Good Times Restaurants Inc

GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

Note1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Good Times Restaurants Inc. (the “Company”) and its wholly-owned subsidiaries as well asone partnership in which the Company is the general partner, andfive limited liability companies in which the Company was the controlling member during the period of time in which unrelated parties owned membership interests in those limited liability companies. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company operates, and licenses full-service restaurants under the brandBad Daddy’s Burger Bar that are primarily located in Colorado and in the Southeast region of the United States.

The Company operates and franchises drive-thru fast-food hamburger restaurants under the brandGood Times Burgers & Frozen Custard, all of which are located in Colorado and Wyoming.

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 26, 2023and the results of its operations and its cash flows for the fiscal quarters ended December 26, 2023and December 27, 2022.Operating results for the fiscal quarter ended December 26, 2023arenot* necessarily indicative of the results that* maybe expected for the year ending September 24, 2024.The condensed consolidated balance sheet as of September 26, 2023is derived from the audited financial statements but doesnot* 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 Form10-K for the fiscal year ended* September 26, 2023.*

Fiscal Year – The Company’s fiscal year is a52/53-week year ending on the last Tuesday of* September.In a52*-week fiscal year, each of the Company’s quarterly periods consist of13 weeks. The additional week in a53-week fiscal year is added to thefirst quarter, making such quarter consist of14 weeks. The quarters ended* December 26, 2023and December 27, 2022each consisted of13* weeks.

Reclassification – Certain prior year balances have been reclassified to conform to the current year’s presentation. Such reclassifications hadno effect on the net income (loss).

Advertising Costs – The company utilizes Advertising Funds to administer certain advertising programs for both the Bad Daddy’s and Good Times brands that benefit both us and our franchisees. We and our franchisees are required to contribute a percentage of gross sales to the fund. The contributions to these funds are designated and segregated for advertising. We consolidate the Advertising Funds into our financial statements whereby contributions from franchisees, when received, are recorded and included as a component of franchise revenues. Contributions to the Advertising Funds from our franchisees were $47,000 and $66,000 for the quarters ended* December 26, 2023and December 27, 2022,*respectively.

Receivables– Our receivables typically consist of royalties and other fees due to us from independent franchisees of our brands as well as product rebates and other incentives due to us under agreements with our food and beverage vendors, payments due fromthird party delivery and online ordering partners, and payments due to us for sales of gift cards tothird party retailers.

Receivables consist of the following as of:

Note2. Recent Accounting Pronouncements

ASU2023-07–Segment Reporting (Topic280): Improvements to Reportable Segment Disclosures was issued* November 2023and is effective for fiscal years beginning after December 15, 2023,and interim periods within fiscal years beginning after December 15, 2024.It is to be applied retrospectively. The Company expects to retrospectively implement ASU2023*-07 in fiscal year2025 and doesnot anticipate that it will have a material effect on the Company’s consolidated financial statements.

The Company reviewed other recently issued accounting pronouncements and concluded that they were eithernot applicable ornot expected to have a significant impact on the Company’s consolidated financial statements.

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Note3. Revenue

Revenue Recognition

Revenues consist primarily of sales from restaurant operations and franchise revenue, which includes franchisee contributions to advertising funds. Revenues associated with gift card breakage are immaterial to our financials. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer, typically a restaurant customer or a franchisee/licensee.

The Company recognizes revenues in the form of restaurant sales at the time of the sale when payment is made by the customer, as the Company has completed its performance obligation, namely the provision of food and beverage, and the accompanying customer service, during the customer’s visit to the restaurant. The Company sells gift cards to customers and recognizes revenue from gift cards primarily in the form of restaurant revenue. Gift Card breakage, which is recognized when the likelihood of a gift card being redeemed is remote, is determined based upon the Company’s historic redemption patterns, and is immaterial to our overall financial statements. Late in fiscal2023, the Company began operating a loyalty program known as GT Rewards. With each purchase, GT Rewards members earn loyalty points that can be redeemed in the future for free products. Activity related to the new reward program is immaterial to the Company’s financial statements for the quarter ended* December 26, 2023.*

Revenues we receive from our franchise and license agreements include sales-based royalties, and from our franchise agreements also* mayinclude advertising fund contributions, area development fees, and franchisee fees. We recognize sales-based royalties from franchisees and licensees as the underlying sales occur. We similarly recognize advertising fund contributions from franchisees as the underlying sales occur. The Company also provides its franchisees with services associated with opening new restaurants and operating them under franchise and development agreements in exchange for area development and franchise fees. The Company would capitalize these fees upon receipt from the franchisee and then would amortize those over the contracted franchise term as the services comprising the performance obligations are satisfied. We havenot* received material development or franchise fees in the periods presented, and the primary performance obligations under existing franchise and development agreements have been satisfied prior to the earliest period presented in our financial statements.

Note4. Goodwill and Intangible Assets

The following table presents goodwill and intangible assets as of* December 26, 2023and September 26, 2023 (*in thousands):

The Company hadno goodwill impairment losses in the periods presented in the above table. The aggregate amortization expense related to these intangible assets subject to amortization was $3,000 for the quarter ended* December 26, 2023and $2,000 for the quarter ended December 27, 2022.*

Note5. Stock-Based Compensation

The Company has traditionally maintained incentive compensation plans that include provision for the issuance of equity-based awards. The Company established the2008 Omnibus Equity Incentive Compensation Plan in2008 (the*“2008* Plan”) and has outstanding awards that were issued under the2008 Plan. Subsequently, the2008 Plan expired in2018 and the Company established a new plan, the2018 Omnibus Equity Incentive Plan (the*“2018* Plan”) during the2018 fiscal year, which was approved by shareholders on* May 24, 2018.Future awards will be issued under the2018* Plan. On* February 8, 2022the Company’s shareholders approved a proposal to increase the number of shares available for issuance under the2018* Plan from 900,000 to 1,050,000, which currently represents the maximum number of shares available for issuance under the2018 Plan.

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). The Company recognizes the impact of forfeitures as forfeitures occur.

Our net loss for the quarters ended* December 26, 2023and December 27, 2022*includes $38,000 and $46,000, respectively, of compensation costs related to our stock-based compensation arrangements.

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Stock Option awards

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 26, 2023.Estimates of fair value arenot* intended to predict actual future events or the value ultimately realized by the employees who receive equity awards.

There were 38,000 incentive stock options awarded during the quarter ended* December 26, 2023to the Company’s Chief Executive Officer and its Senior Vice President of Operations from available shares under the2018* Plan, with an exercise price of $2.51 per share and a per share weighted average fair value of $1.58. During the quarter ended* December 27, 2022,the Company granted 20,000 incentive stock options to its Chief Executive Officer, from available shares under the2018* Plan, with an exercise price of $3.00 per share and a per share weighted average fair value of $2.29.

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:

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 26, 2023*under all plans:

As of* December 26, 2023and December 27, 2022,*the aggregate intrinsic value of the outstanding and exercisable options was $21,269 and $199,000, 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 26, 2023,*the total remaining unrecognized compensation cost related to non-vested stock options was $123,000 and is expected to be recognized over a weighted average period of approximately 3.2 years.

There wereno stock options exercised during the quarter ended* December 26, 2023.There were 2,000 stock options exercised that resulted in an issuance of 2,000 shares during the quarter ended December 27, 2022*with proceeds of approximately $5,000.

Restricted Stock Units

There were 34,000 restricted stock units granted during the quarter ended* December 26, 2023and 25,750 restricted stock units granted during the quarter ended December 27, 2022.*

A summary of the status of non-vested restricted stock units as of* December 26, 2023*is presented below.

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As of* December 26, 2023,*there was $149,000 of total unrecognized compensation cost related to non-vested restricted stock units. This cost is expected to be recognized over a weighted average period of approximately 2.2 years.

Restricted and Unrestricted Common Stock Awards

No grants of restricted or unrestricted common stock were made during the quarter ended* December 26, 2023.*

Note6. Gain on Sale of Assets

For the fiscal quarter ended* December 26, 2023,the Company had $10,000 of deferred gains on prior sale-leaseback transactions related to certain Good Times restaurants. For the fiscal quarter ended December 27, 2022,*the Company had $8,000 of deferred gains on prior sale-leaseback transactions related to certain Good Times restaurants offset by approximately $8,000 of losses incurred in the disposal of miscellaneous assets.

Note7. Prepaid expense and other current assets

Prepaid expenses and other current assets consist of the following as of:

Note8. Other Accrued Liabilities

Other accrued liabilities consist of the following as of:

Note9. Notes Payable and Long-Term Debt

Cadence Credit Facility

The Company and its wholly owned subsidiaries (the “Subsidiaries”) maintain an amended and restated credit agreement with Cadence Bank (“Cadence”) pursuant to which, Cadence agreed to loan the Company up to $8,000,000, which has a maturity date of* April 20, 2028 (the “Cadence Credit Facility”). The Cadence Credit Facility amended and restated the Company’s prior credit facility with Cadence in its entirety. The Cadence Credit Facility accrues commitment fees on the daily unused balance of the facility at a rate of 0.25%. The loans may*from time to time consist of a mixture of SOFR Rate Loans and Base Rate Loans with differing interest rates based upon varying additions to the Federal Funds Rate, the Cadence prime rate or Term SOFR. Each of the Subsidiaries are guarantors of the Cadence Credit Facility.

Proceeds from the Cadence Credit Facility, if and when drawn,* may*be used (i) to fund new restaurant development, (ii) to finance the buyout of non-controlling partners in certain restaurants, (iii) to finance the redemption, purchase or other acquisition of equity interests in the Company and (iv) for working capital and other general corporate purposes.

The Cadence Credit Facility includes customary affirmative and negative covenants and events of default. The Cadence Credit Facility also requires the Company to maintain various financial condition ratios, including minimum liquidity, an amended maximum leverage ratio and an amended minimum fixed charge coverage ratio. In addition, to the extent the aggregate outstanding balance under the revolver under the Cadence Credit Facility exceeds $4.0 million, the Company is required to meet a new specified leverage ratio, on a pro forma basis, before making further borrowings as well as certain restricted payments, investments and growth capital expenditures. As of the date of filing of this report, the Company was in compliance with each of these covenants under the Cadence Credit Facility.

During the fiscal quarter ended* December 26, 2023*the weighted average interest rate applicable to borrowings under the Cadence Credit Facility was 8.45%.

As a result of entering into the Cadence Credit Facility and the various amendments, the Company paid loan origination costs including professional fees of approximately $299,000 and is amortizing these costs over the term of the credit agreement. As of* December 26, 2023,*the unamortized balance of these fees was $115,000.

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In connection with the Cadence Credit Facility, the Company and the Subsidiaries entered into an Amended and Restated Security and Pledge Agreement (the “Security Agreement”) with Cadence. Under the Security Agreement, the Cadence Credit Facility is secured by afirst priority security interest in substantially all the assets of the Company and the Subsidiaries.

As of* December 26, 2023,there were $1,250,000 of borrowings against the facility, all of which is due during the fiscal year ending September 26, 2028and is classified as a long-term liability in the accompanying balance sheet. Availability of the Cadence Credit Facility for borrowings is reduced by the outstanding face value of any letters of credit issued under the facility. As of December 26, 2023,*there were approximately $10,000 in outstanding letters of credit issued under the facility, and approximately $6,740,000 of committed funds available.

Total interest expense on notes payable was $26,000 and $0 for the quarters ended* December 26, 2023and December 27, 2022,*respectively.

Note10. Earnings (Loss) ** per Common Share**

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 units 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.

The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding:

Note11. Contingent Liabilities and Liquidity

There* maybe 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 mayinvolve substantial judgment on the potential outcome of such matters, and the ultimate outcome of such contingencies maydiffer 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 isnot* possible to predict the outcome of these claims with certainty, it is management’s opinion that any reasonably possible losses associated with such contingencies would be immaterial to our financial statements.

The Company is the defendant in a lawsuit styled as White Winston Select Asset Funds, LLC and GT Acquisition Group, Inc. v. Good Times Restaurants, Inc., arising from the failed negotiations between plaintiffs and the Company for the sale of the Good Times Drive Thru subsidiary to plaintiffs. The lawsuit was initially filed on* September 24, 2019in 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 April 11, 2022,the Court heard the parties’ respective motions for summary judgment on the plaintiffs’ claims. The Court verbally ruled that it was dismissing all of the plaintiffs’ claims except for their claim for breach of an express and implied obligation to negotiate in good faith under the parties’ letter of intent. The Court also indicated its intent to dismiss Good Times’s counterclaim against the plaintiffs for breach of a covenantnot* to sue over the failed negotiations. On* May 5, 2022,the Court issued a written order confirming this ruling. On May 25, 2022,the Court issued an order that the plaintiffs are only entitled to reliance damages should they prevail on their claim for breaches of the express and implied obligations to negotiate in good faith. The parties conducted a bench trial on the plaintiffs’ claims. The parties concluded post-trial briefing on October 24, 2022.On January 25, 2023,*the Court rendered judgment dismissing the plaintiffs’ claims in their entirety and denying all of the requested relief.

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The plaintiffs filed a notice of appeal of the Court’s* January 25, 2023decisions. Good Times, in turn, filed a notice of appeal of the Court’s previous dismissal of its counterclaim against the plaintiffs. On May 18, 2023,the plaintiffs filed their opening brief. On June 23, 2023,Good Times filed its brief in response to the plaintiffs’ opening brief and Good Times own opening brief regarding its appeal of the dismissal of its counterclaims against the plaintiffs. On August 7, 2023,the plaintiffs filed their reply brief in support of their appeal and a response to Good Times appeal. Good Times filed a reply brief in support of its appeal on August 28, 2023and briefing is now closed. The court of appeals had previously indicated it mayhold oral argument the week of January 29, 2024but has subsequently indicated it wouldno* longer hold oral argument in its review and decision in the matter. The court of appeals* may*render a decision at any time.

The Company previously recorded an accrual for contingent litigation expense in the fiscal quarter ended* March 28, 2022*in the amount of $332,000. This amount represented the Company’s best estimate of the likely amount of plaintiffs’ damage recovery. While the Company was successful at trial, in light of plaintiff’s appeal, the Company has determined to maintain the accrual and will continue to evaluate this matter based on new information as it becomes available. The ultimate resolution of the case could result in losses less than or in excess of amounts accrued. Any additional liability in excess of the accrual could have a` material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which any such additional liability is accrued. The Company will continue to vigorously pursue a full defense of this matter on the merits.

Note12. Leases

The Company determines if a contract contains a lease at inception. The Company's material long-term operating lease agreements are for the land and buildings for our restaurants as well as our corporate office. The initial lease terms range from 10 years to 20 years, most of which include renewal options of 10 to 15 years. The lease term is generally the minimum of the noncancelable period or the lease term including renewal options which are reasonably certain of being exercised up to a term of approximately 20 years. The Company reassesses the number of remaining renewal options to include in a lease term for a specific lease when it exercises an option to extend such lease.

Operating lease assets and liabilities are recognized at the lease commencement date for material leases with a term of greater than12 months. Operating lease liabilities represent the present value of future minimum lease payments. Since our leases donot provide an implicit rate, our operating lease liabilities are calculated using our estimated incremental borrowing rate based on a collateralized borrowing over the term of each individual lease. Minimum lease payments include only fixed lease components of the agreement, as well as variable rate payments that depend on an index, initially measured using the index at the lease commencement date.

Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepaid or accrued lease payments, initial direct costs and lease incentives. Lease incentives are recognized when earned and reduce our operating lease asset related to the lease. They are amortized through the operating lease assets as reductions of rent expense over the lease term.

Operating lease expense is recognized on a straight-line basis over the lease term. Certain of the Company’s operating leases contain clauses that provide for contingent rent based on a percentage of sales greater than certain specified target amounts. Variable lease payments that donot depend on a rate or index, escalation in the index subsequent to the initial measurement, payments associated with non-lease components such as common area maintenance, real estate taxes and insurance, and short-term lease payments (leases with a term with12 months or less) are expensed as incurred or when the achievement of the specified target that triggers the contingent rent is considered probable.

Some of the leases provide for base rent, plus additional rent based on gross sales, as defined in each lease agreement. The Company is also generally obligated to pay certain real estate taxes, insurance and common area maintenance charges, and various other expenses related to properties, which are expensed as incurred.

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Components of operating lease costs are as follows for the fiscal quarters ended* December 26, 2023and December 27, 2022:*

Weighted average lease term and discount rate are as follows:

Supplemental cash flow disclosures:

Supplemental balance sheet disclosures:

Future minimum rent payments for our operating leases for each of the nextfive years as of* December 26, 2023*are as follows:

The above future minimum rental amounts exclude the amortization of deferred lease incentives, renewal options that arenot reasonably assured of renewal, and contingent rent. The Company generally has escalating rents over the term of the leases and records rent expense on a straight-line basis.

Note13. Impairment of Long-Lived Assets and Goodwill

**Long-Lived Assets.We review our long-lived assets including land, property, and equipment for impairment when there are factors that indicate that the carrying amount of an asset maynot be recoverable. We assess recovery of assets at the individual restaurant level and typically include an analysis of historical cash flows, future operating plans, and cash flow projections in assessing whether there are indicators of impairment. Recoverability of assets to be held and used is measured by comparing the net book value of the assets of an individual restaurant to the fair value of those assets. This impairment process involves significant judgment in the use of estimates and assumptions pertaining to future projections and operating results.

There wereno impairments of long-lived assets recorded in the fiscal quarters ended* December 26, 2023and December 27, 2022.*

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**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 wasno impairment required to the acquired trademarks as of December 26, 2023and December 27, 2022.

*Goodwill.Goodwill represents the excess of cost over fair value of the assets of businesses the Company acquired. Goodwill isnot amortized, but rather, the Company is required to test goodwill for impairment on an annual basis or whenever indications of impairment arise. The Company considers its operations to be comprised oftwo reporting units: (1) Good Times restaurants and (2) Bad Daddy’s restaurants. As of December 26, 2023and December 27, 2022,*the Company had $96,000 of goodwill attributable to the Good Times reporting unit and $5,617,000 of goodwill attributable to its Bad Daddy’s reporting unit.

Note14. Income Taxes

We account for income taxes using 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. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. The deferred tax assets are reviewed periodically for recoverability and valuation allowances are adjusted as necessary.

The Company’s effective income tax rate for thethree months ended* December 26, 2023was (14.04%), a decrease from the effective income tax rate of 0.0% for thethree* months ended* December 27, 2022.The decrease is due to the release of the Company’s valuation allowance during fiscal year2023.* For the quarter ended* December 27, 2022,the Company held a full valuation allowance resulting in an effective income tax rate ofzero* for the period.

The Company is subject to taxation in various jurisdictions within the U.S. The Company continues to remain subject to examination by U.S. federal authorities for tax years 2020 through2022. The Company believes that its income tax filing positions and deductions will be sustained upon audit and doesnot anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. No accrual for interest and penalties was considered necessary as of* December 26, 2023.*

Note15. Non-controlling Interests

Non-controlling interests are presented as a separate item in the shareholders’ equity section of the condensed consolidated balance sheet. The amount of consolidated net income or loss attributable to non-controlling interests is presented on the face of the condensed consolidated statement of operations. Changes in a parent’s ownership interest in a subsidiary that donot result in deconsolidation are equity transactions, while changes in ownership interest that do result in deconsolidation of a subsidiary require gain or loss recognition based on the fair value on the deconsolidation date.

The equity interests of the unrelated limited partners and members are shown on the accompanying consolidated balance sheet in the shareholders’ equity section as a non-controlling interest and is adjusted each period to reflect the limited partners’ and members’ share of the net income or loss as well as any cash contributions or distributions to or from the limited partners and members for the period. The limited partners’ and members’ share of the net income or loss in the subsidiary is shown as non-controlling interest income or expense in the accompanying consolidated statement of operations. All inter-company accounts and transactions are eliminated.

The following table summarizes the activity in non-controlling interests during the quarter ended* December 26, 2023(*in thousands):

Our non-controlling interests at the end of the quarter consisted ofone joint-venture partnership involvingsix Good Times restaurants, in which the Company is the controlling partner and owns a 50.0% interest.

Note16. Segment Reporting

All of our Bad Daddy’s Burger Bar restaurants (Bad Daddy’s) compete in the full-service segment of the restaurant industry while our Good Times Burgers and Frozen Custard restaurants (Good Times) compete in the quick-service segment of the 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. Income (loss) from operations represents revenues less restaurant operating costs and expenses, directly allocable general and administrative expenses, and other restaurant-level expenses directly associated with each brand including depreciation and amortization, pre-opening costs and losses or gains on disposal of property and equipment. Unallocated corporate capital expenditures are presented below as reconciling items to the amounts presented in the consolidated financial statements.

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The following tables present information about our reportable segments for the respective periods (in thousands):

Note17. Subsequent Events

None.

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