|
Balance at September 24, 2019
|
|
$
|
1,190
|
|
|
$
|
332
|
|
|
$
|
1,522
|
|
|
Income attributable to non-controlling interests
|
|
$
|
493
|
|
|
$
|
629
|
|
|
$
|
1,122
|
|
|
Net Distributions to unrelated limited partners*
|
|
$
|
(660
|
)
|
|
$
|
(691
|
)
|
|
$
|
(1,351
|
)
|
|
Balance at September 29, 2020
|
|
$
|
1,023
|
|
|
$
|
270
|
|
|
$
|
1,293
|
|
* Includes $352,000 of distributions reflected
on our consolidated balance sheet in other accrued liabilities at September 29, 2020.
Our non-controlling interests consist of
one joint venture partnership involving Good Times restaurants and five joint venture partnerships involving five Bad Daddy’s
restaurants.
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 after-tax basis (Roth Contributions). In fiscal year 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
2020 and 2019 was $177,000 and $225,000, respectively. The matching contribution is typically contributed to the plan in
the fiscal year following 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 (in thousands):
|
|
|
Fiscal Year
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Bad Daddy’s
|
|
$
|
76,538
|
|
|
$
|
80,124
|
|
|
Good Times
|
|
|
33,320
|
|
|
|
30,631
|
|
|
|
|
$
|
109,858
|
|
|
$
|
110,755
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
Bad Daddy’s
|
|
$
|
(14,837
|
)
|
|
$
|
(2,788
|
)
|
|
Good Times
|
|
|
3,035
|
|
|
|
704
|
|
|
Corporate
|
|
|
(239
|
)
|
|
|
(1,411
|
)
|
|
|
|
$
|
(12,041
|
)
|
|
$
|
(3,495
|
)
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
Bad Daddy’s
|
|
$
|
2,351
|
|
|
$
|
7,016
|
|
|
Good Times
|
|
|
212
|
|
|
|
993
|
|
|
Corporate
|
|
|
33
|
|
|
|
70
|
|
|
|
|
$
|
2,596
|
|
|
$
|
8,079
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Equipment, net
|
|
|
|
|
|
|
|
|
|
Bad Daddy’s
|
|
$
|
23,586
|
|
|
$
|
30,479
|
|
|
Good Times
|
|
|
3,874
|
|
|
|
4,890
|
|
|
Corporate
|
|
|
209
|
|
|
|
308
|
|
|
|
|
$
|
27,669
|
|
|
$
|
35,677
|
|
The global crisis resulting from the spread
of COVID-19 continues to have a substantial impact on our restaurant operations. In November 2020 most of our Bad Daddy’s
dining rooms in Colorado closed again due to government requirements, which has resulted in lower average weekly sales for those
restaurants. Should additional dining room closures occur, our business would be adversely affected. Even without government orders,
customers may choose to reduce or eliminate in-restaurant dining because of increasing numbers of COVID-19 cases, hospitalizations,
or deaths.
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