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 for the fiscal years ended September 28, 2021 and September 29, 2020.
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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. Although our dining rooms were re-opened in early June 2020, all continued to operate 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 followed our own internal protocols designed to maintain a safe foodservice
environment, both for our employees and for our customers, until May 2021.
During portions of the month of November 2020 through early
January 2021, all of the Company’s Bad Daddy’s Burger Bar restaurants in Colorado were open only for limited outdoor dining,
delivery and carry-out service, with indoor dining rooms once again closed by government orders. In early January 2021, we re-opened these
dining rooms, with limited occupancy, as local regulations allowed. Our dining rooms in all other states in which Bad Daddy’s has
operations were open, at reduced capacity, during this time. Presently, all of our Bad Daddy’s restaurants are allowed to operate
at full capacity.
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, including the recent acceleration of the spread
of the Delta variant of COVID-19; neither are we able to predict how the pandemic will evolve nor how various government entities will
respond to its evolution. 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. Furthermore, although certain available vaccines may reduce the risk of further government restrictions, there is no guarantee
that the vaccine will be effective in eradicating the virus, additional mutations or variants of the virus may be resistant to any vaccine,
and the length of the ongoing pandemic may change consumer behavior such that potential customers may still choose to reduce or eliminate
in-restaurant dining.
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
the 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, including recent industry-wide labor shortages, the impact and duration of which are uncertain,
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 during fiscal 2020, including temporarily reducing employee pay, reductions in workforce, 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.
We currently have a meaningful cash balance and generated significant
cash flow from operations during fiscal 2021. We used a portion of this cash balance to repurchase Company stock pursuant to the Tender
Offer. While we believe that we will continue to have adequate working capital to meet our current needs, should business decline significantly,
we would not likely choose to, and we may not be able to, take some of the same actions as we took during fiscal 2020 to increase our
liquidity as they would negatively impact the long-term performance of the business. Furthermore, 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 various tangential impacts of the COVID-19 pandemic last.
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 accumulated losses and cannot guarantee future
profits.
We have incurred losses in 29 of our 34 years since inception. As
of September 28, 2021, we had an accumulated deficit of $27,680,000. Although we generated net income in the current year,
in light of the uncertainty of the COVID-19 pandemic and the lingering impacts on our supply chain and employee markets, we cannot provide
assurance that we will produce income again or generate a loss for the fiscal year ending September 27, 2022.
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 two of the past three 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 operating costs increase, our ability to attain profitability
will be adversely affected.
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New restaurants, when and if opened, may not be profitable,
if at all, for several months.
We anticipate that our new restaurants, when and if opened,
will generally take several months to reach normalized operating levels due to inefficiencies typically associated with new restaurants,
including lack of market awareness, the need to hire and train a sufficient number of employees, operating costs which are often materially
greater during the first several months of operation than thereafter, preopening costs and other factors. In addition, restaurants
opened in new markets may open at lower average weekly sales volumes than restaurants opened in existing markets and may have higher restaurant
level operating expense ratios than in existing markets. Sales at restaurants opened in new markets may take longer to reach
average annual company-owned restaurant sales, if at all, thereby affecting the profitability of these restaurants.
Our operations are susceptible to the cost of and changes
in food availability which could adversely affect our operating results.
Our profitability depends in part on our ability to anticipate
and react to changes in food costs. Various factors beyond our control, including adverse weather conditions, governmental
regulation, production, availability, recalls of food products, 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, and Whataburger
has announced its intention to expand into the state of Colorado. We also compete with small regional and local hamburger and other fast-food
restaurants, many of which feature drive-thru 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.
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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 and Chief Executive Officer, Scott
LeFever, our Vice President of Operations for Good Times, and James Abbott, our Vice President of Operations for Bad Daddy’s. Although
we have entered into employment agreements with Messrs. Zink and LeFever, 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 or LeFever. We have not entered into
an employment agreement with Messr. Abbott. The loss of Messrs. Zink’s, LeFever’s, or Abbott’s services, or those of
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, and in 2021 we have seen an extreme shortage of qualified workers by historical standards as has been reported
in various news outlets. 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 has required us to pay meaningfully higher wages to attract enough employees than has historically been the case, and continued
tightness in labor markets could result in continued escalation of 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.
Increasingly competitive labor markets and our need to
provide additional incentives to remain competitive in our hiring and retention efforts may continue to negatively impact our margins
and, if we are unable to staff and retain qualified restaurant management and operating personnel, we may be unable to effectively operate
and grow our business and revenues, which could materially adversely affect our financial performance.
Our ongoing success requires us to attract, motivate and retain
a sufficient number of qualified, high-energy employees, including both restaurant managers and crew. However, qualified individuals needed
to fill these positions are in short supply in many areas, and we and other companies in our industry have experienced high turnover.
Many individuals have left the restaurant industry altogether due to difficult pandemic-related operating demands and, in some cases,
current unemployment subsidies. These conditions have resulted in aggressive competition for talent, wage inflation and pressure to improve
benefits and workplace conditions to remain competitive and attract talent, which in turn has led to higher labor costs and margin compression.
If this trend continues, it will negatively impact our ability to effectively operate and grow our business and revenues and materially
adversely affect our financial performance.
If we fail to appropriately plan and sustain our workforce and
proactively respond to employee dissatisfaction, it could adversely impact guest satisfaction and operational efficiency, lead to increased
litigation and unionization efforts and negatively impact restaurant profitability. Our restaurants could be short staffed, we may be
forced to incur overtime expenses, and our ability to operate and expand our concepts effectively and meet customer demand could be limited.
Difficulties recruiting and retaining new restaurant crew members in a timely manner also negatively impacts our ability to grow sales
at existing restaurants and open new restaurants. Any or all of these factors any could materially adversely affect our financial performance.
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.
The recently-released Emergency Temporary Standard (“ETS”)
from OSHA provides guidance surrounding requirements related to vaccination against COVID-19 among our employees. Although the ETS provides
for the alternative of weekly testing for the virus and also allows employers to shift the cost burden of this testing to employees, labor
markets, competitive forces, and practical application may dictate that we would shoulder the cost of such testing, which could result
in meaningful costs that have not been incurred to-date. Additionally, beliefs, perceptions, and behaviors among employees relative to
either vaccination or testing, could result in employees choosing not to work for us, or other companies bound by the ETS, and further
limit the supply of labor.
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.
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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.
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Costs associated with our employee health care programs
continue to escalate and we may not be able to fully pass along those costs increases to employees.
We maintain various health care programs, including coverage
for medical claims, to employees who select such programs. All of our salaried managers are eligible to participate in these programs
and those of our hourly employees who meet the service requirements under the Affordable Care Act are also eligible. We maintain insurance
coverage for claims in excess of a certain threshold on a per-member basis but do not maintain insurance coverage for aggregate claims.
We have a limited number of participants in our plans and should a significant number of participants report claims in a given year, the
actual claims under the plan may meaningfully exceed our expected claims, and any such costs would be borne by us and not by the participants
in the plan (our Employees).
Risks Related to the Ownership of Our Common Stock
Our business could be negatively affected as a result
of significant shareholders or potential shareholders 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.
Shareholders 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 shareholders
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 disclosures of 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 shareholders;
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· 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 Shareholders 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:
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 shareholders for their common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
We currently lease approximately 5,100 square feet of space
for our executive offices in Golden, Colorado for approximately $76,500 per year, beginning November 1, 2021, under a lease agreement
which expires in October 2026. In October 2021 we executed an extension amendment to this lease whereby we will lease an additional 2,550
square feet. Upon completion of the office expansion the cost will increase to $114,750 per year. 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. Any future development is expected to be conducted through a combination of ground leases
and land purchases.
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 expect future development to be conducted through the leasing of end-cap spaces in retail developments, ground leases, and
or land purchases upon which we would be able to build 3,000 – 4,000 square foot standalone building suitable for restaurants, or
if the site characteristics otherwise met our criteria, larger sites where we would be able to construct multi-tenant buildings, where
we would be able to occupy a portion of the space with a Bad Daddy’s restaurant and lease other portions of the building to restaurant
or non-restaurant tenants.
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
As previously disclosed in the Company’s Form 10-K for
the fiscal year ended September 29, 2020, the Company is the defendant in a lawsuit styled as White Winston Select Asset Funds, LLC and
GT Acquisition Group, Inc. v. Good Times Restaurants, Inc., arising from the failed negotiations between plaintiffs and the Company for
the sale of the Good Times Drive Thru subsidiary to plaintiffs. The lawsuit was initially filed on September 24, 2019 in Delaware Chancery
Court, and Company removed the case to federal court in the US District Court for the District of Delaware on November 5, 2019. On July
30, 2021, the plaintiffs moved the Court for leave to amend their complaint and add new causes of action and a claim for $18 million in
damages. On August 31, 2021, the Company’s retained damages expert submitted a report in response to the plaintiffs’ claims
for damages. Good Times contends that the most reasonable estimation of damages is between $332,000 and $3.3 million. The estimate assumes
a finding of liability in favor of the plaintiffs and their ability to satisfy the legal standards for proving damages. The Company views
these events as not probable. On October 25, 2021, the Court granted the plaintiffs leave to amend their complaint and add new causes
of action and damages. The Company will continue to vigorously pursue a full defense of this matter on the merits. Because the Company
has concluded that a loss is not probable, we therefore 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.
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PART II
Shares of our Common Stock are listed for trading on the NASDAQ
Capital Market under the symbol “GTIM”. As of December 15, 2020, there were approximately 47 holders of record of our common
stock. Because many shares of our common stock are held by brokers and other institutions on behalf of shareholders, we are unable
to estimate the total number of shareholders 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
Tender Offer
On August 13, 2021, the Company commenced a tender offer (the
“Tender Offer”) to purchase up to 1,413,000 shares of its common stock at a price per share of $4.60. On September 10, 2021,
at 11:59pm, the offer expired, and the Company subsequently accepted for payment, at a purchase price of $4.60 per share, a total of 333,241
shares properly tendered and not properly withdrawn before the expiration date, at an aggregate cost of approximately $1,532,908, excluding
fees and expenses relating to the Tender Offer.
ITEM 6. [RESERVED]
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-thru 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.
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 2021 and 2020, which ended on September 28, 2021 and September 29, 2020, respectively, cover periods
of 52 full calendar weeks in fiscal 2021 and 53 full calendar weeks in fiscal 2020.
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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: (1)
Good Times:
Restaurant operating costs: (1)
Asset impairment costs - 0.0 % 350 1.1 %
Gain on restaurant asset sale (37 ) (0.1 %) (45 ) (0.1 %)
(1) Restaurant operating costs are expressed as a percentage of restaurant
sales.
(2) Includes direct and allocated corporate general and administrative
costs.
Bad Daddy’s Restaurants:
We currently operate forty 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 2022. Due to the unusual rate of inflation of our
raw products, we cannot, at this time, reasonably predict our expected price increases during fiscal 2022 at our Bad Daddy’s restaurants.
Good Times Burgers & Frozen Custard Restaurants:
We currently operate twenty-four 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.
Due to the unusual rate of inflation of our raw products, we
cannot at this time reasonably predict our expected price increases during fiscal 2022 at our Good Times restaurants. We are continuing
to manage our marketing communications to balance growth in customer traffic and the average customer expenditure.
Impact of Inflation at Both Concepts
Commodity prices, particularly for key proteins have recently
been at near-record highs and have exhibited extreme volatility. During the fourth quarter of fiscal 2021 we experienced meaningful price
inflation which has continued into our first quarter of 2022. We are experiencing price inflation in most goods, including paper and packaging,
other restaurant supplies, and energy (utilities) costs.
In addition to food cost inflation, we have also experienced
the need to meaningfully increase wages to attract workers in our restaurants. While we are hopeful that wage rate inflation moderates,
the persistent shortage of qualified workers, rather than statutory wage rate increases, which have traditionally created rate pressure,
is the primary factor creating upward pressure on wages, as demand for labor is currently significantly exceeding the supply of qualified
workers.
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We have historically used menu price increases to manage profitability
in times of inflation, however the current unusually high rate of inflation, both of goods and labor, exceeds what we believe we can reasonably
pass through to our customers without negatively affecting frequency and trial by our customers.
Same Store Sales
Same store sales for each brand represents the comparison of
restaurant sales in the current year, to the same comparable weeks in the immediately preceding fiscal year for those stores open for
at least 18 months. Same store sales is a commonly used metric in the restaurant industry and management believes it is an indicator of
strength of a brand and its existing restaurant locations. Further, management believes that by excluding growth achieved through new
unit development, same store sales provides a metric that measures organic growth within the Company’s existing restaurants.
Results of Operations for Fiscal 2021 Compared to Fiscal 2020
Net Revenues: Net revenues for fiscal 2021 increased
$14,094,000 (12.8%) to $123,953,000 from $109,859,000 for fiscal 2020. Bad Daddy’s concept revenues increased $12,306,000 while
our Good Times concept revenues increased $1,788,000.
Bad Daddy’s restaurant sales increased $12,279,000 to
$88,595,000 in fiscal 2021 from $76,316,000 in fiscal 2020. Sales were positively impacted by two new restaurants opened in fiscal 2021
and two new restaurants opened in the first fiscal quarter of 2020 and the impact of rolling over fiscal year 2020 dining room closures
due to the COVID-19 pandemic. This was offset by the impact of the 53rd week of the fiscal year in fiscal 2020, which we estimate
to be approximately $2,015,000. Bad Daddy’s same store restaurant sales increased 18.2% during fiscal 2021 compared to fiscal 2020,
substantially driven by decreases between March and May of 2020 when dining rooms were closed, and to a lesser extent in June of 2020
when dining rooms were open but at reduced capacity. Indoor dining rooms in Colorado were also closed between November of 2020 and January
of 2021, and most dining rooms operated at reduced capacity through May 2021. 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 3.1% in 2021 over 2020. There were thirty-seven
restaurants included in the same store sales base at the end of the fiscal year. Additionally, net revenues for fiscal 2021 were increased
by $27,000 in higher franchise royalties and license fees compared to the prior fiscal year, primarily related to the Charlotte Airport
licensee. Fiscal 2021 and fiscal 2020 include franchise advertising contributions of $15,000 and $13,000, respectively.
Additional sales data related to Bad Daddy’s company-owned and joint-venture
restaurants:
Fiscal Year
Annualized net sales per square foot $ 619 $ 556
Good Times restaurant sales increased $1,701,000 to $34,463,000
in fiscal 2021 from $32,763,000 in fiscal 2020. Same store restaurant sales increased 10.5% during fiscal 2021 compared to fiscal 2020
despite the extra operating week in the first fiscal quarter of 2020, which we estimate contributed approximately $460,000. Restaurant
sales increased $3,264,000 from the prior year due to the same store sales increase resulting from increased customer preference for drive-thru
service. One restaurant closed during each of fiscal 2021 and 2020 and were excluded from same store sales. The average menu price increase
in fiscal 2021 over fiscal 2020 was approximately 5.5%. Additionally, net revenues for fiscal 2021 were increased by $88,000 in higher
franchise revenues compared to fiscal 2020. Fiscal 2021 and fiscal 2020 include franchise advertising contributions of $263,000 and $231,000,
respectively.
Average Good Times restaurant sales for company-operated restaurants
open the entire fiscal year for fiscal 2021 and 2020 were as follows:
Fiscal Year
During fiscal 2021, company-operated Good Times restaurants’
sales for restaurants that had been open a full eighteen months ranged from a low of $761,000 to a high of $2,174,000.
Food and Packaging Costs: For fiscal 2021, food and packaging
costs increased $3,565,000 from $32,599,000 (29.4% of restaurant sales) in fiscal 2020 to $36,164,000 (29.9% of restaurant sales).
Bad Daddy’s food and packaging costs were $26,123,000
(29.5% of restaurant sales) in fiscal 2021, up from $22,527,000 (29.5% of restaurant sales) in fiscal 2020. This increase is primarily
attributable to higher restaurant sales during the current fiscal year versus prior fiscal year.
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Good Times food and packaging costs were $10,041,000 (29.1%
of restaurant sales) in fiscal 2021, down slightly from $10,072,000 (30.7% of restaurant sales) in fiscal 2020. This decrease as a percent
of sales is due primarily to the impact of an 5.5% increase in menu pricing, which offset purchase price increases on our primary ingredients.
Payroll and Other Employee Benefit Costs: For fiscal
2021, payroll and other employee benefit costs increased $2,287,000 from $38,762,000 (35.5% of restaurant sales) in fiscal 2020 to $41,049,000
(33.4% of restaurant sales).
Bad Daddy’s payroll and other employee benefit costs were
$30,058,000 (33.9% of restaurant sales) for fiscal 2021, up from $27,790,000 (36.4% of restaurant sales) in fiscal 2020. The $2,268,000
increase was primarily attributable to higher restaurant sales during the current fiscal year versus the prior fiscal year. As a percent
of sales, payroll and employee benefits costs decreased by 2.5% primarily attributable to the leveraging of higher sales and staffing
reductions associated with the closure of our Colorado dining rooms from late November 2020 through early January 2021, offset by pay
rate increases for hourly employees in the current year and staffing reductions associated with dining room closures in the prior year.
Good Times payroll and other employee benefit costs were $10,991,000
(31.9% of restaurant sales) in fiscal 2021, up slightly from $10,971,000 (33.5% of restaurant sales) in fiscal 2020. As a percent of sales,
payroll and employee benefits costs decreased by 1.6% in fiscal 2021 compared to fiscal 2020. This decrease is primarily attributable
to the leveraging impact of sales and price increases, offset by pay rate increases for hourly employees in the current year.
Occupancy Costs: Occupancy costs include rent, real and
personal property taxes, common area maintenance expenses, licenses and insurance expense. For fiscal 2021, occupancy costs decreased
$109,000 from $8,877,000 (8.1% of restaurant sales) in fiscal 2021 to $8,815,000 (7.2% of restaurant sales).
Bad Daddy’s occupancy costs were $5,960,000 (6.7% of restaurant
sales) for fiscal 2021, down from $6,025,000 (7.9% of restaurant sales) in fiscal 2020. The $113,000 decrease was primarily attributable
to reduced personal property taxes and reduced rent on one Colorado location related to the COVID-19 pandemic. The decrease as a percentage
of sales was due to the leveraging effect of increased restaurant sales.
Good Times occupancy costs were $2,855,000 (8.3% of restaurant
sales) in fiscal 2021, up slightly from $2,852,000 (8.7% of restaurant sales) in fiscal 2020. The decrease as a percentage of sales was
due to the closure of one restaurant in the first quarter of fiscal 2021, as well as the leveraging effect of increased restaurant sales.
Other Operating Costs: For fiscal 2021, other operating
costs increased $2,763,000 from $12,148,000 (11.1% of restaurant sales) in fiscal 2020 to $14,911,000 (12.1% of restaurant sales).
Bad Daddy’s other operating costs were $11,643,000 (13.1%
of restaurant sales) for fiscal 2021, up from $9,206,000 (12.1% of restaurant sales) in fiscal 2020. The $2,438,000 increase was partially
attributable to the two new restaurants opened in fiscal 2020 and two new restaurants opened in the third and fourth fiscal quarter of
2021. The increase was attributable to significantly reduced sales in the third and fourth fiscal quarters of the prior year and a $1,407,000
increase in commissions paid to delivery service providers in the current fiscal year compared to the prior fiscal year. The percentage
increase was primarily attributable to the significant shift in delivery sales as a percentage of overall sales throughout the COVID-19
pandemic.
Good Times other operating costs were $3,268,000 (9.5% of restaurant
sales) in fiscal 2021, up from $2,942,000 (9.0% of restaurant sales) in fiscal 2020. The increase was primarily attributable to an approximate
$119,000 increase in commissions paid to delivery service providers.
New Store Preopening Costs: For fiscal 2021, we incurred
$766,000 of preopening costs compared to $1,031,000 in fiscal 2020. All of the preopening costs are related to our Bad Daddy’s restaurants.
Preopening costs in the current fiscal year are attributable
to two restaurants that opened in the third and fourth quarters of fiscal 2021. Preopening costs in the prior fiscal year were primarily
attributable to two restaurants that opened late during the fourth quarter of fiscal 2019, two restaurants that opened during the first
fiscal quarter of 2020, and approximately $157,000 of non-cash operating lease costs associated with the two restaurants that opened in
fiscal 2021. Preopening costs typically occur over a period of approximately five months; however, due to COVID-19 pandemic-related delays,
the two restaurants opened in fiscal 2021 incurred preopening costs for approximately 15 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 2021, depreciation and amortization costs decreased $287,000 from $4,129,000 in fiscal 2020
to $3,842,000 in fiscal 2021.
Bad Daddy’s depreciation costs decreased $205,000 from
$3,268,000 in fiscal 2020 to $3,064,000 in fiscal 2021. This decrease was attributable to reduced depreciation resulting from asset impairment
charges recorded in the second quarter of fiscal 2020, offset by the two new restaurants opened in fiscal 2021.
Good Times depreciation costs decreased $83,000 from $861,000
in fiscal 2020 to $778,000 in fiscal 2021.
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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 2021, general and administrative costs increased $2,658,000 from $6,779,000 (6.2% of total
revenues) in fiscal 2020 to $9,437,000 (7.6% of total revenue).
The $2,658,000 increase in general and administrative expenses
in fiscal 2021 is primarily attributable to:
· Increase of $222,000 related to business insurance premiums
· Increase of $139,000 in computer and technology costs