ITEM 1A. RISK FACTORS
You should carefully consider 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
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 supply chain impacts due to pandemics or other public
health situations may affect our food costs or cause a disruption in our supply chain. We enter 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 pandemics or other public health emergencies, 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.
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 recent years we have seen an extreme shortage of qualified workers by historical standards.
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.
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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 could materially adversely affect our financial
performance.
The outbreak of, and local, state and federal
governmental responses to, pandemics or other future health concerns 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.
Public health concerns including pandemics and
the associated government response, change in consumer behavior, labor market effects and supply chain impacts significantly affected
the results of operations and financial condition of our business. The risk of similar government and consumer response to future public
health concerns, and the risk of similar impacts within the labor markets and global supply chain, could cause significant disruption
to our business.
The failure of banks where we maintain deposits
in excess of the limits insured by FDIC or other government, or quasi-government agencies could materially affect our financial position
and operating results.
The Company maintains deposits with certain banks
in excess of the maximum insured limits by the FDIC. The significant interest rate increases by the Federal Reserve have caused recent
bank failures. Although in certain of those cases, depositors have been protected from loss by government intervention, no assurances
can be made in the case of any failure of a bank in which the Company has uninsured deposits, that the Company would be similarly protected
against loss of such uninsured deposits.
International conflicts could disrupt our business
and could materially affect our financial condition and operating results.
Although we conduct all of our restaurant operations
within the USA, worldwide product supply chains have been impacted by international conflicts, which have expanded into new regions of
the world recently. The lack of availability of supplies of such products may impact the availability and supplier pricing for products
purchased by us for use in our business, which could result in higher food and packaging costs or reduced revenues. Consumer behavior
may also be affected by international conflicts and may result in reduced traffic and sales at our restaurants.
We have accumulated losses and cannot guarantee
future profits.
We have incurred losses in 29 of our 36 years
since inception. As of September 24, 2024, we had an accumulated deficit of $17,622,000. Though we recognized net income in fiscal 2024,
in light of the uncertainty of macroeconomic conditions, increasing inflation and other factors affecting our supply chain and employee
markets, we cannot provide assurance that we will produce income again for the fiscal year ending September 30, 2025.
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 thirteen
of the past fourteen years at Good Times. We have operated Bad Daddy’s for a shorter period of time and have recently experienced
declines in same store sales. 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 changes in general customer behavior and preferences. If
our same store sales decline, and our operating costs increase, our ability to attain profitability will be adversely affected.
New restaurants, when and if opened, may not
be profitable, if at all, for several months.
We anticipate that our new restaurants, when and
if opened, will generally take several months to reach normalized operating levels due to inefficiencies typically associated with new
restaurants, including lack of market awareness, the need to hire and train a sufficient number of employees, operating costs which are
often materially greater during the first several months of operation than thereafter, preopening costs and other factors. In addition,
restaurants opened in new markets may open at lower average weekly sales volumes than restaurants opened in existing markets and may have
higher restaurant level operating expense ratios than in existing markets. Sales at restaurants opened in new markets may take longer
to reach average annual company-owned restaurant sales, if at all, thereby affecting the profitability of these restaurants.
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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 expanded into the state of Colorado with future development expected in markets where we currently operate. We also compete with small
regional and local hamburger and other fast-food restaurants, many of which feature drive-thru service. Increasingly, fast casual burger
restaurants such as Shake Shack have incorporated drive-thru service into their operating model, and in the case of Shake Shack, also
feature an all-natural beef platform. 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.
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, particularly Ryan Zink, our President and Chief Executive Officer,
Keri August our Senior Vice President of Finance and Accounting and Don Stack, our Senior Vice President of Operations for Good Times.
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 or Stack or Ms. August. We have not entered
into any employment agreements with Ms. August or Mr. Stack, and both are employees at will. The loss of services by Messrs. Zink or Stack
or Ms. August, or those of other key management personnel, could have a material adverse effect on our financial condition and results
of operations.
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.
Information technology system failures or breaches
of our network security could interrupt our operations and harm our business, financial condition and results of operations.
We rely on our computer systems and network infrastructure
across our operations, including point-of-sale processing at our restaurants and various cloud-based systems that are an integral part
of our operations and financial reporting processes. Our operations depend upon our ability to protect our technology and digital assets
against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal
and external security breaches or attacks, malware, and other disruptions. Any damage or failure of our computer systems or network infrastructure
or any cybersecurity incident that causes an interruption in our operations or otherwise compromises our technology or digital assets,
an interruption in our operations or otherwise compromises our computer systems or network infrastructure, or if software or third-party
vendors that support our information technology environment are compromised, our business, financial condition and results of operations
could be harmed and subject us to litigation or actions by regulatory authorities. Further, adverse publicity resulting from such an event
may harm our business, financial condition and results of operations. Although we have a comprehensive program to protect and mitigate
risks associated with physical infrastructure and digital assets, including various vulnerability thefts, firewalls, data encryption and
other security controls and intend to maintain and upgrade our security technology and operational procedures to prevent damage, breaches
or other disruptions, these measures may not eliminate all risks Further, although we purchase cybersecurity insurance, such insurance
is a responsive, not a preventive measure, and there can be no assurances that the limits of the policy will be sufficient to cover the
costs associated with a cybersecurity event.
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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.
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.
Consumer preferences could be affected by health
concerns about outbreaks of other viruses, including various strains of influenza; the consumption of beef, the key ingredient in many
of our menu items; or negative publicity concerning food quality, illness and injury generally, such as negative publicity concerning
E. coli, “mad cow” or “foot-and-mouth” disease, publication of government or industry findings concerning food
products served by us, or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants. This
negative publicity may adversely affect demand for our food and could result in a decrease in customer traffic to our restaurants. If
we react to the negative publicity by changing our concept or our menu, we may lose customers who do not prefer the new concept or menu,
and we may not be able to attract a sufficient new customer base to produce the revenue needed to make our restaurants profitable. In
addition, we may have different or additional competitors for our intended customers as a result of a concept change and may not be able
to compete successfully against those competitors. A decrease in customer traffic to our restaurants as a result of these health
concerns or negative publicity or as a result of a change in our menu or concept could materially harm our business. Additionally, if
our customers or staff members become infected with a pathogen which was actually or claimed to be contracted at our restaurants, customers
may avoid our restaurants and/or it may become difficult to adequately staff our restaurants. Any adverse food safety occurrence may result
in litigation against us. The negative publicity associated with such an event could damage our reputation and materially adversely affect
our financial performance.
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The inability of the company to successfully
negotiate extended terms on leases reaching end-of-term may reduce future profitability.
The company leases the real estate underlying
substantially all of its restaurants. While our leases generally have options for extension of the initial term, in the case of some of
our Good Times restaurants, we have exercised all of the options granted to us under the lease. Additionally, some options are set at
fair market rental rates, and in the case of one Bad Daddy’s restaurant, no option to extend exists in the lease. Furthermore, many
of our Good Times leases are at rates below current market prices. Although the Company has generally been successful in negotiations
with our landlords, the risk that we are unable to negotiate additional lease term on expiring leases at reasonable rental rates could
materially impact our future profitability, and even in the case we are able to negotiate additional term at rates that are acceptable
to us, those rates may be significantly higher than the expiring rate and may result in lower profitability for the Company.
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.
Ongoing capital expenditures at existing restaurants
will require significant capital expenditures and remodel initiatives may not result in increased sales.
Most of our Good Times restaurants are more than
a decade old. As a result, we are in the process of replacing signage and making other significant capital investments in our existing
restaurants. These signage, technology, and other remodeling expenditures may not increase sales and we may not be able to attract enough
additional customers to meet our targeted level of performance and our business and results of operations may be adversely affected.
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.
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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 seventeen years and the average age for all Bad Daddy’s restaurants, as of the date of this filing,
is approximately eight 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.
Though the Company currently has no franchisee-owned restaurants, the Company has offered franchises in the past and may do so again in
the future. 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.
Costs associated with our employee health care
programs continue to escalate and we may not be able to fully pass along those cost 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 (“Stop-Loss” insurance) 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). Further, excessive claims may result in the inability for us to
renew our Stop-Loss policies at reasonable rates, if at all, and we may be required to self-insure significantly higher levels of claims
or to completely self-insure all claims under the plans which could have a material and adverse effect on our business and financial performance.
Our business is subject to evolving corporate
governance and public disclosure regulations, including environmental, social and governance (“ESG”) matters, that could expose
us to numerous risks.
We are subject to changing rules and regulations
arising from governmental, quasi-governmental, and other self-regulatory organizations, including state and local governments, the SEC,
the Nasdaq Stock Market and the Financial Accounting Standards Board. These rules and regulations are evolving in scope and complexity
and many new requirements have been created in response to recently enacted laws, making compliance more difficult and uncertain. In addition,
increasingly regulators, customers, investors, employees and other stakeholders are focusing on environmental, social and governance (“ESG”)
matters and related disclosures. Within our industry, concerns have been expressed regarding energy sourcing and management, water usage,
chemicals used in food and supplies (such as PFAS or other “forever chemicals”), food safety, labor policies and practices
and supply chain and management of food sourcing. These changing rules, regulations and stakeholder expectations have resulted in, and
are likely to continue to result in, increased general and administrative expenses and increased management time and attention spent complying
with or meeting such regulations and expectations. For example, developing and acting on policies, procedures, and practices within the
scope of ESG, and collecting, measuring and reporting ESG related information may be costly and time intensive. Further, these issues
are subject to evolving reporting standards, including the SEC’s recently proposed climate-related reporting requirements. We may
also communicate certain information regarding ESG-related matters in our SEC filings or in other public disclosures. Even to the extent
to which we are not subject to certain rules or regulations, shareholders or other interested parties could make intensive efforts to
push for our voluntary compliance with such rules or regulations, or could be criticized for the accuracy or completeness of the disclosure;
all of which could lead to increased costs. Our approach towards compliance, whether required or voluntary, toward ESG-related matters,
and criticism over such, could adversely affect our reputation, business and financial performance.
Changes in enforcement practices related to
existing immigration laws and/or modified or newly adopted immigration legislation may affect labor markets related to our suppliers or
the QSR business segment
The upcoming Presidential administration change
may increase the likelihood for Congress to amend existing immigration laws or adopt new immigration laws. Further, policy decisions related
to the enforcement of, and rulemaking related to, immigration laws have been volatile and subject to changes resulting from election cycles.
Those policies include the degree of tolerance of undocumented workers employed in various segments of the workforce. Various subsegments
of the agricultural industry, as well as the QSR subsegment of the restaurant industry itself are at risk for employees who obtain fraudulent
documentation but that contains data related to actual individuals or are of such quality that they may not be detected through appropriate
document validation practices. Any new or modified immigration laws or a change in these policy decisions may have an adverse impact on
the number of individuals participating in these markets, and may reduce the total number of employees in the population from which we
recruit, affecting our ability to conduct our business, and with respect to our suppliers, may have an adverse impact on their ability
to produce products that we purchase for ingredients in our recipes.
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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.
A future ownership change as defined by Section
382 of the Internal Revenue Code (“IRC”) could limit our ability to utilize tax loss and credit carryforwards to offset our
taxable income.
Our deferred tax assets include certain general
business credit tax credits and loss carryforwards. Our ability to realize these deferred tax assets through their use to offset future
taxable income may be significantly limited if we experience an ownership change, as defined by Section 382 of the IRC. In general, an
ownership change under Section 382 occurs if the percentage of stock owned by an entity’s 5% stockholders (as defined for tax purposes)
increases by more than 50 percentage points over a rolling three-year period. Such an ownership change has occurred several times in the
Company’s history, although during the periods in which such prior ownership changes occurred, the Company had placed a 100% valuation
allowance on its deferred tax assets. The limitation on our ability to utilize these credits and tax loss carryforwards that could arise
from an ownership change under Section 382 would depend on the value of our equity at the time of any ownership change. If we were to
experience an ownership change, it is possible that a significant portion of our tax loss and credit carryforwards could expire before
we would be able to use them to offset future taxable income and could result in the recognition of loss associated with the reduced value
of the Company’s deferred tax assets.
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. Our average daily volume traded is
extremely low and even smaller amounts of activity can cause significant movements in the price of our common stock. 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 public health concerns 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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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 1C. CYBERSECURITY
The Company recognizes the critical importance
of maintaining the safety and security of our systems and data amidst an ever-evolving landscape of cybersecurity threats and has adopted
a process for overseeing and managing cybersecurity and related risks.
Our approach to cybersecurity encompasses a wide
range of strategies, practices, and technologies designed to safeguard our systems and data. This process involves continuous monitoring,
risk assessment, implementation of advanced security measures, and regular updates to our protocols to address emerging threats.
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As of the date of this report, we are not aware
of any cybersecurity incidents that have had a material effect on our operations, business, results of operations, or financial condition.
Cybersecurity Risk Management and Strategy
As part of the Company’s overall risk management
strategy, the Company has instituted a cybersecurity risk management program and a set of procedures to protect, identify, detect, respond
to, and manage reasonably foreseeable cybersecurity risks and threats. A variety of security tools are utilized to prevent, identify,
investigate, address, and recover from identified vulnerabilities and security incidents. We employ security technologies, including firewalls,
encryption, intrusion detection systems, and multi-factor authentication. In addition, we purchase cybersecurity insurance through a reputable
carrier, which includes access to a breach coach and a preferred panel of experienced, qualified vendors to respond to an actual attack.
There can be no assurances that our cybersecurity
risk management program, including policies, controls, or procedures will be effective in preventing successful attacks on our information
technology infrastructure or digital assets, or that the limits of our cybersecurity policy will be sufficient to cover losses which could
be incurred in a successful attack.
Personnel and Third-Party Engagement
Our Information Technology department is led by
the Director of Technology who has more than twenty years of experience in technology management and cybersecurity, conducts regular risk
assessments and continuously monitors our networks and systems.
The Company engages third party risk security
vendors to identify, mitigate, and remediate cybersecurity risks. A third-party vendor is utilized to perform quarterly scans of all our
network endpoints. Any issues identified by the scans are remediated. Annual penetration tests are conducted, which simulate real-world
threats, including social engineering threats, to the Company’s network and other digital assets. These tests include comprehensive
“Dark Web” searches of all domain user emails. We require the annual submission of SOC 1 security certificates from third
party vendors that provide systems underlying our financial reporting infrastructure or with access to our financial and sales data.
Governance
The Director’s presentation at the Company’s
monthly senior leadership meeting, led by the CEO, includes the results of the most recent scans and routine testing. Should a cybersecurity
incident occur, the Director would immediately report it to the CEO, who would report any material cybersecurity breach promptly to the
Company’s Board of Directors.
The Board of Directors is acutely aware of the
critical nature of managing risks associated with cybersecurity threats. The Audit Committee has the primary responsibility to oversee
effective governance in managing risks associated with cybersecurity threats. At each quarterly Audit Committee meeting, Management presents
a cybersecurity update, which includes results of testing by third-party vendors and any suspected cybersecurity incidents.
ITEM 2. PROPERTIES
We currently lease approximately 7,650 square
feet of space for our executive offices in Golden, Colorado for approximately $126,225 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. Except for one Good Times restaurant where we own both
the land and building underlying, we do not own 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 16,000 to 50,000 square feet. 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, 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 3,500 – 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.
Our restaurants serve as collateral for the Cadence Credit Facility as discussed in the Notes to Consolidated Financial Statements included
in this report.
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ITEM 3. LEGAL PROCEEDINGS
There may be various claims in process, matters
in litigation, and other contingencies brought against the Company by employees, vendors, customers, franchisees, or other parties. Evaluating
these contingencies is a complex process that may involve substantial judgment on the potential outcome of such matters, and the ultimate
outcome of such contingencies may differ from our current analysis. We regularly review the adequacy of accruals and disclosures related
to such contingent liabilities in consultation with legal counsel. While it is not possible to predict the outcome of these claims with
certainty, it is management’s opinion that any reasonably possible losses associated with such contingencies have been adequately
accrued or would be immaterial to our financial statements.
The Company was 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 the 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 January 25, 2023, the Court rendered judgment dismissing the plaintiffs’
claims in their entirety and denying all of the requested relief.
The plaintiffs filed a notice of appeal of the
Court’s January 25, 2023, decisions. Good Times, in turn, filed a notice of appeal of the Court’s previous dismissal
of its counterclaim against the plaintiffs. On March 1, 2024, the court of appeals issued a ruling affirming the trial court’s
dismissal of the plaintiffs’ claims and reversed the trial court’s previous dismissal of Good Times’ own claim for the
plaintiffs’ breach of their covenant not to sue Good Times. The court of appeals ordered that Good Times’ counterclaim be
remanded to the trial court for further consideration. Due to this favorable decision, during the quarter ended March 26,2024 we reversed
our previous contingency reserve of $332,000. The plaintiffs petitioned the court of appeals for rehearing on its reversal of the
trial court’s dismissal of Good Times’ counterclaim. On June 20, 2024, the court of appeals affirmed its previous reversal
of the trial court’s dismissal of Good Times’ counterclaim. The trial court will now consider the issue of White Winston’s
liability to Good Times. The amount of Good Times’ claimed damages (which consists substantially of its prior legal fees) exceeds
$3 million. The trial court ordered the parties to submit briefing on the issue of Good Times’ damages claim. The briefing
closed on December 10, 2024, and Good Times expects the trial court to render a decision sometime after. While Good Times plans to vigorously
pursue this remaining claim to conclusion, there is no assurance that it will be successful and, even if it is successful, its recovery
may be less than such claimed damages amount.
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 the date of this filing, there were approximately 45
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 at the present time do not anticipate paying dividends in the immediate future. In addition, the Cadence Credit Facility
places restrictions on the payment of dividends. Any ability to pay future dividends would necessarily depend on our earnings, financial
condition and willingness of our lender to allow for the payment of dividends.
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 24, 2024, the Company
has purchased approximately 1,670,718 shares of its common stock pursuant to the share repurchase plan leaving approximately $350,000
available for repurchases under the plan. On December 12, 2024, the Company the Company announced a $2 million expansion of its existing
share repurchase program, which now provides authorization for a total of $7 million dollars of aggregate share repurchases.
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 (“Good Times”) and Bad Daddy’s Burger Bar (“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 24, 2024 and September 26, 2023 each cover periods of 52 full calendar weeks. Fiscal 2025 will consist
of 53 weeks and end on September 30, 2025.
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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)
Gain on disposal of assets 23 0.0 % (4 ) 0.0 %
Good Times:
Restaurant operating costs: (1)
Litigation Contingencies (332 ) (0.9 %) 0 0.0 %
Asset impairment costs 9 0.0 % 70 0.2 %
Gain on restaurant asset sale (21 ) (0.0 %) (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 thirty-nine company-owned
Bad Daddy’s restaurants. We also license one restaurant in North Carolina.
Good Times Burgers & Frozen Custard
Restaurants
We currently operate twenty-seven company-owned
and joint-venture Good Times restaurants all in the state of Colorado. In addition, we have three Good Times franchise restaurants, one
operating in Colorado and two in Wyoming.
Impact of Inflation at Both Concepts
Commodity prices have been more stable during
fiscal 2024, though beef and bacon are at or are near record highs and have exhibited extreme volatility.
In addition to food and supplies cost inflation,
we have experienced the need to meaningfully increase wages to attract restaurant employees. While we are hopeful that wage rate inflation
moderates as overall inflation, as evidenced by the Consumer Price Index (CPI-U), has moderated the persistent shortage of qualified workers,
and in Colorado inflation-indexed statutory wage rate increases continue to place upward pressure on wages.
We have historically used menu price increases
to manage profitability in times of inflation, however the current unusually high rate of wage inflation, exceeds what we believe we can
reasonably pass through to our customers without negatively affecting frequency and trial by our customers, and we are not able to predict
the impact of beef price inflation or our ability to offset the potential increase in cost of beef with menu price increases.
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Same Store Sales
Same store sales for each brand represent the