Business Context and Reporting Period
Company: Good Times Restaurants Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company operates and franchises 52 Good Times restaurants, primarily in Colorado. The reporting period reflects a challenging macroeconomic environment characterized by declining consumer spending, intense competitive pricing, and severe weather events (snow storms) that impacted sales.
Key Financial Metrics
| Metric (Nine Months Ended June 30) | 2009 | 2008 |
|---|---|---|
| Total Revenues | $17,532,000 | $19,236,000 |
| Net Loss | ($1,427,000) | ($746,000) |
| Loss Per Share (Basic & Diluted) | ($0.37) | ($0.19) |
| Net Cash Used in Operating Activities | ($821,000) | $313,000 (Provided) |
| Cash and Cash Equivalents (End of Period) | $671,000 | $1,627,000 |
| Total Debt (Current + Long-Term) | $3,529,000 | $3,150,000 |
| Working Capital | ($1,087,000) Deficit | ($2,082,000) Deficit |
Note: Working capital deficit in 2009 is primarily due to the reclassification of the Wells Fargo note to current liabilities following a covenant default.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 8.9% year-over-year. Same-store restaurant sales dropped 13.8% for the nine-month period, driven by economic downturns and competitor discounting. Franchise revenues also declined 16.1%.
- Widening Losses: The net loss more than doubled from $746,000 in the prior year to $1,427,000. This was driven by a $574,000 increase in operating losses and an $87,000 unrealized loss on an interest rate swap.
- Cost Structure: While total restaurant operating costs decreased slightly in absolute dollars, they rose as a percentage of sales from 90.3% to 96.1% due to the revenue decline. General and administrative costs were reduced by $342,000 through staff reductions and elimination of expansion plans.
- Liquidity: Cash reserves decreased by $743,000 during the period. Operating cash flow turned negative, consuming $821,000 compared to generating $313,000 in the prior year.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management maintains a cautious outlook for fiscal 2009, anticipating continued economic pressure and competitive pricing. The Company has suspended most restaurant development. While commodity cost increases have moderated, the Company does not plan to implement a broader $1 menu, which may continue to adversely affect sales.
Risks and Contingencies
- Debt Covenant Default: The Company is in default of technical covenants (EBITDA coverage and Tangible Net Worth) on its $876,000 Wells Fargo note. While the bank is not currently accelerating the loan, it has reserved all rights. Failure to cure the default could trigger immediate repayment requirements.
- Liquidity Risk: The Company has a working capital deficit. If sales trends do not improve, additional working capital will be required in fiscal 2010.
- Contingent Liabilities: The Company remains contingently liable on land leases for restaurants previously sold to franchisees.
Unusual Items and Recent Developments
- Related Party Financing: On April 20, 2009, the Company secured a $185,000 loan from Golden Bridge, LLC (owned by Board members) to fund working capital. This included the issuance of warrants to purchase 92,500 shares at $1.15.
- Debt Extension: The maturity of the $2.5 million revolving line of credit with PFGI II, LLC was extended to July 10, 2010.
- Strategic Review: As of August 14, 2009, the Board formed a Special Committee and hired Mastodon Ventures, Inc. to explore strategic alternatives, including restructuring debt and reducing the costs of being a public entity.
Investor Verification Checklist
- Covenant Cure Status: Verify if the Company has reached an agreement with Wells Fargo to waive or modify the EBITDA and Tangible Net Worth covenants to prevent loan acceleration.
- Strategic Alternatives: Monitor the progress of the Special Committee's review and the engagement with Mastodon Ventures for potential restructuring or sale scenarios.
- Same-Store Sales Trend: Track whether the 13.8% decline in same-store sales stabilizes or worsens in the upcoming quarter, as this directly impacts the ability to service debt.
- Asset Sale Progress: Confirm the status of the sale-leaseback transaction for the Firestone, Colorado restaurant (valued at $1.595 million), which is critical for reducing the PFGI line of credit.
- Cash Burn Rate: Assess if the current cash balance of $671,000 is sufficient to cover operations and debt service through the end of fiscal 2009 without further dilution or financing.