Business Context and Reporting Period
Company: Good Times Restaurants Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2014
Business Overview: The Company operates two primary concepts: "Good Times Burgers & Frozen Custard," a quick-service drive-through chain focused on all-natural ingredients, primarily in Colorado; and "Bad Daddy's Burger Bar," a full-service, upscale casual dining concept. The Company holds a 48% equity interest in Bad Daddy's Franchise Development, LLC (BDFD) and manages its operations.
Key Financial Metrics
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Total Net Revenues | $28,037,000 | $22,892,000 |
| Loss from Operations | ($219,000) | ($392,000) |
| Net Loss | ($370,000) | ($544,000) |
| Net Loss Attributable to Common Shareholders | ($749,000) | ($807,000) |
| Cash and Cash Equivalents (End of Period) | $9,894,000 | $6,143,000 |
| Working Capital | $7,841,000 | $4,834,000 |
| Long-Term Debt | $219,000 | $94,000 |
| Operating Cash Flow | $1,438,000 | $703,000 |
Segment Performance:
- Good Times: Generated $878,000 in operating income (vs. $267,000 loss in 2013). Same-store sales increased 14.6%.
- Bad Daddy's: Generated a $1,097,000 operating loss (vs. $125,000 loss in 2013) due to pre-opening costs and initial operating losses of new locations.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 22.5% ($5.1 million) driven by a 14.6% increase in Good Times same-store sales and the addition of two Bad Daddy's locations.
- Profitability Improvement: The operating loss narrowed by 44% ($173,000) despite significant new store opening costs ($570,000 increase) and initial losses from Bad Daddy's. Good Times segment turned profitable.
- Liquidity Expansion: Cash balances increased by $3.75 million. This was bolstered by $6.8 million in gross proceeds from warrant exercises during the fiscal year and an additional $3.2 million in proceeds subsequent to year-end.
- Debt Structure: The Company entered a new $2.1 million Development Line Loan with United Capital Business Lending in July 2014. As of September 30, 2014, approximately $196,000 had been drawn.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Expansion: Plans to open additional Good Times restaurants in Colorado and a third Bad Daddy's location in January 2015. Capital expenditures for fiscal 2015 are estimated at $1.7 million for recurring and remodeling needs.
- Same-Store Sales: Management is cautiously optimistic for fiscal 2015, aiming to continue the 17-quarter streak of same-store sales growth.
- Cost Management: Anticipates food and packaging costs as a percentage of sales to be slightly higher in 2015 due to commodity price pressures (beef, bacon, dairy).
Risks and Contingencies:
- Securities Law Compliance: The Company disclosed that 484,600 shares issued between May and August 2014 upon exercise of A Warrants may not have been in compliance with federal securities laws (Section 10(a)(3) of the Securities Act) due to a lack of a post-effective amendment. Holders may seek rescission, potentially creating a liability of approximately $1.3 million plus interest.
- Bad Daddy's Development: Failure to meet development schedules could result in the loss of exclusive development rights in Colorado, Oklahoma, and Kansas.
- Commodity Costs: Significant price increases in beef (38%) and bacon (29%) were experienced in 2014, with continued pressure expected.
- Accumulated Deficit: The Company has an accumulated deficit of $20.0 million and has incurred losses in most of its 27-year history.
Investor Verification Checklist
- Warrant Redemption Status: Verify the final count of shares issued and any potential rescission claims related to the A Warrant exercise compliance issue.
- Bad Daddy's Ramp-Up: Monitor the sales performance of the first two Bad Daddy's locations to determine if they can achieve the targeted "Prime Costs" below 64% of sales.
- Commodity Hedging: Assess the Company's ability to pass on food cost increases to consumers without dampening traffic, given the "value-priced" positioning.
- Debt Covenants: Review compliance with the new United Capital Loan covenants (debt service coverage, leverage, and quick ratios).
- Capital Expenditure Execution: Track the $1.7 million planned capital spend for 2015 against actual cash flow generation.