Good Times Restaurants, Inc. — Q2 FY2014 Form 10-Q
Business context and reporting period. The unaudited quarter and six-month periods ended March 31, 2014 (fiscal Q2 and first half). Good Times operated or franchised 37 Good Times restaurants and had opened its first Bad Daddy’s Burger Bar in Denver in February 2014. The company reported 18 company-owned, 7 co-developed, and 12 franchise-operated restaurants; the total restaurant count was 37 versus 39 a year earlier.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total revenue | $6.164 million, up 21.9% from $5.055 million | $12.152 million, up 23.1% from $9.871 million |
| Operating loss | $382,000, versus $325,000 loss | $468,000, versus $622,000 loss |
| Net loss | $425,000, versus $337,000 loss | $584,000, versus $666,000 loss |
| Net loss attributable to common shareholders | $509,000; loss per share $0.10 | $762,000; loss per share $0.15 |
| Net cash from operating activities | Not separately presented for the quarter | $146,000, versus $331,000 used |
Revenue and margins. Good Times same-store sales rose 17.8% in the quarter and 17.6% for the first half. Management attributed the first-half gain to higher transactions, breakfast sales, pricing, and menu mix. Restaurant operating costs were 94.3% of restaurant sales in the quarter and 92.2% for the first half, including Bad Daddy’s preopening costs; excluding preopening costs, the reported ratios were 90.7% and 89.1%. Good Times generated $109,000 of first-half operating income, compared with a $622,000 loss a year earlier. Bad Daddy’s recorded operating losses of $381,000 for the quarter and $577,000 for the first half.
Liquidity and debt. Cash and cash equivalents were $5.594 million at March 31, down from $6.143 million at September 30, 2013. Working capital was $4.019 million. Current liabilities were $1.977 million. Debt and capital lease obligations totaled approximately $117,000, including $46,000 due within one year. The filing states management believed capital would be sufficient for fiscal 2014 working capital, debt service, and recurring capital spending.
Cash flow and investment. First-half investing activities used $1.486 million, including $1.126 million of property and equipment purchases and a $375,000 investment in Bad Daddy’s Franchise Development, LLC. Financing activities provided $791,000, principally from $979,000 of warrant exercises, partly offset by debt payments, preferred dividends, and distributions to non-controlling interests. Cash declined by $549,000 during the period.
Material changes and significant events
- Good Times revenue growth and improved operating performance reflected strong same-store sales; franchise royalty revenue declined year over year, partly because the company had purchased two previously franchised restaurants.
- The new Bad Daddy’s operation added $208,000 in quarterly revenue, but incurred opening-related costs and operating losses. First-half preopening costs were $369,000.
- On March 28, 2014, all 355,451 Series C preferred shares were converted into 710,902 common shares, eliminating preferred dividends and potential cash redemption obligations.
- After quarter-end through May 7, the company reported $2.071 million of gross proceeds from warrant exercises and issued 812,150 shares. As of May 8, 2014, 6,864,666 common shares were outstanding.
- A May 2014 transaction in which investors agreed to buy 1 million existing shares from Small Island Investments for $3.05 million was a secondary sale and had no effect on the company’s financial statements. Robert Stetson joined the board effective May 2.
Outlook, risks, and contingencies
Management described its fiscal 2014 outlook for Good Times as cautiously optimistic, while noting that the company would begin comparing against stronger prior-year sales from April. It expected moderate additional menu price increases in response to anticipated beef, bacon, and dairy cost pressure, but cautioned that pricing might not fully offset higher costs. Management expected food and packaging costs as a percentage of sales to be slightly lower for fiscal 2014 than fiscal 2013, based on pricing, sales mix, and recipe changes.
The company expected a second Bad Daddy’s location, in Thornton, Colorado, to open in July 2014 and was negotiating additional leases for 2014 and 2015. Expansion and other capital spending were contingent on sales trends, internally generated cash, and access to capital. Key risks cited include competitor discounting, same-store sales declines, shifts in customer preferences, rising food and labor costs, staffing availability, and access to affordable capital. Seasonal weather can adversely affect sales in December through March.
The company remained contingently liable on leases assigned or subleased to franchisees; it reported no known defaults but said future defaults could materially affect results. Management reported no restaurant or goodwill impairment at March 31, while noting that changes in projections or decisions to close or exit a location could lead to impairment. Routine legal proceedings were not expected to have a material impact. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether Good Times’ strong same-store sales and operating improvement continue as comparisons become more difficult.
- Bad Daddy’s opening costs, sales ramp, operating losses, and planned restaurant development requirements.
- Actual impact of commodity inflation and planned menu increases on food costs and restaurant margins.
- Warrant-exercise proceeds, resulting dilution, and the share count following post-quarter exercises.
- Capital needs for expansion and any exposure under contingent franchisee lease obligations.