Good Times Restaurants Inc. - Quarter Report: 2016 December (Form 10-Q)

 

 

 

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Form 10-Q

Quarter Ended December 27, 2016

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

Good Times Restaurants Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)

(In thousands, except share and per share data)

 

		Dec. 27,				Sep. 27,
		2016				2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	3,517			$	6,330
Receivables, net of allowance for doubtful accounts of $0			566				425
Prepaid expenses and other			395				349
Inventories			647				631
Notes receivable			58				58
Total current assets			5,183				7,793
PROPERTY AND EQUIPMENT:
Land and building			5,068				5,069
Leasehold improvements			16,343				14,726
Fixtures and equipment			16,655				15,316
Total property and equipment			38,066				35,111
Less accumulated depreciation and amortization			(16,163	)			(15,512	)
Total net property and equipment			21,903				19,599
Assets held for sale			1,407				93
OTHER ASSETS:
Notes receivable, net of current portion			56				59
Deposits and other assets			253				268
Trademarks			3,900				3,900
Other intangibles, net			82				89
Goodwill			15,076				15,076
Total other assets			19,367				19,392
TOTAL ASSETS:		$	47,860			$	46,877
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and capital lease obligations		$	23			$	19
Accounts payable			3,364				1,918
Deferred income			26				23
Other accrued liabilities			2,672				3,162
Total current liabilities			6,085				5,122
LONG-TERM LIABILITIES:
Maturities of long-term debt and capital lease obligations due after one year		$	52			$	19
Deferred and other liabilities			4,251				3,938
Total long-term liabilities			4,303				3,957
STOCKHOLDERS’ EQUITY:
Good Times Restaurants Inc. stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding as of 12/27/16 and 09/27/2016			0				0
Common stock, $.001 par value; 50,000,000 shares authorized, 12,297,550 and 12,282,625 shares issued and outstanding as of 12/27/16 and 09/27/16, respectively			12				12
Capital contributed in excess of par value			58,390				58,191
Accumulated deficit			(22,758	)			(22,125	)
Total Good Times Restaurants Inc. stockholders' equity			35,644				36,078
Non-controlling interests			1,828				1,720
Total stockholders’ equity			37,472				37,798
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	47,860			$	46,877

 

See accompanying notes to condensed consolidated financial statements

 

Good Times Restaurants Inc. and Subsidiaries
Consolidated Statements of Operations

(Unaudited)

(In thousands except share and per share data)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

Good Times Restaurants Inc. and Subsidiaries
Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Tabular dollar amounts in thousands, except share and per share data)

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Good Times Restaurants Inc. and its wholly-owned subsidiaries, Good Times Drive Thru, Inc. (“Drive Thru”), BD of Colorado, LLC (“BD of Colo”), Bad Daddy’s Franchise Development, LLC (“BDFD”) and Bad Daddy’s International, LLC (“BDI”) (together referred to as the “Company”, “we” or “us”).  All significant intercompany balances and transactions have been eliminated in consolidation.

 

Drive Thru is engaged in the business of developing, owning, operating and franchising hamburger-oriented drive-through restaurants under the name Good Times Burgers & Frozen Custard.  Most of our Good Times restaurants are located in the front-range communities of Colorado, but we also have franchised restaurants in Wyoming.  BD of Colo, BDI and BDFD are engaged in the business of licensing, owning and operating full-service hamburger-oriented restaurants under the name Bad Daddy’s Burger Bar.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and practices of the United States of America (“GAAP”) for interim financial information.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all of the normal recurring adjustments necessary to present fairly the financial position of the Company as of December 27, 2016 and the results of its operations and its cash flows for the fiscal quarters ended December 27, 2016 and December 31, 2015. Operating results for the fiscal quarter ended December 27, 2016 are not necessarily indicative of the results that may be expected for the year ending September 26, 2017. The condensed consolidated balance sheet as of September 27, 2016 is derived from the audited financial statements, but does not include all disclosures required by generally accepted accounting principles.  As a result, these condensed consolidated financial statements should be read in conjunction with the Company's Form 10-K for the fiscal year ended September 27, 2016.

 

Advertising Costs – We utilize Advertising Funds to administer certain advertising programs for both the Good Times and Bad Daddy’s brands that benefit both us and our franchisees.   We and our franchisees are required to contribute a percentage of gross sales to the fund.  As the contributions to these funds are designated and segregated for advertising, we act as an agent for the franchisees with regard to these contributions.  We consolidate the Advertising Funds into our financial statements on a net basis, whereby contributions from franchisees, when received, are recorded as offsets to reported advertising expenses.  Contributions to the Advertising Funds from our franchisees were $89,000 and $101,000 for the first fiscal quarters of 2017 and 2016, respectively.

 

Reclassification – Certain prior year balances have been reclassified to conform to the current year’s presentation.  Such reclassifications had no effect on the net income or loss.

 

Fiscal Year – The Company changed its fiscal year from a 12-month year ending on September 30 to a 52-53-week year ending on the last Tuesday of September, effective with fiscal year 2016.  In a 52-week fiscal year, each of the Company’s quarterly periods comprise 13 weeks.  The additional week in a 53-week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks.  The Company made the fiscal year change on a prospective basis and did not adjust operating results for prior periods.

 

Our first fiscal quarter of 2017 consisted of 13 weeks beginning on September 28, 2016 and ending on December 27, 2016, our first fiscal quarter of 2016 consisted of three calendar months beginning on October 1, 2015 and ending on December 31, 2015. Our first fiscal quarter of 2017 included one less operating day than the first fiscal quarter of 2016.

 

 

The following table presents goodwill and intangible assets as of December 27, 2016 and September 27, 2016 (in thousands):

 

 

The Company had no goodwill impairment losses in the periods presented in the above table or any prior periods.

    

There were no impairments to intangible assets during the quarter ended December 27, 2016.  The aggregate amortization expense related to these intangible assets subject to amortization was $7,000 for the quarter ended December 27, 2016.

    

The estimated aggregate future amortization expense as of December 27, 2016 is as follows (in thousands):

 

 

Note 3.

Common Stock.

 

On January 26, 2015, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission ("SEC") which was declared effective by the SEC on March 25, 2015. The registration statement allows the Company to issue common stock from time to time up to an aggregate amount of $75 million, of which $22,688,052 has been issued.

 

On May 7, 2015, the Company completed a public offering of 2,783,810 shares of its common stock, which included the full exercise of the underwriters’ over-allotment option, at $8.15 per share for net proceeds, after deducting underwriting discounts and commissions and offering expenses, of approximately $20.6 million.  Net proceeds were used for the acquisition of BDI and to fund the remodeling and reimaging of existing Good Times Burgers & Frozen Custard restaurants, for the development of new Bad Daddy’s Burger Bar restaurants, as working capital reserves and for future investment at the discretion of our Board of Directors.

 

Note 4.

Stock-Based Compensation

 

Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the grant).

 

Our net loss for the quarters ended December 27, 2016 and December 31, 2015 includes $199,000 and $177,000, respectively, of compensation costs related to our stock-based compensation arrangements.

 

 

 

The Company measures the compensation cost associated with stock option awards by estimating the fair value of the award as of the grant date using the Black-Scholes pricing model. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options and stock awards granted during the quarter ended December 27, 2016. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards.

 

During the quarter ended December 27, 2016, the Company granted a total of 149,899 incentive stock options, from available shares under its 2008 Plan, as amended, with exercise prices between of $3.05 and $3.15 and per-share weighted average fair values between $2.17 and $2.30.

 

During the quarter ended December 31, 2015, the Company granted a total of 22,686 non-statutory stock options and a total of 54,110 incentive stock options, from available shares under its 2008 Plan, as amended, with exercise prices between of $5.29 and $6.23 and per-share weighted average fair values between $2.87 and $4.52.

 

In addition to the exercise and grant date prices of the stock option awards, certain weighted average assumptions that were used to estimate the fair value of stock option grants are listed in the following table:

 

	Fiscal 2017 Incentive and Non-Statutory Stock Options		Fiscal 2016 Incentive and Non-Statutory Stock Options
Expected term (years)	6.5 to 7.5		6.5 to 7.5
Expected volatility	75.66% to 80.70%		81.77% to 89.08%
Risk-free interest rate	1.49% to 2.40%		1.65% to 2.07%
Expected dividends	0		0

 

We estimate expected volatility based on historical weekly price changes of our common stock for a period equal to the current expected term of the options. The risk-free interest rate is based on the United States treasury yields in effect at the time of grant corresponding with the expected term of the options. The expected option term is the number of years we estimate that options will be outstanding prior to exercise considering vesting schedules and our historical exercise patterns.

 

The following table summarizes stock option activity for the quarter ended December 27, 2016 under all plans:

 

 

As of December 27, 2016, the aggregate intrinsic value of the outstanding and exercisable options was $251,000 and $247,000, respectively. Only options whose exercise price is below the current market price of the underlying stock are included in the intrinsic value calculation.

 

As of December 27, 2016, the total remaining unrecognized compensation cost related to non-vested stock options was $958,000 and is expected to be recognized over a weighted average period of approximately 1.9 years.

 

There were no stock options exercised during the quarter ended December 27, 2016 and 3,891 stock options exercised during the quarter ended December 31, 2015 with proceeds of $7,000.

 

 

 

During the quarter ended December 27, 2016, the Company granted a total of 101,094 shares of restricted stock to certain employees and executive officers from available shares under its 2008 Plan, as amended. The shares were issued with a grant date fair market value of $3.15 which is equal to the closing price of the stock on the date of the grants. The restricted stock grants vest over three years following the grant date.

 

During the quarter ended December 31, 2015, the Company granted a total of 44,755 shares of restricted stock to certain employees and executive officers from available shares under its 2008 Plan, as amended. The shares were issued with a grant date fair market value of $4.18 which is equal to the closing price of the stock on the date of the grants. The restricted stock grants vest over three years following the grant date.

 

A summary of the status of non-vested restricted stock as of December 27, 2016 is presented below.

 

 

As of December 27, 2016, there was $556,000 of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a weighted average period of approximately 1.6 years.

 

 

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 Agreement”) 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 in full 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.

 

 

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 0.25%.  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 0.125% 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 elects 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 of December 27, 2016, the Company was in compliance with its covenants.

 

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 collateralized by a first priority lien on substantially all of the Company’s assets.

 

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

 

 

In May 2015, in connection with the BDI purchase, the Company entered into a one-year secured promissory note bearing interest at 3.25 percent in the amount of $2,414,000. The entire note and all accrued interest was paid in full on May 6, 2016.

 

Our basic earnings per share calculation is computed based on the weighted-average number of common shares outstanding. Our diluted earnings per share calculation is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive securities for this calculation consist of in-the-money outstanding stock options, restricted stock grants and warrants (which were assumed to have been exercised at the average market price of the common shares during the reporting period). The treasury stock method is used to measure the dilutive impact of in-the-money stock options. Options and restricted stock grants for 984,718 and 778,156 shares of common stock were not included in computing diluted EPS for the quarters ended December 27, 2016 and December 31, 2015, respectively, because their effects were anti-dilutive.

We remain contingently liable on various 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 by the franchisees, however there can be no assurance that there will not be in the future which could have a material effect on our future operating results.

 

Long-Lived Assets. We review our long-lived assets for impairment, including land, property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the capitalized costs of the assets to the future undiscounted net cash flows expected to be generated by the assets and the expected cash flows are based on recent historical cash flows at the restaurant level (the lowest level that cash flows can be determined).

 

Given the results of our impairment analysis at December 27, 2016 there are no restaurants which are impaired.

 

Trademarks. Trademarks have been determined to have an indefinite life.  We evaluate our trademarks for impairment annually and on an interim basis as events and circumstances warrant by comparing the fair value of the trademarks with their carrying amount. There was no impairment required to the acquired trademarks as of December 27, 2016 and December 31, 2015.

 

Goodwill. The Company is required to test goodwill for impairment on an annual basis or whenever indications of impairment arise including, but not limited to, a significant decline in cash flows from store operations. Such tests could result in impairment charges. As of December 27, 2016, the Company had $96,000 of goodwill related to the purchase of a Good Times franchise operation on December 31, 2012 and $14,980,000 of goodwill related to the acquisition of BDI on May 7, 2015.  There was no impairment required to the goodwill as of December 27, 2016 and December 31, 2015.