ITEM 1A. RISK FACTORS
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.
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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.
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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.
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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.
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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.
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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:
· the impact of the ongoing COVID-19 pandemic on our business;
· developments in our business;
· changes in market valuations of similar companies;
· additions or departures of key management personnel;
· actions by institutional stockholders;
· speculation in the press or investment community; and
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.
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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:
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.
ITEM 2. PROPERTIES
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.
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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.
PART II
Shares of our Common Stock are listed for
trading on the NASDAQ Capital Market under the symbol “GTIM”. As of December 11, 2020, there were approximately 57
holders of record of our common stock. Because many shares of our common stock are held by brokers and other institutions on behalf
of stockholders, we are unable to estimate the total number of stockholders represented by these holders of record.
Dividend Policy
We have never paid dividends
on our common stock and do not anticipate paying dividends in the foreseeable future. In addition, we have obtained financing under
loan agreements that restrict the payment of dividends. Our ability to pay future dividends will necessarily depend on our earnings
and financial condition. However, since restaurant development is capital intensive, we currently intend to retain any earnings
for that purpose.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
The following discussion and analysis of
our financial condition and results of operations should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this Annual Report on Form 10-K.
Overview
Please see “Item 1 Business-Recent
Developments” for a discussion regarding the impact of, and the Company’s actions taken in response to, the COVID-19
pandemic on our business.
We operate as two reportable business segments:
Good Times Burgers and Frozen Custard restaurants (“Good Times”) and Bad Daddy’s Burger Bar restaurants (“Bad
Daddy’s”). All of our Good Times restaurants compete in the quick service drive-through segment of the restaurant industry
while our Bad Daddy’s restaurants compete in the full-service casual dining segment of the restaurant industry. We believe
that providing this additional financial information for each of our brands will provide a better understanding of our overall
operating results. Refer to Note 10, Segment Reporting, in the notes to our consolidated financial statements for more information.
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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 2020 had a quarter with 14 weeks. Our discussion for fiscal years 2020 and 2019, which ended on September 29, 2020 and September
24, 2019, respectively, cover periods of 53 full calendar weeks in fiscal 2020 and 52 full calendar weeks in fiscal 2019.
The following tables present information
about our reportable segments for the respective periods, all dollar values are represented in thousands:
Fiscal Year
Bad Daddy’s:
Restaurant operating costs:
Loss on restaurant asset sale - 0.0 % 17 0.0 %
Good Times:
Restaurant operating costs:
Gain on restaurant asset sale (45 ) (0.1 %) (21 ) (0.1 %)
(1) Includes direct and allocated corporate
general and administrative costs.
Restaurant operating costs are expressed
as a percentage of restaurant sales
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Bad Daddy’s Restaurants:
We currently operate thirty-seven company-owned
and joint-venture Bad Daddy’s restaurants. We also license one restaurant in North Carolina and have a franchise restaurant
in South Carolina. We expect to open no more than two additional Bad Daddy’s restaurants during fiscal 2021. We anticipate
an approximate 2% to 3% blended price increase during fiscal 2021 at our Bad Daddy’s restaurants.
Good Times Burgers & Frozen Custard
Restaurants:
We currently operate twenty-five company-owned
and joint-venture Good Times restaurants all in the state of Colorado. In addition, we have eight Good Times franchise restaurants,
six operating in Colorado and two in Wyoming.
We anticipate an approximate 4% price increase
during fiscal 2021 at our Good Times restaurants. We are continuing to manage our marketing communications to balance growth in
customer traffic and the average customer expenditure.
Results of Operations for Fiscal 2020 Compared to Fiscal
2019
Net Revenues: Net revenues for fiscal
2020 decreased $897,000 (-0.8%) to $109,858,000 from $110,755,000 for fiscal 2019. Bad Daddy’s concept revenues decreased
$3,586,000 while our Good Times concept revenues increased $2,689,000.
Bad Daddy’s restaurant sales decreased
$3,438,000 to $76,316,000 in fiscal 2020 from $79,753,000 in fiscal 2019. Sales were positively impacted by four new restaurants
opened in fiscal 2019 and two new restaurants opened in the first fiscal quarter of 2020 and the impact of the 53rd
week of the fiscal year, offset by the negative impact of our dining room closures due to the COVID-19 pandemic. We estimate the
impact of the extra week of sales in the first fiscal quarter of 2020 to be approximately $2,015,000. Bad Daddy’s same store
restaurant sales decreased 17.7% during fiscal 2020 compared to fiscal 2019, substantially driven by decreases between March and
May when dining rooms were closed, and to a lesser extent in June when dining rooms were open but at reduced capacity. Bad Daddy’s
restaurants are included in same store sales after they have been open a full eighteen months. The average menu price increase
was 4.0% in 2020 over 2019. There were thirty restaurants included in the same store sales base at the end of the fiscal year.
Additionally, net revenues for fiscal 2020 were reduced by $148,000 in lower franchise royalties and license fees compared to the
prior fiscal year, primarily related to the Charlotte Airport licensee. Fiscal 2020 and fiscal 2019 include franchise advertising
contributions of $13,000 and $14,000, respectively.
Additional sales data related to Bad Daddy’s company-owned
and joint-venture restaurants:
Fiscal Year
Annualized net sales per square foot $ 556 $ 654
Good Times restaurant sales increased $2,716,000
to $32,763,000 in fiscal 2020 from $30,047,000 in fiscal 2019. Same store restaurant sales increased 7.9% during fiscal 2020 compared
to fiscal 2019 and benefitted from an extra operating week in the first fiscal quarter of 2020 which we estimate contributed approximately
$460,000. Restaurant sales increased $2,373,000 from the prior year due to the same store sales increase. One restaurant was not
included in same store sales while closed for a major remodel in fiscal 2019. Sales increased $359,000 in fiscal 2020 from the
prior year due to the closure. One restaurant closed during fiscal 2020 and was excluded from same store sales. Sales decreased
$642,000 due to this closure. The average menu price increase in fiscal 2020 over fiscal 2019 was approximately 4.0%. Additionally,
net revenues for fiscal 2020 were reduced by $26,000 in lower franchise revenues compared to fiscal 2019. Fiscal 2020 and fiscal
2019 include franchise advertising contributions of $231,000 and $295,000, respectively.
Average Good Times restaurant sales for
company-operated restaurants open the entire fiscal year for fiscal 2020 and 2019 were as follows:
Fiscal Year
During fiscal 2020, company-operated Good
Times restaurants’ sales for restaurants that had been open a full eighteen months ranged from a low of $846,000 to a high
of $2,315,000.
Food and Packaging Costs: For fiscal
2020, food and packaging costs decreased $1,076,000 from $32,471,000 (29.6% of restaurant sales) in fiscal 2019 to $31,395,000
(28.8% of restaurant sales).
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Bad Daddy’s food and packaging costs
were $21,323,000 (27.9% of restaurant sales) in fiscal 2020, down from $23,006,000 (28.8% of restaurant sales) in fiscal 2019.
This decrease is primarily attributable to lower restaurant sales during the current fiscal year versus prior fiscal year. The
decrease as a percent of sales is attributable to menu mix shift from a limited menu during the ongoing COVID-19 pandemic, improved
cost on soft beverage because refills are not available on off-premise sales, reduced discounting due to the reduction in on-premises
sales, and increased pricing charged on sales through third-party delivery services, typically at a 10% to 20% premium to purchases
made in-store or through our online ordering system. Purchase prices generally increased on beef and bacon but generally decreased
on chicken, on a year-over-year basis.
Good Times food and packaging costs were
$10,072,000 (30.7% of restaurant sales) in fiscal 2020, up from $9,465,000 (31.5% of restaurant sales) in fiscal 2019, the result
of increased sales. This decrease as a percent of sales is due primarily to the impact of higher menu pricing and menu engineering,
which offset purchase price increases on our primary ingredients.
Payroll and Other Employee Benefit Costs:
For fiscal 2020, payroll and other employee benefit costs decreased $2,779,000 from $41,221,000 (37.5% of restaurant sales) in
fiscal 2019 to $38,442,000 (35.2% of restaurant sales).
Bad Daddy’s payroll and other employee
benefit costs were $27,465,000 (36.0% of restaurant sales) for fiscal 2020, down from $30,224,000 (37.9% of restaurant sales) in
fiscal 2019. The $2,759,000 decrease was primarily attributable to lower restaurant sales during the current fiscal year versus
the prior fiscal year. As a percent of sales, payroll and employee benefits costs decreased by 1.9% primarily attributable to staffing
reductions associated with the full and partial closures of our dining rooms for much of the third and fourth fiscal quarters as
well as reductions in management staffing.
Good Times payroll and other employee benefit
costs were $10,977,000 (33.5% of restaurant sales) in fiscal 2020, consistent with $10,997,000 (36.6% of restaurant sales) in fiscal
2019. Payroll and other employee benefits decreased approximately $279,000 in fiscal 2020 due to one company-owned restaurant that
was closed in December 2019. This was offset by a $259,000 increase in payroll and other employee benefit expenses primarily due
to an increase in restaurant sales compared to the same prior year period. As a percent of sales, payroll and employee benefits
costs decreased by 1.1% in fiscal 2020 compared to fiscal 2019. This decrease is primarily attributable to the leveraging impact
of the significant sales increases in the third and fourth fiscal quarters of 2020. The average wage paid to our employees increased
approximately 4.2% in fiscal 2020 compared to fiscal 2019. The 4.2% increase is attributable to a very competitive labor market
in Colorado and state mandated increases in the minimum wage rate.
Occupancy Costs: Occupancy costs
include rent, real and personal property taxes, common area maintenance expenses, licenses and insurance expense. For fiscal 2020,
occupancy costs increased $524,000 from $8,353,000 (7.6% of restaurant sales) in fiscal 2019 to $8,877,000 (8.1% of restaurant
sales).
Bad Daddy’s occupancy costs were
$6,025,000 (7.9% of restaurant sales) for fiscal 2020, up from $5,413,000 (6.8% of restaurant sales) in fiscal 2019. The $612,000
increase was primarily attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened in the first
fiscal quarter of 2020, offset by rent abatements of approximately $85,000 granted by various landlords due to the COVID-19 pandemic.
The increase as a percentage of sales was due to general increases in our operating lease costs as well as the deleveraging effect
of lower restaurant sales.
Good Times occupancy costs were $2,852,000
(8.7% of restaurant sales) in fiscal 2020, down from $2,940,000 (9.8% of restaurant sales) in fiscal 2019. The $88,000 decrease
was primarily attributable to rent abatements of approximately $69,000 granted by various landlords in the third fiscal quarter
of 2020 due to the COVID-19 pandemic, as well as a $45,000 decrease related to the restaurant that closed in December 2019, offset
by increases in our operating lease costs.
Other Operating Costs: For fiscal
2020, other operating costs increased $1,489,000 from $11,862,000 (10.8% of restaurant sales) in fiscal 2019 to $13,351,000 (12.2%
of restaurant sales).
Bad Daddy’s other operating costs
were $10,409,000 (13.6% of restaurant sales) for fiscal 2020, up from $9,161,000 (11.5% of restaurant sales) in fiscal 2019. The
$1,248,000 increase was partially attributable to the four new restaurants opened in fiscal 2019 and two new restaurants opened
in the first fiscal quarter of 2020. Generally speaking, other restaurant operating costs were significantly reduced due to the
large decrease in sales in the third and fourth fiscal quarters compared to the same prior year quarters; however, the general
decrease was fully offset by a $1,346,000 increase in commissions paid to delivery service providers in the current fiscal year
compared to the prior fiscal year as well as increased paper and packaging costs associated with off-premise sales. The percentage
increase was primarily attributable to the deleveraging impact of lower overall sales and a significant shift in delivery sales
as a percentage of overall sales, as customers migrated to delivery during the first two months of the COVID-19 pandemic and dining
rooms were generally closed.
Good Times other operating costs were $2,942,000
(9.0% of restaurant sales) in fiscal 2020, up from $2,701,000 (9.0% of restaurant sales) in fiscal 2019. The increase was primarily
attributable to an approximate $284,000 increase in commissions paid to delivery service providers offset by decreases in other
general restaurant supplies and expenses.
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New Store Preopening Costs: For
fiscal 2020, we incurred $1,031,000 of preopening costs compared to $1,774,000 in fiscal 2019. All of the preopening costs are
related to our Bad Daddy’s restaurants.
Preopening costs in the current fiscal
year are primarily attributable to four restaurants: two that opened late during the fourth quarter of fiscal 2019, and two restaurants
that opened during the first fiscal quarter of 2020. In addition, the current fiscal year includes approximately $157,000 of non-cash
operating lease costs associated with two future Bad Daddy’s restaurants. In the prior fiscal year, pre-opening costs are
related to the one Bad Daddy’s restaurant opened during the second fiscal quarter of 2019, and two that opened during the
fourth quarter of fiscal 2019. Preopening costs typically occur over a period of approximately five months. Although the exact
timing varies by location, we typically spend approximately $275,000 to $350,000 per location.
Depreciation and Amortization Costs:
Depreciation and amortization includes depreciation on capital expenditures for restaurants and corporate assets as well as amortization
of acquired franchise rights and leasehold interests. For fiscal 2020, depreciation and amortization costs decreased $216,000 from
$4,345,000 in fiscal 2019 to $4,129,000 in fiscal 2020.
Bad Daddy’s depreciation costs decreased
$170,000 from $3,438,000 in fiscal 2019 to $3,268,000 in fiscal 2020. This decrease was attributable to reduced depreciation resulting
from asset impairment charges recorded in the fourth quarter of fiscal 2019 and the second quarter of fiscal 2020, offset by the
four new restaurants opened in fiscal 2019 and two new restaurants opened in the first fiscal quarter of 2020.
Good Times depreciation costs decreased
$46,000 from $907,000 in fiscal 2019 to $861,000 in fiscal 2020.
General and Administrative Costs:
General and administrative costs include all corporate and administrative functions. Components of this category include corporate,
regional and franchise support salaries and benefits; professional and consulting fees; travel; corporate information systems;
training; board of directors’ expenses; office rent; and legal expenses. For fiscal 2020, general and administrative costs
decreased $1,971,000 from $9,071,000 (8.2% of total revenues) in fiscal 2019 to $7,100,000 (6.5% of total revenue).
The $1,971,000 decrease in general and
administrative expenses in fiscal 2020 is primarily attributable to:
· Decrease in training and recruiting costs of $350,000