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)

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 is the sole owner following the* January 2023*purchase of the membership interests of the previously joint-venture restaurants. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company owns a 50% interest in a limited partnership which ownssix Good Times restaurants, is the sole general partner, and receives a management fee prior to any distributions to the limited partner. Because the Company owns an approximate 50% interest in the partnership and exercises complete management control over all decisions for the partnership, except for certain veto rights, the financial statements of the partnership are consolidated into the Company’s consolidated financial statements.

The Company operates and licenses full-service restaurants under the brandBad Daddy’s Burger Bar (“Bad Daddy’s”) 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(“Good Times”), 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* March 26, 2024and the results of its operations and its cash flows for the fiscal quarters ended March 26, 2024and March 28, 2023.Operating results for the fiscal quarter ended March 26, 2024arenot* 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* March 26, 2024and March 28, 2023each 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.

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 $93,000 and $129,000 for thetwo quarters ended* March 26, 2024and March 28, 2023,*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:

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.

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The Company reviewed all 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.

***Revenue Recognition.***Revenues consist primarily of sales from restaurant operations and franchise revenue, which also 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 and year-to-date periods ended* March 26, 2024.*

Revenues we receive from our franchise and license agreements include sales-based royalties and, from our franchise agreements,* mayalso include 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 years 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.

The following table presents goodwill and intangible assets as of* March 26, 2024and September 26, 2023 (*in thousands):

Intangible assets subject to amortization primarily consist of non-compete agreements associated with prior restaurant purchases. The aggregate amortization expense related to these intangible assets subject to amortization was $10,000 for thetwo quarters ended* March 26, 2024and $9,000 for thetwo* quarters ended* March 28, 2023.As of both March 26, 2024and March 28, 2023,*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. The Company hadno goodwill impairment losses in the periods presented in the above table.

The Company has traditionally maintained incentive compensation plans that include provisions 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.

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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.

For the quarters ended* March 26, 2024and March 28, 2023,we recognized $40,000 and $43,000, respectively, related to stock-based compensation arrangements. Our net income for thetwo* quarters ended* March 26, 2024and March 28, 2023*includes $78,000 and $89,000, respectively, of compensation costs related to our stock-based compensation arrangements.

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

Other accrued liabilities consist of the following as of:

***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 the credit agreement, Cadence agreed to loan the Company up to $8,000,000, with 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 mayfrom 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.

As of* March 26, 2024*the weighted average interest rate applicable to borrowings under the Cadence Credit Facility was 8.42%.

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* March 26, 2024,*the unamortized balance of these fees was $109,000.

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.

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As of* March 26, 2024,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 March 26, 2024,*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 $37,000 and $0 for the quarters ended* March 26, 2024and March 28, 2023,*respectively.

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 (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:

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 have been adequately accrued or would be immaterial to our financial statements. During the quarter ended* March 26, 2024,*we have recognized $235,000 in contingent liabilities related to routine course of business claims.

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’ 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.

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 March 1, 2024,the court of appeals issued a ruling affirming the trial court’s dismissal of the plaintiffs’ claims and reversed the trial court’s previous dismissal of Good Times’ own claim for the plaintiffs’ breach of their covenantnot* to sue Good Times. The court of appeals ordered that Good Times’ counterclaim be remanded to the trial court for further consideration. Due to this favorable decision, we have reversed our previous contingency reserve of $332,000. The plaintiffs petitioned the court of appeals for rehearing on its reversal of the trial court’s dismissal of Good Times’ counterclaim. The court of appeals’ ruling on the petition for rehearing is pending. The amount of Good Times’ claimed damages (which consists substantially of its prior legal fees) exceeds*$3* million. While Good Times plans to vigorously pursue this remaining claim to conclusion, there isno assurance that it will be successful and, even if it is successful, its recovery* may*be less than such claimed damages amount.

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.

Components of operating lease costs are as follows for the fiscal quarters ended* March 26, 2024and March 28, 2023:*

Weighted average lease term and discount rate are as follows:

Supplemental cash flow disclosures:

Future minimum rent payments for our operating leases as of* March 26, 2024*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.

**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. The 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 asset impairments in thetwo quarters ended* March 26, 2024.During thetwo* quarters ended* March 28, 2023,*there were $76,000 of asset impairments related primarily to new assets deployed in restaurants where impairment was previously assessed, and the Company’s current analysis indicated impairment of assets associated with those restaurants.

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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 March 26, 2024or March 28, 2023.

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 periods ended* March 26, 2024was (12.82%), an increase from the effective income tax rate of (1,487%) for thethree* periods ended* March 28, 2023.The Company’s effective tax rate for thesix* periods ended* March 26, 2024was (1.83%), an increase from an effective income tax rate of (1,836%) for thesix* periods ended* March 28, 2023.*The increase is due to the Company’s valuation allowance release that occurred during the prior year quarter and the prior year.

The Company is subject to taxation in various jurisdictions within the United States. The Company continues to remain subject to examination by United States federal authorities for the years 2020 through2023. 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* March 26, 2024.*

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 non-controlling 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 non-controlling members’ share of the net income or loss as well as any cash contributions or distributions to or from the limited partners and non-controlling members for the period. The limited partners’ and members’ share of the net income or loss in the subsidiary is shown as income or expense attributable to non-controlling interests 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 thetwo quarters ended* March 26, 2024 (*in thousands):

As previously described in Note1, our non-controlling interests as of the quarter ended* March 26, 2024consisted ofone* joint-venture partnership involvingsix Good Times restaurants, in which the Company is the general partner and owns a 50.0% interest.

All of our Bad Daddy’s compete in the full-service segment of the restaurant industry while our Good Times compete in the quick-service segment of the restaurant industry. We believe that providing this additional financial information for each of our brands will provide a better understanding of our overall operating results. 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):

None.