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 or future pandemics have previously significantly disrupted and could disrupt our business again
in the future, which has and could materially affect our financial condition and operating results.
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 to a lesser extent September
27, 2022 in the way of dining room closures, customer preference, supply chain interruptions, and employee behaviors. Recurrence of COVID-19,
new variants, or pandemics arising from novel pathogens could substantially impact our business in a negative manner.
We have accumulated losses and cannot guarantee
future profits.
We have incurred losses in 29 of our 34 years since
inception. As of September 27, 2022, we had an accumulated deficit of $30,335,000 and reported a loss for fiscal 2022 of $2,655,000. In
light of the uncertainty of the lingering impacts of COVID-19, increasing inflation and other factors affecting 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 26, 2023.
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 ten of the
past eleven 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 and inflation 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. Similarly, significant
inflation has negatively affected our labor and product input costs and could continue to do so. If the economy experiences a more significant
economic downturn or there are uncertainties regarding continued economic prosperity, declines in stock market indices, or other negative
macroeconomic occurrences, consumer spending and the unemployment rate may be affected, which may adversely affect our sales in the future. A
proliferation of heavy discounting or highly competitive pricing 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 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,
Matthew Karnes, our Senior Vice President of Finance, Don Stack, our Senior Vice President of Operations for Good Times, and James Abbott,
our Vice President of Operations for Bad Daddy’s. Although we have entered into an employment agreement with Mr. Zink, he may voluntarily
terminate his employment with us at any time. In addition, we do not currently maintain key-person insurance on the lives of Messrs. Zink,
Karnes, Abbott or Stack. We have not entered into an employment agreement with Messrs. Karnes, Abbott or Stack. The loss of services by
Messrs. Zink, Karnes, Abbott, or Stack, 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 fiscal 2022 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 legal 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 fifteen years and the average age for all Bad Daddy’s restaurants is 6.2 years. Existing restaurants
are currently located in Alabama, Colorado, Georgia, North Carolina, Oklahoma, South Carolina, and Tennessee. Because of the small number
of existing Bad Daddy’s Burger Bar restaurants and the relatively short period of time that they have been in operation, there is
substantial uncertainty that additional restaurants in other locations will be successful. There is no guarantee that we will be successful
in offering Bad Daddy’s Burger Bar franchises throughout the U.S. or that, if and when, such franchises are granted, the restaurants
developed by franchisees will be successful. There is also substantial uncertainty that the franchising business will be successful in
view of the facts that we have sold only two Bad Daddy’s Burger Bar restaurant franchises to date and that the restaurant franchising
business is very competitive.
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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;
● speculation in the press or investment community; and
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Holders of our common stock will be subject to
the risk of volatile and depressed market prices of our common stock. In addition, many of the factors listed above are beyond our control.
These factors may cause the market price of our common stock to decline, regardless of our financial condition, results of operations,
business or prospects. It is impossible to assure investors in our common stock that the market price of our common stock will not fall
in the future.
Sales of a substantial number of shares of our common stock in the
public market by our existing 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.
ITEM 2. PROPERTIES
We currently lease approximately 7,650 square feet
of space for our executive offices in Golden, Colorado for approximately $114,750 per year, under a lease agreement which expires in October
2027. 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.
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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, North Carolina, Oklahoma, South
Carolina, and Tennessee. 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
For a discussion of material legal proceedings
affecting the Company, see note 5 to the audited consolidated financial statements included in this report.
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 14, 2022, there were approximately 46 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
The Company‘s Board of Directors authorized
a $5.0 Million share repurchase program which became effective February 7, 2022. The authorization to repurchase will continue until the
maximum value of shares is achieved or the Company terminates the program. The timing and actual number of shares repurchased will depend
on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. As of September
27, 2022, the Company has purchased approximately 316,000 shares of its common stock pursuant to the share repurchase plan leaving approximately
$4,038,000 available for repurchases under the plan.
In addition, on September 23, 2022, outside of the publicly
announced share repurchase program referred to above, the Board authorized the Company to purchase an aggregate of 27,307 shares from
two non-executive employees for a purchase price of $3.75 per share.
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
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 comprises 13 weeks.
The additional week in a 53-week fiscal year is added to the first quarter, making such quarter consist of 14 weeks. Our discussion for
the fiscal years ending September 27, 2022 and September 28, 2021 each cover periods of 52 full calendar weeks.
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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)
Asset impairment costs 2,647 2.6 % - 0.0 %
Income (loss) from operations (811 ) (0.8 %) 3,274 3.7 %
Good Times:
Restaurant operating costs: (1)
Litigation Contingencies 332 1.0 % - 0.00 %
Asset impairment costs 790 2.3 % - 0.0 %
Gain on restaurant asset sale (676 ) (1.9 %) (37 ) (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. We anticipate opening one new Bad Daddy’s restaurant
during fiscal 2023. Due to the unusual rate of inflation of our raw products, we cannot, at this time, reasonably predict our expected
price increases during fiscal 2023 at our Bad Daddy’s restaurants.
Good Times Burgers & Frozen Custard Restaurants
We currently operate twenty-three 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 2023 at our Good Times restaurants.
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 2022 we experienced
meaningful price inflation which has continued into our first quarter of 2023. 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 provide a metric that measures organic growth within the Company’s existing restaurants.
Results of Operations for Fiscal 2022 Compared to Fiscal 2021
Net Revenues: Net revenues for fiscal 2022
increased $14,247,000 (11.5%) to $138,200,000 from $123,953,000 for fiscal 2021. Bad Daddy’s concept revenues increased $14,657,000
while our Good Times concept revenues decreased $410,000.
Bad Daddy’s restaurant sales increased $14,621,000
to $103,216,000 in fiscal 2022 from $88,595,000 in fiscal 2021. This increase is primarily due to increased traffic, including strong
off-premise sales, as well as menu price increases. Bad Daddy’s same store restaurant sales increased 11.2% during fiscal 2022 compared
to fiscal 2021. Bad Daddy’s restaurants are included in same store sales after they have been open a full eighteen months. This
increase is due to average menu price increases throughout the year as well as the continued strength of off-premise sales and strong
demand for in-person dining. The average menu price increase was approximately 5.7 % in 2022 over 2021. There were thirty-eight restaurants
included in the same store sales base at the end of the fiscal year. Additionally, net revenues for fiscal 2022 were increased by $36,000
in higher franchise royalties and license fees compared to the prior fiscal year, primarily related to the Charlotte Airport licensee.
Fiscal 2022 and fiscal 2021 include franchise advertising contributions of $9,000 and $15,000, respectively.
Additional sales data related to Bad Daddy’s company-owned and
joint-venture restaurants:
Fiscal Year
Annualized net sales per square foot $ 670 $ 619
Good Times restaurant sales decreased $429,000
to $34,034,000 in fiscal 2022 from $34,463,000 in fiscal 2021. This decrease is primarily due to the loss of sales associated with the
closure of one restaurant in the second quarter of 2022, partially offset by menu price increases. Same store restaurant sales increased
1.1% during fiscal 2022 compared to fiscal 2021. This increase is primarily due to menu price increases, slightly offset by lower traffic.
One restaurant closed during each of fiscal 2022 and 2021 and were excluded from same store sales. The average menu price increase in
fiscal 2022 over fiscal 2021 was approximately 7.7%. Additionally, revenues for fiscal 2022 were increased by $19,000 in higher franchise
revenues compared to fiscal 2021. Fiscal 2022 and fiscal 2021 include franchise advertising contributions of $273,000 and $263,000, respectively.
Average Good Times restaurant sales for company-owned
and joint venture restaurants open the entire 2022 and 2021 fiscal years were as follows:
Fiscal Year
During fiscal 2022, company-operated Good Times
restaurants’ sales for restaurants that had been open a full eighteen months ranged from a low of $860,679 to a high of $2,411,766.
Food and Packaging Costs: For fiscal 2022,
food and packaging costs increased $7,713,000 to $43,877,000 (32.0% of restaurant sales) compared to the increase in fiscal 2021 to $36,164,000
(29.4% of restaurant sales).
Bad Daddy’s food and packaging costs were
$33,155,000 (32.1% of restaurant sales) in fiscal 2022, up from $26,123,000 (29.5% of restaurant sales) in fiscal 2021. This increase
is primarily attributable to higher restaurant sales during the current fiscal year versus prior fiscal year. The increase, as a percent
of sales, is attributable to significant inflation with most of our food and packaging products seeing meaningful unit price increases,
partially offset by the impact of a 5.7 % average annual increase in menu pricing.
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Good Times food and packaging costs were $10,722,000
(31.5% of restaurant sales) in fiscal 2022, up from $10,041,000 (29.1% of restaurant sales) in fiscal 2021. This increase is primarily
attributable to the impact of higher purchase prices on food and paper goods, partially offset by the impact of a 7.7% increase in menu
pricing.
Payroll and Other Employee Benefit Costs:
For fiscal 2022, payroll and other employee benefit costs increased $5,466,000 to $46,515,000 (33.9% of restaurant sales) compared to
the increase in fiscal 2021 to $41,049,000 (33.4% of restaurant sales).
Bad Daddy’s payroll and other employee benefit
costs were $35,085,000 (34.0% of restaurant sales) for fiscal 2022, up from 30,058,000 (33.9% of restaurant sales) in fiscal 2021. The
$5,027,000 increase is primarily attributable to greater hours to support increased guests at restaurants during the current year versus
the same prior year period, as well as higher average pay rates. As a percent of sales, payroll and employee benefits costs increased
by 0.1% primarily attributable to higher average wage rates paid to attract qualified employees.
Good Times payroll and other employee benefit costs
were $11,430,000 (33.6% of restaurant sales) in fiscal 2022, up from $10,991,000 (31.9% of restaurant sales) in fiscal 2021. As a percent
of sales, payroll and employee benefits costs increased by 1.7% in fiscal 2022 compared to fiscal 2021. This increase, both in nominal
dollars and as measured as a percent of restaurant sales, was primarily attributable to higher average wage rates. These higher wages
are in-part driven by a combination of the significant statutory wage increase in the City and County of Denver and the impact of the
extremely competitive labor market for qualified restaurant employees in Colorado.
Occupancy Costs: Occupancy costs include
rent, real and personal property taxes, common area maintenance expenses, licenses and insurance expense. For fiscal 2022, occupancy costs
increased $625,000 from $8,815,000 (8.3% of restaurant sales) in fiscal 2021 to $9,440,000 (6.9% of restaurant sales).
Bad Daddy’s occupancy costs were $6,668,000
(6.5% of restaurant sales) for fiscal 2022, up from $5,959,000 (6.7% of restaurant sales) in fiscal 2021. The $709,000 increase was primarily
attributable to lease costs with newly opened restaurants and increased property tax assessments. The decrease as a percentage of sales
was primarily due to the leveraging effect of higher restaurant sales.
Good Times occupancy costs were $2,772,000 (8.1%
of restaurant sales) in fiscal 2022, down from $2,856,000 (8.3% of restaurant sales) in fiscal 2021. The decrease, as a percentage of
sales, was due to the closure of one restaurant in the second quarter of fiscal 2022, the leveraging effect of increased restaurant sales,
decreases in property tax expense, end-of-term rent abatement, and associated with a lease termination agreement for one good times restaurant.
Other Operating Costs: For fiscal 2022,
other operating costs increased $3,604,000 from $14,911,000 (12.1% of restaurant sales) in fiscal 2021 to $18,515,000 (13.5% of restaurant
sales).
Bad Daddy’s other operating costs were $14,519,000
(14.1% of restaurant sales) for fiscal 2022, up from $11,647,000 (13.1% of restaurant sales) in fiscal 2021. The $2,872,000 increase was
attributable to higher overall sales. As a percent of sales, the increase is attributable to higher increased spending on restaurant technology,
and higher repair and maintenance expenses.
Good Times other operating costs were $3,996,000
(11.7% of restaurant sales) in fiscal 2022, up from $3,264,000 (9.5% of restaurant sales) in fiscal 2021. The increase was primarily attributable
to general price inflation in operating supplies costs, increases in commissions paid to delivery service providers due to increases in
overall delivery sales, and higher repair and higher preventive maintenance expenses.
New Store Preopening Costs: For fiscal 2022,
we incurred $51,000 of preopening costs compared to $766,000 in fiscal 2021. All of the preopening costs are related to our Bad Daddy’s
restaurants. The costs in the prior year were related to a Bad Daddy’s restaurant opened near the end of fiscal 2021.
Preopening costs in the current fiscal year are
attributable to one restaurant that was purchased from a franchisee in the second quarter of fiscal 2022. Preopening costs in the prior
fiscal year were primarily attributable to two restaurants that opened during the third and fourth fiscal quarters of 2021. Preopening
costs typically occur over a period of approximately five months and 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 2022, depreciation and amortization costs increased $53,000 from to $3,842,000 in
fiscal 2021to $3,895,000 in fiscal 2022.
Bad Daddy’s depreciation costs increased
$139,000 from $3,095,000 in fiscal 2021 to $3,234,000 in fiscal 2022. This increase was primarily attributable to the two new restaurants
opened in final quarter of fiscal 2021 as well as the acquisition of our franchise unit in the second quarter of 2022.
Good Times depreciation costs decreased $86,000
from $747,000 in fiscal 2021 to $661,000 in fiscal 2022. This decrease is primarily attributable to assets reaching full amortization
and the closure of a restaurant in fiscal 2022 associated with a landlord termination option.
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General and Administrative Costs: General
and administrative costs include all corporate and administrative functions. Components of this category include accounting and administrative
costs, 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 2022, general and administrative costs increased
$1,069,000 from $9,437,000 (7.6% of total revenue).in fiscal 2021 to $10,506,000 (7.6% of total revenue) in fiscal 2022.
The $1,069,000 increase in general and administrative
expenses in fiscal 2022 is primarily attributable to:
● Increase of $591,000 in legal and professional services fees
● Increase of $124,000 related to a reduction of vendors fee income
● Increase of $109,000 related to regional manager expenses
● Increase of $189,000 in technology-related expenses
● Increase of $56,000 in general travel-related expenses
● Increase of $31,000 in general office expenses
● Decrease of $111,000 in incentive stock compensation
● Net decreases in all other expenses of $17,000
We expect general and administrative costs to continue
to increase slightly from fiscal 2022 to fiscal 2023 due to increased insurance and health costs, and as we make investments in new human
resource and financial management systems.
Advertising Costs: For fiscal 2022, advertising
costs increased $1,082,000 from $2,082,000 (1.7% of total revenues) in fiscal 2021 to $3,164,000 (2.3% of total revenues) in fiscal 2022.
Bad Daddy’s advertising costs increased $959,000
from $868,000 (1.0% of total revenues) in fiscal 2021 to $1,827,000 (1.8% of total revenues) in fiscal 2022. The increase is primarily
due to recognition of commission earned by third parties on gift cards sold through large-box retailers and a radio advertising campaign
in Colorado. Bad Daddy’s advertising costs consist primarily of menu development, printing costs, local store marketing and social
media. All restaurants contribute to an advertising materials fund based on a percentage of restaurant sales. The current and prior years
include advertising costs of $9,000 and $15,000, respectively, associated with franchise advertising contributions.
We anticipate that in fiscal 2023, Bad Daddy’s
advertising costs as a percentage of total revenues will remain consistent with fiscal 2022.
Good Times advertising costs increased $123,000
from $1,214,000 (3.5% of total revenues) in fiscal 2021 to $1,337,000 (3.9% of total revenues) in fiscal 2022. The increase is primarily
due to increased advertising expenditures. Good Times advertising costs consists primarily of contributions made to the advertising materials
fund and a regional advertising cooperative based on a percentage of restaurant sales which are used to provide radio advertising, social
media, on-site and point-of-purchase materials. The percentage contribution paid to the regional advertising cooperative was reduced at
the start of the current fiscal year associated with a change in expected media mix. Advertising costs are presented gross, with franchisee
contributions to the fund being recognized as a component of franchise revenues.
We anticipate that in fiscal 2023 Good Times advertising
costs as a percentage of net revenues will remain relatively stable, between approximately 3.0% and 3.5%.
Franchise Costs: For fiscal 2022, franchise
costs decreased $5,000 from $27,000 in fiscal 2021 to $22,000 in fiscal 2022. The costs are primarily related to the Good Times franchised
restaurants. We currently have minimal direct costs associated with maintaining our franchise systems as those employees overseeing franchisee
relations primarily perform responsibilities associated with company operations.
Gain or Loss on Restaurant Asset Disposals:
For fiscal 2022, the gain on restaurant asset disposals was $676,000 compared to a gain of $37,000 in fiscal 2021. The gain in both fiscal
2022 and 2021 is primarily comprised of a deferred gain on previous sale lease-back transactions related to two Good Times restaurants,
as well as the termination of a lease of a good times restaurant.
Long-lived Asset Impairment Charges: For
fiscal 2022, the asset impairment charge was $3,437,000 compared to no impairment charge being recorded in fiscal 2021. We review long-lived
assets and intangibles subject to amortization for impairment when there are factors that indicate the carrying value of such assets may
not be recoverable. We recorded non-cash charges of $790,000 related to 3 Good Times restaurants located in Colorado. We recorded non-cash
charges of $2,647,000 related to 2 Bad Daddy’s locations
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Goodwill Impairment Charges: We review goodwill
for impairment on an annual basis or whenever indications of impairment arise. During fiscal 2022 and 2021, no goodwill impairment charges