Good Times Restaurants Inc. - Annual Report: 2016 (Form 10-K)

Securities registered pursuant to Section 12(g) of the Act: None

 

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ITEM 1A.

RISK FACTORS

 

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If our internal controls are not adequate, we may discover errors in our financial and other reporting that will require significant resources to remedy and could subject us to additional fines.

Public companies in the United States are required to review their internal controls as set forth in the Sarbanes-Oxley Act of 2002.  It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.  In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.  Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions, regardless of how remote.  If the internal controls put in place by us are not adequate or in conformity with the requirements of the Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated by the Securities and Exchange Commission (“SEC”), we may be forced to restate our financial statements and take other actions which will take significant financial and managerial resources, as well as be subject to fines and other government enforcement actions.

Because we currently qualify as a “smaller reporting company,” our non-financial and financial information are less than is required by non-smaller reporting companies.

Currently we qualify as a “smaller reporting company.”  The “smaller reporting company” category includes companies that (1) have a common equity public float of less than $75 million or (2) are unable to calculate their public float and have annual revenue of $50 million or less, upon entering the system.  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.  Regulation S-X contains the SEC requirements for financial statements, while Regulation S-K contains the non-financial disclosure requirements.

To locate the scaled disclosure requirements, smaller reporting companies will refer to the special paragraphs labeled “smaller reporting companies” in Regulation S-K.  As an example only, smaller reporting companies are not required to make risk factor disclosure in Item 1A of Form 10-K.  Other disclosure required by non-smaller reporting companies can be omitted in Form 10-K and Form 10-Q by smaller reporting companies.

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:

·

operating results that vary from the expectations of management, securities analysts and investors;

·

developments in our business;

·

the operating and securities price performance of companies that investors consider to be comparable to us;

·

announcements of implementation of strategic transactions or developments and other material events by us or our competitors;

·

negative economic conditions that adversely affect the economy, commodity prices, the job market and other factors that may affect the markets in which we operate;

·

publication of research reports about us or the sectors in which we operate generally;

·

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

·

the realization of any of the other risk factors included in this Annual Report on Form 10-K.

 

 

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 stockholder 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 stockholder 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.

You may not receive dividends on the shares of our common stock.

Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. We have no plans to pay cash dividends on our common stock in the foreseeable future.

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 stockholder, including all affiliates and associates of the stockholder, who is the beneficial owner of 10% or more of the corporation’s outstanding voting stock, for two years following the date that the stockholder 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 stockholder unless certain other conditions are met.

Our articles of incorporation and our bylaws contain a number of provisions that may deter or impede takeovers or changes of control or management.  These provisions:

·

authorize our board of directors to establish one or more series of preferred stock the terms of which can be determined by the board of directors at the time of issuance;

·

do not allow for cumulative voting in the election of directors unless required by applicable law.  Under cumulative voting a minority stockholder holding a sufficient percentage of a class of shares may be able to ensure the election of one or more directors;

·

state that special meetings of our stockholders may be called only by the chairman of the board of directors, the president or any two directors and must be called by the president upon the written request of the holders of 25% of the outstanding shares of capital stock entitled to vote at such special meeting; and

·

provide that the authorized number of directors is no more than seven, as determined by our board of directors.

These provisions, alone or in combination with each other, may discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to stockholders for their common stock.

 

 

We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and liquidation.

In the future, we may issue debt or equity securities or securities convertible into or exchangeable for equity securities, or we may enter into debt-like financing that is unsecured or secured by any or all of our properties. Such securities may be senior to our common stock with respect to distributions. In addition, in the event of our liquidation, our lenders and holders of our debt and preferred securities would receive distributions of our available assets before distributions to the holders of our common stock.

None.

We currently lease approximately 8,568 square feet of space for our executive offices in Lakewood, Colorado for approximately $188,000 per year under a lease agreement which expires in February 2020.  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 our prototype building with a 45 to 70 seat dining room. We do not own any of the land underlying these restaurants and either lease the land or the land and building.  In addition, we have several restaurants that are conversions from other concepts in various sizes ranging from 1,700 square feet to 3,500 square feet.  The buildings are situated on lots of approximately 18,000 to 50,000 square feet.  Certain restaurants serve as collateral for the underlying debt financing arrangements as discussed in the Notes to Consolidated Financial Statements included in this report.  We intend to acquire new sites both through ground leases and purchase agreements supported by mortgage and leasehold financing arrangements and through sale-leaseback agreements.

Our 17 Bad Daddy’s restaurants are leased spaces of approximately 3,000 to 4,000 square feet in retail developments located in Colorado and North Carolina.  We intend to lease additional in-line and end-cap spaces in retail developments for new Bad Daddy’s locations.

All of the restaurants are regularly maintained by our repair and maintenance staff as well as by outside contractors, when necessary.  We believe that all of our properties are in good condition and that there will be a need for periodic capital expenditures to maintain the operational and aesthetic integrity of our properties for the foreseeable future, including recurring maintenance and periodic capital improvements.  All of our properties are covered up to replacement cost under our property and casualty insurance policies and in the opinion of management are adequately covered by insurance.

We are not involved in any material legal proceedings.  We are subject, from time to time, to various lawsuits in the normal course of business.  These lawsuits are not expected to have a material impact.

Not applicable.

 

 

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Shares of our Common Stock are listed for trading on the NASDAQ Capital Market under the symbol “GTIM”.  The following table presents the quarterly high and low bid prices for our Common Stock as reported by the NASDAQ Capital Market for each quarter within the last two fiscal years.  The quotations reflect interdealer prices, without retail mark-ups, mark-downs or commissions and may not represent actual transactions.

As of December 16, 2016 there were approximately 129 holders of record of our common stock.  However, management estimates that there are not fewer than 2,509 beneficial owners of our common stock.

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.

Disclosure with Respect to our Equity Compensation Plans: We maintain the 2008 Omnibus Equity Incentive Compensation Plan, pursuant to which we may grant equity awards to eligible persons, and have outstanding stock options and restricted stock grants issued under our 2001 Good Times Restaurants Stock Option Plan.  Pursuant to stockholder approval in February 2016 the total number of shares available for issuance under the 2008 plan was increased to 1,500,000. For additional information, see Note 10, Stockholders’ Equity, in the Notes to the Consolidated Financial Statements included in this report. The following table gives information about equity awards under our plans as of September 27, 2016:

 

 

ITEM 6.

SELECTED FINANCIAL DATA

The selected financial data on the following pages are derived from our historical financial statements and is qualified in its entirety by such financial statements which are included in Item 8 hereof.

The following presents certain historical financial information.  This financial information includes the combined operations of the Company and its subsidiaries for the fiscal years ended September 30, 2012 to September 27, 2016. Certain prior year balances have been reclassified to conform to the current year’s presentation.  Such reclassifications had no effect on the net loss.  Due to the acquisition of BDI on May 7, 2015, fiscal years 2016 and 2015 may not be comparable to the other fiscal years presented.

 

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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-through dining industry while our Bad Daddy’s restaurants compete in the full-service upscale casual dining industry. We believe that providing this additional financial information for each of our brands will provide a better understanding of our overall operating results. Refer to note 12, Segment Reporting, in the notes to our consolidated financial statements for more information.

The following tables present information about our reportable segments for the respective periods:

Restaurant operating costs are expressed as a percentage of restaurant sales

⁽¹⁾ For fiscal year 2015, the information includes revenues and costs related to the acquisition of BDI in May 2015.

 

 

Good Times restaurants:

We currently operate twenty-seven company-owned and joint venture Good Times restaurants – all in the state of Colorado.  In addition, we have ten Good Times franchise restaurants, eight operating in Colorado and two in Wyoming.

Same store sales at our Good Times restaurants increased 0.3% in fiscal 2016 compared to fiscal 2015.  The increase in fiscal 2016 is comprised of an approximate 3.4% increase in menu pricing and an approximate 3.1% decrease in customer traffic.

Our outlook for fiscal 2017 for Good Times is cautiously optimistic based on the last six years of positive sales trends; however, our sales trends are influenced by many factors. We are continuing to manage our marketing communications to balance growth in customer traffic and the average customer expenditure.  We plan to open one additional Good Times restaurant in fiscal 2017.

Bad Daddy’s restaurants:

We currently operate 17 company-owned and joint venture Bad Daddy’s restaurants—ten in Colorado and seven in North Carolina.   We also license one restaurant in North Carolina and have a franchise restaurant in South Carolina and a franchise restaurant in Tennessee.  The North Carolina restaurants were all acquired in the acquisition of BDI in May 2015, as described below.  Subsequent to fiscal year end, we opened one additional Bad Daddy’s restaurant in the Denver metropolitan area, and we expect to open eight to ten more during fiscal 2017.

In May 2015, we completed our acquisition of all of the membership interests in Bad Daddy’s International, LLC from five sellers.  As of the date of the acquisition, BDI owned all of the member interests in four limited liability companies, each of which owned and operated a Bad Daddy’s Burger Bar restaurant in North Carolina.  In addition, BDI owned a portion of the member interests in three other limited liability companies, each of which also owned a Bad Daddy’s Burger Bar restaurant in North Carolina.  BDI owns the intellectual property associated with the Bad Daddy’s Burger Bar concept and owns 52% of the member interests in Bad Daddy’s Franchise Development, LLC (“BDFD”), which has granted franchises for the ownership and operation of Bad Daddy’s Burger Bar restaurants in South Carolina and Tennessee.  Prior to the acquisition, the Company owned the other 48% of BDFD.

The aggregate price paid by the Company for the purchase of BDI was $21,402,000, comprised of $18,988,000 payable in cash and a one-year secured promissory note bearing interest at 3.25% in the amount of $2,414,000.  To finance the acquisition in May 2015, we issued an additional 2,783,810 shares of our common stock at a price to the public of $8.15 per shares.

For additional information, see Note 2 to the Consolidated Financial Statements for the years ended September 27, 2016 and September 30, 2015 included elsewhere in this Annual Report on Form 10-K.

Results of Operations for Fiscal 2016 Compared to Fiscal 2015

Net Revenues: Net revenues for fiscal 2016 increased $20,382,000 (+46.3%) to $64,439,000 from $44,057,000 for fiscal 2015, of which $316,000 came from the Good Times restaurants and $20,066,000 from the Bad Daddy’s restaurants.

Good Times restaurant sales increased $340,000 to $28,861,000 from $28,521,000 in fiscal 2015. Same store restaurant sales increased 0.3% during fiscal 2016 compared to fiscal 2015. Restaurants are included in same store sales after they have been open a full fifteen months.  Restaurant sales increased from the prior year due to the same store sales increase and the opening of one new restaurant in May 2015.  The average menu price increase in fiscal 2016 over fiscal 2015 was approximately 3.4%.  Franchise revenues decreased $24,000 in fiscal 2016 primarily due to a decrease in restaurant sales at the franchise locations.

Average Good Times restaurant sales for company-operated restaurants open the entire fiscal year for fiscal 2015 and 2016 were as follows:

During fiscal 2016, company-operated Good Times restaurants’ sales for restaurants that had been open a full fifteen months ranged from a low of $786,000 to a high of $1,907,000.

 

 

Bad Daddy’s restaurant sales for fiscal 2016 were $34,855,000, which includes sales of $7,652,000 for three Bad Daddy’s restaurants in Colorado that were open the entire fiscal year and sales of $8,726,000 for six new restaurants in Colorado that opened during the year. It also includes sales of $18,477,000 for the seven Bad Daddy’s restaurants acquired from BDI in May 2015. Additionally, net revenues increased $207,000 compared to fiscal 2015 due to Bad Daddy’s franchise royalties and license fees which are all associated with the BDI acquisition.

For factors which may affect future results of operations, please refer to a discussion of planned product and system changes discussed in the section entitled “Our Growth Strategies” in Item 1 of this Annual Report on Form 10-K.

Food and Packaging Costs: For fiscal 2016, food and packaging costs increased $5,669,000 from $14,567,000 (33.9% of restaurant sales) in fiscal 2015 to $20,236,000 (31.8% of restaurant sales).

Good Times food and packaging costs were $9,346,000 (32.4% of restaurant sales) in fiscal 2016, down from $9,734,000 (34.1% of restaurant sales) in fiscal 2015. We experienced moderation in commodity costs beginning in our third fiscal quarter of 2015 and continuing into fiscal 2016.

Bad Daddy’s food and packaging costs were $10,890,000 (31.2% of restaurant sales) in fiscal 2016, up from $4,833,000 (32.2% of restaurant sales) in fiscal 2015. $3,388,000 of the $6,057,000 increase was attributable to the North Carolina BDI restaurants acquired in May 2015. The remaining increase of $2,669,000 was attributable to the three Bad Daddy’s restaurants in Colorado open the entire fiscal year and the six new Bad Daddy’s restaurants that opened in fiscal 2016.

Payroll and Other Employee Benefit Costs: For fiscal 2016, payroll and other employee benefit costs increased $7,711,000 from $14,387,000 (33.1% of restaurant sales) in fiscal 2015 to $22,098,000 (34.7% of restaurant sales).

Good Times payroll and other employee benefit costs were $9,450,000 (32.7% of restaurant sales) in fiscal 2016, up from $8,967,000 (31.4% of restaurant sales) in fiscal 2015. The $483,000 increase in payroll and other employee benefit expenses is primarily due to an increase in the average wage paid to our employees, which increased approximately 6% in fiscal 2016 compared to fiscal 2015. The 6% increase is attributable to a very competitive labor market in Colorado. Payroll and other employee benefits increased approximately $146,000 in fiscal 2016 due to one new restaurant opened in May 2015.

Bad Daddy’s payroll and other employee benefit costs were $12,648,000 (36.3% of restaurant sales) for fiscal 2016 up from $5,420,000 (36.1% of restaurant sales) in fiscal 2015. $3,732,000 of the $7,228,000 increase was attributable to the North Carolina BDI restaurants acquired in May 2015. The remaining increase of $3,496,000 was attributable to the three Bad Daddy’s restaurants in Colorado open the entire fiscal year and the six new Bad Daddy’s restaurants that opened in fiscal 2016.

Occupancy and Other Operating Costs: For fiscal 2016, occupancy and other operating costs increased $3,398,000 from $7,179,000 (16.6% of restaurant sales) in fiscal 2015 to $10,577,000 (16.5% of restaurant sales).

Good Times occupancy and other operating costs were $5,092,000 (17.6% of restaurant sales) in fiscal 2016, up from $4,768,000 (16.7% of restaurant sales) in fiscal 2015. The $324,000 increase in occupancy and other costs is primarily attributable to:

·

Increase of $108,000 in occupancy and other restaurant operating costs due to the one new restaurant opened in May 2015.

·

Increases in various other restaurant operating costs of $216,000 at existing restaurants comprised primarily of repairs and maintenance, rent, property taxes and bank fees.

Occupancy costs may increase as a percent of sales as new company-owned restaurants are developed due to higher rent associated with sale-leaseback operating leases, as well as increased property taxes on those locations.

Bad Daddy’s occupancy and other operating costs were $5,485,000 (15.7% of restaurant sales) for fiscal 2015 up from $2,411,000 (16.1% of restaurant sales) in fiscal 2015. $1,666,000 of the $3,074,000 increase was attributable to the North Carolina BDI restaurants acquired in May 2015. The remaining increase of $1,408,000 was attributable to the three Bad Daddy’s restaurants in Colorado open the entire fiscal year and the six new Bad Daddy’s restaurants that opened in fiscal 2016.

 

 

New Store Preopening Costs: In fiscal 2016, we incurred $1,695,000 of preopening costs compared to $784,000 in fiscal 2015.

Good Times preopening costs were $4,000 for fiscal 2016 compared to $172,000 in fiscal 2015.

Bad Daddy’s preopening costs were $1,691,000 for fiscal 2016 compared to $612,000 in fiscal 2015. All of the preopening costs are related to the newly developed Bad Daddy’s restaurants.

Depreciation and Amortization Costs: For fiscal 2016, depreciation and amortization costs increased $976,000 from $1,246,000 in fiscal 2015 to $2,222,000 in fiscal 2016.

Good Times depreciation costs increased $68,000 from $678,000 in fiscal 2015 to $746,000 in fiscal 2016, primarily due to the one new restaurant opened in fiscal 2015 and one major remodel completed in fiscal 2015.

Bad Daddy’s depreciation costs increased $908,000 from $568,000 in fiscal 2015 to $1,476,000 in fiscal 2016. $383,000 of the increase was attributable to the North Carolina BDI restaurants acquired in May 2015. The remaining increase of $525,000 was attributable to the three Bad Daddy’s restaurants in Colorado open the entire fiscal year and the six new Bad Daddy’s restaurants that opened in fiscal 2016.

General and Administrative Costs: For fiscal 2016, general and administrative costs increased $2,121,000 from $4,167,000 (9.5% of total revenues) in fiscal 2015 to $6,288,000 (9.8% of total revenue).

The $2,121,000 increase in general and administrative expenses in fiscal 2015 is primarily attributable to:

·

Increase in payroll and employee benefit costs of $1,385,000

·

Increase in incentive stock compensation cost of $240,000

·

Net increases in all other expenses of $496,000.

General and administrative costs will continue to increase as we build up our infrastructure to support the growth of both of our brands but are expected to decrease as a percent of revenue as new restaurants are opened.

Advertising Costs: For fiscal 2016, advertising costs increased $342,000 from $1,198,000 (2.8% of restaurant sales) in fiscal 2015 to $1,540,000 (2.4% of restaurant sales).

Good Times advertising costs increased $161,000 from $1,122,000 (3.9% of restaurant sales) in fiscal 2015 to $1,283,000 (4.4% of restaurant sales) in fiscal 2016.  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.

We anticipate that in fiscal 2017 Good Times advertising costs will remain consistent with fiscal 2016 as a percentage of restaurant sales and will consist primarily of cable television advertising, social media and on-site and point-of-purchase merchandising totaling approximately 4.4% of restaurant sales.

Bad Daddy’s advertising costs were $257,000 (0.7% of restaurant sales) in fiscal 2016 compared to $76,000 (0.5% of restaurant sales) in fiscal 2015.  The North Carolina BDI restaurants acquired in May 2015 accounted for $100,000 of the increase. Bad Daddy’s advertising costs consist primarily of menu development, printing costs and local store marketing. Beginning in fiscal 2016 all restaurants contributed to an advertising materials fund based on a percentage of restaurant sales.

Acquisition Costs: For fiscal 2016 there were no acquisition costs compared to acquisition costs of $648,000 in fiscal 2015. All acquisition costs in the prior year were related to the acquisition of BDI, as discussed under “Acquisition of Bad Daddy’s International, LLC,” and included legal, accounting, other non-recurring integration costs and other professional services related to the transaction.

Franchise Costs: For fiscal 2016, franchise costs decreased $3,000 from $111,000 in fiscal 2015 to $108,000. The costs are primarily related to the Good Times franchised restaurants.

Gain or Loss on Restaurant Asset Disposals: For fiscal 2016, the gain on restaurant asset disposals was $25,000 compared to a loss of $9,000 in fiscal 2015. The $25,000 gain in fiscal 2016 is comprised of a deferred gain on a previous sale lease-back transaction.

Loss from Operations: The loss from operations was $300,000 in fiscal 2016 compared to a loss from operations of $239,000 in fiscal 2015.

 

 

The increase in loss from operations for the fiscal year is due primarily to matters discussed in the "Restaurant Operating Costs", "General and Administrative Costs", “Franchise Costs” and “Gain on Restaurant Asset Sales” sections above.

Net Loss: The net loss was $465,000 for fiscal 2016 compared to a net loss of $300,000 in fiscal 2015.  The change from fiscal 2015 to fiscal 2016 was primarily attributable to the matters discussed in the "Net Revenues", "Restaurant Operating Costs", "General and Administrative Costs" and "Franchise Costs" sections above, as well as 1) an increase in net interest expense of $58,000 compared to the same prior year period; and 2) debt extinguishment costs of $57,000 in fiscal 2016 compared to none in the same prior year period.

Income Attributable to Non-Controlling Interests: For fiscal 2016, the income attributable to non-controlling interests was $856,000 compared to $491,000 in fiscal 2015. The non-controlling interest represents the limited partner’s share of income in the Good Times and Bad Daddy’s joint venture restaurants. $427,000 of the current year income is attributable to the Good Times joint venture restaurants, compared to $367,000 in the same prior year period. $429,000 of the current year income is attributable to the BDI joint venture restaurants, compared to $124,000 in the same prior year period.

Adjusted EBITDA

EBITDA is defined as net income (loss) before interest, income taxes and depreciation and amortization.

Adjusted EBITDA is defined as EBITDA plus non-cash stock based compensation expense, preopening expense, non-recurring acquisition costs, GAAP rent in excess of cash rent, and non-cash disposal of assets. Adjusted EBITDA is intended as a supplemental measure of our performance that is not required by, or presented in accordance with GAAP. We believe that EBITDA and Adjusted EBITDA provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. Our management uses EBITDA and Adjusted EBITDA (i) as a factor in evaluating management's performance when determining incentive compensation and (ii) to evaluate the effectiveness of our business strategies.

We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company's financial measures with other fast casual restaurants, which may present similar non-GAAP financial measures to investors. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate Adjusted EBITDA in the same fashion.

Our management does not consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company's financial statements. Some of these limitations are:

·

Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

·

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

·

Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

·

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

·

stock based compensation expense is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing performance for a particular period;

·

Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and

·

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

 

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.  You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

The following table reconciles net loss to EBITDA and Adjusted EBITDA (in thousands):

(1)	Represents expenses directly associated with the opening of new restaurants, including preopening rent.

(2)	Represents non-cash stock based compensation as described in Note 10 to the financial statements.

(3)	Represents the costs related to the acquisition of BDI and includes legal, accounting and other non-recurring integration costs related to the transaction.

(4)	Represents the prepayment penalty and write off of unamortized loan fees associated with the retirement of the Bridge Funding Credit Facility.

(5)	Represents the excess of GAAP rent recorded in the financial statements over the amount of cash rent incurred.

(6)	Primarily related to a deferred gain on a previous sale leaseback transaction on a Good Times restaurant.

Liquidity and Capital Resources

Cash and Working Capital:

As of September 27, 2016, we had a working capital excess of $2,671,000. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have two to four weeks to pay our vendors.  This benefit may increase when new Bad Daddy’s and Good Times restaurants are opened.  We believe that we will have sufficient capital to meet our working capital, long term debt obligations and recurring capital expenditure needs in fiscal 2017 and beyond.  As of September 27, 2016, we had total commitments outstanding of $1,621,000 related to construction contracts for Good Times and Bad Daddy’s restaurants currently under development.  We anticipate these commitments will be funded out of existing cash or future borrowings against the Cadence Bank credit facility.

Financing:

Public Offering: On May 4, 2015 we completed a public offering of 2,783,810 shares of common stock, par value $0.001 per share.  The price to the public was $8.15 per share with an underwriter’s agreement at a price of $7.58 per share.  The public offering resulted in net proceeds of approximately $20.6 million that we primarily used for the acquisition of Bad Daddy’s International and development of additional Bad Daddy’s Burger Bar restaurants.

Bad Daddy’s International Note Payable: In May 2015, in connection with the BDI purchase, the Company entered into a one-year secured promissory note bearing interest at 3.25% in the amount of $2,414,000. The outstanding promissory note, along with all accrued interest, was paid in full on May 6, 2016.

Bridge Funding Credit Facility: On July 30, 2014 Drive Thru entered into a Development Line Loan and Security Agreement with United Capital Business Lending, whose name was changed to Bridge Funding Group in February 2016 (“Lender”), pursuant to which Lender agreed to loan Drive Thru up to $2,100,000 (the “Loan”) and entered into a Collateral Assignment of Franchise Agreements, Management Agreement and Partnership Interests with Lender.  In addition, on July 30, 2014, the Company entered into a Guaranty Agreement (the “Guaranty Agreement”) with Lender, pursuant to which the Company guaranteed the repayment of the Loan.  The Loan Agreement, Collateral Assignment, Notes (as defined below) and Guaranty Agreement are referred to herein as the “Loan Documents.”

 

 

In connection with each disbursement under the Loan Agreement, Drive Thru executed a Promissory Note (the “Notes”) in the full amount of each disbursement request.  The Notes incurred interest at a rate of 6.69% per annum, were repayable in monthly installments of principal and interest over 84 months, and contained other customary terms and conditions.  The Notes were subject to certain prepayment fees ranging between 1% and 3% of the unpaid balance at such time if Drive Thru repaid a Note in certain circumstances prior to the thirty seventh monthly installment under such Note. All promissory notes associated with the Loan Agreement, including all accrued interest, were paid off on September 9, 2016, and the Loan Agreement with the Lender was terminated.  In connection with the termination of the Loan Agreement, the Company incurred Debt Extinguishment Costs of $57,000 for the fiscal year ended September 27, 2016 as a result of $20,000 of prepayment fees paid to Lender and the write off of $37,000 in unamortized loan fees associated with the Loan Agreement.

Cadence Credit Facility: On September 8, 2016 the Company entered into a credit agreement with Cadence Bank (“Cadence”) pursuant to which Cadence agreed to loan the Company up to $9,000,000 (the “Cadence Credit Facility”).  The Cadence Credit Facility will mature on September 8, 2019 and accrues commitment fees on the daily unused balance of the facility at a rate of .25%.  All borrowings under the Cadence Credit Facility bear interest at a variable rate based upon the Company’s election of (i) 3.0% plus the base rate, which is the highest of the (a) Federal Funds Rate plus 0.5%, (b) the Cadence bank publicly-announced prime rate, and (c) LIBOR plus 1.0%, or (ii) LIBOR, with a .125% floor, plus 4.0%.  Interest is due at the end of each calendar quarter if the Company selects to pay interest based on the base rate and at the end of each LIBOR period if it selects to pay interest based on LIBOR.

The Cadence Credit Facility contains certain affirmative and negative covenants and events of default that the Company considers customary for an agreement of this type, including covenants setting a maximum leverage ratio of 5.35:1 and a minimum fixed charge coverage ratio of 1.25:1.

As a result of entering into the Cadence Credit Facility, the Company paid loan origination costs including professional fees of approximately $173,000 and will amortize these costs over the term of the credit agreement.

The obligations under the Cadence Credit Facility are secured by a first priority lien on substantially all of the Company’s assets.

As of September 27, 2016 the Company had not yet borrowed against the Cadence Credit Facility.

Cash Flows:

Net cash provided by operating activities was $5,398,000 for fiscal 2016 compared to net cash provided by operating activities of $3,168,000 in fiscal 2015.  The increase in net cash provided by operating activities for fiscal 2016 was the result of a net loss of $465,000 and non-cash reconciling items totaling $5,863,000 (comprised principally of 1) depreciation and amortization of $2,336,000; 2) accretion of deferred rent of $423,000; 3) amortization of lease incentive obligations of $218,000 4) $718,000 of stock option compensation expense; 5) an increase in deferred liabilities related to tenant allowances of $2,161,000; 6) an $89,000 decrease in accounts payable; 7) an increase in accrued liabilities of $1,255,000; and 8) net decreases in operating assets and liabilities totaling $723,000).

 

 

Net cash used in investing activities in fiscal 2016 was $8,482,000 compared to net cash used in investing activities of $23,715,000 in fiscal 2015.  Fiscal 2016 primarily reflects the purchases of property and equipment. Purchases of property and equipment were $8,501,000, comprised of the following:

·

$7,235,000 in costs for the development of Bad Daddy’s locations in Colorado

·

$229,000 for miscellaneous capital expenditures related to our Bad Daddy’s restaurants

·

$641,000 in costs related to our existing Good Times locations, for reimaging and remodeling

·

$100,000 for the development of one Good Times locations

·

$199,000 for miscellaneous capital expenditures related to our Good Times restaurants

·

$97,000 for miscellaneous capital expenditures related to our corporate office

Net cash used in financing activities in fiscal 2016 was $4,395,000 compared to net cash provided by financing activities $24,462,000 in fiscal 2015.  The fiscal 2016 activity includes principal payments on notes payable and long term debt of $3,683,000, net proceeds from option exercises of $39,000, and net distributions to non-controlling interests in partnerships of $751,000.

Contingencies and Off-Balance Sheet Arrangements

We remain contingently liable on various land leases underlying restaurants that were previously sold to franchisees.  We have never experienced any losses related to these contingent lease liabilities; however, if a franchisee defaults on the payments under the leases, we would be liable for the lease payments as the assignor or sub-lessor of the lease.  Currently we have not been notified nor are we aware of any leases in default under which we are contingently liable.  However, there can be no assurance that there will not be defaults in the future, which could have a material adverse effect on our future operating results.

Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S.  Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses.  These estimates and assumptions are affected by the application of our accounting policies.  Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements.  Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods.  While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions.  It is possible that materially different amounts would be reported using different assumptions.  The following is a description of what we consider to be our most significant accounting policies.

Leases:  We lease real estate for various restaurant locations under long-term non-cancelable leases from unrelated third parties.  All of our real estate leases are classified as operating leases under ASC 840—Leases.  The lease term begins on the date we become legally obligated for the rent payments or we take possession of the building or land, whichever is earlier.  The lease term includes cancelable option periods where failure to exercise such options would result in an economic penalty.

Certain of our operating leases contain predetermined fixed escalations of the minimum rent during the term of the lease.  For these leases, we recognize the related rent expense on a straight-line basis over the lease term and record the difference between the amounts charged to operations and amounts paid as deferred rent.   Most of our leases contain rent holidays, which typically begin on the possession date and end on the date the restaurant opens, during which no cash rent payments are due under the terms of the lease.  Rent holidays are included in the lease term when determining straight-line rent expense, and the rent incurred before the restaurant opens is charged to Preopening costs.

Additionally, certain of our operating leases contain clauses that provide for additional contingent rent based on a percentage of sales greater than certain specified target amounts.  We recognize contingent rent expense provided the achievement of that target is probable.

 

 

Deferred Rent:  The excess of cumulative rent expense (recognized on a straight-line basis) over cumulative rent payments made on leases is recognized as a deferred rent liability in the accompanying balance sheets.  Also included in deferred rent are lease incentives provided by landlords upon entering into leases, often related to landlord payments for tenant improvements that we commonly negotiate when opening new restaurants to help fund build-out costs.  These costs typically include general construction to alter the layout of the restaurant, leasehold improvements, and other miscellaneous items.  We capitalize leasehold improvements and record a deferred liability for the amount of cash received from the landlord, which is amortized on a straight-line basis over the lease term as defined above. The amortization of the deferred liability related to these tenant improvements is recorded as a reduction of rent expense.

Non-controlling Interests: Non-controlling interests, previously called minority interests, are presented as a separate item in the equity section of the consolidated balance sheet. Consolidated net income or loss attributable to non-controlling interests are presented on the face of the consolidated statement of operations. Additionally, changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions, and that deconsolidation of a subsidiary is recorded as a gain or loss based on the fair value on the deconsolidation date.

Income Taxes: We account for income taxes under the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.  We continually review the realizability of our deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies.  We assessed whether a valuation allowance should be recorded against our deferred tax assets based on consideration of all available evidence, using a “more likely than not” standard.  In assessing the need for a valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of deferred tax assets.  In making such assessment, more weight was given to evidence that could be objectively verified, including recent cumulative losses.  Future sources of taxable income were also considered in determining the amount of the recorded valuation allowance.  Based on our review of this evidence, we determined that a full valuation allowance against all of our deferred tax assets was appropriate.  As we increase earnings and utilize deferred tax assets in the future, it is possible the valuation allowance could be reduced or eliminated.

We are subject to taxation in various jurisdictions. We continue to remain subject to examination by U.S. federal authorities for the years 2013 through 2016. We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material adverse effect on our financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We have accrued $0 for interest and penalties as of September 27, 2016.

Variable Interest Entities: Once an entity is determined to be a Variable Interest Entity (VIE), the party with the controlling financial interest, the primary beneficiary, is required to consolidate it.  We have three franchisees with notes payable and after analysis we have determined that, while the franchisees are VIE’s, we are not the primary beneficiary of the entities, and therefore they are not required to be consolidated.

Business Combination: In accordance with Accounting Standards Codification ("ASC") 805, Business Combinations ("ASC 805"), the total purchase consideration related to the acquisition of BDI was allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of May 7, 2015 (the acquisition date). The values for current assets and current liabilities including receivables, prepaid expenses, inventories and accounts payable and other accrued liabilities were determined based on their respective book values which approximated their realizable values.  We estimated the value of property and equipment based on the original cost and remaining life of each asset.  The value of unfavorable lease liabilities was based on the estimate of future rent payments in excess of current fair market value rents.  The value of non-controlling interests was based on the ownership percent of each non-controlling interest multiplied by the estimated net values of the underlying assets of each respective joint venture.  The values of identifiable intangible assets such as Trademarks, Franchise Agreements and Non-compete agreements were determined by an independent Corporate Finance and Business Valuation firm.  The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to goodwill which represents benefits expected as a result of the acquisition including sales and unit growth opportunities.

 

 

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases (Topic 842), (ASU 2016-02), which replaces the existing guidance in Accounting Standard Codification 840, Leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. We are currently assessing the impact that adoption of ASU 2016-02 will have on our consolidated financial position or results of operations, but expect that it will result in a significant increase in our long-term assets and liabilities given we have a significant number of leases as disclosed in Note 7 to the financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The areas for simplification include income tax consequences, forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016 and early adoption is permitted for financial statements that have not been previously issued. We are currently evaluating the impact of the adoption of ASU 2016-09 on our financial statements and disclosures.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The report of the independent registered public accounting firm and financial statements listed in the accompanying index are included in Item 15 of this report. See index to the consolidated financial statements on page F-1 of this Annual Report on Form 10-K.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

During the two most recent fiscal years, Good Times has not had any changes in or disagreements with its independent accountants on matters of accounting or financial disclosure.

ITEM 9A.

CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures: As previously reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, we concluded that, as of September 30, 2015, our controls were not adequate to ensure that all liabilities related to development costs for restaurants that were currently under construction but not yet open were recorded in the proper period.  Subsequent to September 30, 2015, we implemented a process of analyzing each new restaurant on a project by project basis to ensure that all development costs and the related liabilities are recorded as of the end of each reporting period.  This process involves using estimates to record costs incurred but not yet billed for the reporting period.

Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this report on form 10K, the Company’s Chief Executive Officer and Controller (its principal executive officer and principal financial officer, respectively) have concluded that the Company’s disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting: We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended). We maintain a system of internal controls that is designed to provide reasonable assurance in a cost-effective manner as to the fair and reliable preparation and presentation of the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

 

We conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 27, 2016. In making this evaluation, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. This evaluation included a review of the documentation of controls, evaluation of the design effectiveness of controls and a conclusion on this evaluation. We have concluded that, as of September 27, 2016, the Company’s internal control over financial reporting was effective based on these criteria.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report.

Changes in Internal Control over Financial Reporting: Other than as set forth above, there have been no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal year ended September 27, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

Nothing to report.

 

 

PART III

We will file a definitive proxy statement for our 2016 Annual Meeting of Stockholders with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, those sections of our definitive Proxy Statement that specifically address the items set forth herein are incorporated by reference.

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 is hereby incorporated by reference from our definitive proxy statement relating to our 2016 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year covered by this Form 10-K.

Item 11.

EXECUTIVE COMPENSATION

The information required by Item 11 is hereby incorporated by reference from our definitive proxy statement relating to our 2016 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year covered by this Form 10-K.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 is hereby incorporated by reference from our definitive proxy statement relating to our 2016 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year covered by this Form 10-K.

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 is hereby incorporated by reference from our definitive proxy statement relating to our 2016 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year covered by this Form 10-K.

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is hereby incorporated by reference from our definitive proxy statement relating to our 2016 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year covered by this Form 10-K.

PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

a)	The following documents have been filed as part of this report or, where noted, incorporated by reference:

1)

Financial Statements

The Company’s consolidated financial statements are included beginning on pages F-1.

2)

Financial Statement Schedules

All schedules have been omitted because the matter or conditions are not present or the information required to be set forth therein is included in the Company’s consolidated financial statements and related notes thereto.

3)

Exhibits

The following exhibits are furnished as part of this report:

 

 

 

 

 

 

 

 

*	Filed herewith

**	The schedules to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the SEC upon request; provided, however, that the registrant may request confidential treatment of omitted items.

 

 

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.