GTIM

Business Context and Reporting Period

Company: Good Times Restaurants Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: The Company operates and franchises Good Times restaurants, primarily in Colorado. As of March 31, 2011, the Company operated 47 total restaurants (19 company-owned, 7 co-developed, 21 franchised). The Company is classified as a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total revenues decreased 1.7% ($83,000) for the three months ended March 31, 2011, compared to the prior year. However, for the six-month period, revenues increased 2.6% ($251,000). Same-store sales increased 5.7% (three months) and 9.6% (six months), driven by better weather and menu pricing.
• Profitability: The loss from continuing operations improved significantly. The three-month loss narrowed from ($866,000) to ($415,000), and the six-month loss narrowed from ($1,477,000) to ($801,000). This improvement was driven by reduced operating costs and lower interest expense.
• Operating Costs: Restaurant operating costs as a percentage of sales decreased from 103.1% to 100.0% (three months) and from 101.5% to 98.2% (six months). Payroll and occupancy costs decreased as a percentage of sales due to higher sales volume and rent reductions.
• Asset Sales: The Company recorded a gain of $86,000 on the sale of assets for the three months ended March 31, 2011, primarily due to the sale of a company-owned restaurant in February 2011.
• Discontinued Operations: The Company reported income from discontinued operations of $27,000 for the three months ended March 31, 2011, compared to a loss of ($400,000) in the prior year period, largely due to the reversal of lease accruals for a closed Denver location.

Guidance, Outlook, and Risks

• Outlook: Management expresses optimism for fiscal 2011 based on positive sales trends over the last ten months, noting an increase in average transaction value. However, the macroeconomic environment remains challenging.
• Capital Strategy: The Company sold 1,400,000 shares to Small Island Investments Limited (SII) in December 2010 for $2.1 million, resulting in a change of control (SII owns ~51.4%). Proceeds were used to repay short-term loans, reduce liabilities, and increase working capital.
• Asset Disposition: The Company is actively selling underperforming assets. Two company-owned restaurants in Colorado Springs are being sold; one was sold in February 2011, and the second is expected by May 31, 2011. Proceeds are being used to reduce debt.
• Liquidity: The Company has a working capital deficit of $573,000, primarily due to property taxes of approximately $400,000 due in April 2011. Additional capital will be required for new restaurant development.
• Risks: Key risks include competition from larger chains, potential same-store sales declines, rising food and labor costs, and contingent liabilities related to land leases for restaurants sold to franchisees.

Investor Verification Checklist

• Working Capital Deficit: Verify the ability to pay the $400,000 property tax liability due in April 2011 given the current cash balance of $987,000.
• Debt Covenants: Confirm continued compliance with the modified Wells Fargo loan covenants (Tangible Net Worth, Debt-to-Equity, EBITDA Coverage) following the SII investment.
• Asset Sales: Monitor the completion and proceeds of the second Colorado Springs restaurant sale anticipated by May 31, 2011.
• Change of Control: Assess the strategic impact of SII's 51.4% ownership and their designation of four new board members.
• Food Cost Inflation: Track the impact of rising commodity costs (beef, bacon, dairy) on margins, as the Company anticipates continued pressure in fiscal 2011.