Good Times Restaurants, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended June 30, 2012; comparisons are with the corresponding 2011 periods. The filing is unaudited. The company operated or franchised 41 restaurants at June 30, including dual-brand locations.
Financial performance and position
| Metric | Three months ended June 30, 2012 | Nine months ended June 30, 2012 |
|---|---|---|
| Total revenue | $5.248 million | $14.664 million |
| Operating income (loss) | $84,000 | ($558,000) |
| Net income (loss) | $37,000 | ($710,000) |
| Net income (loss) attributable to Good Times | ($13,000) | ($776,000) |
| Restaurant operating costs as a share of restaurant sales | 90.1% | 94.5% |
- Quarterly revenue fell 3.0% year over year; nine-month revenue fell 3.5%. Same-store restaurant sales rose 3.4% in the quarter and 4.6% for nine months.
- Food and packaging costs improved to 34.1% of restaurant sales for the quarter and 34.6% for nine months. Management attributed improvement to pricing, sales mix, and recipe changes, while warning of commodity cost pressure.
- Cash was $569,000 at June 30, down from $847,000 at September 30, 2011. Current assets were $904,000 and current liabilities $1.772 million; the filing describes a working-capital deficit of approximately $869,000.
- Balance-sheet debt was approximately $2.025 million: $219,000 current and $1.806 million long-term. Nine-month cash used in operations was reported as $63,000; investing activities provided $149,000 and financing activities used $364,000.
Changes versus prior period
- Quarterly same-store sales growth and lower restaurant-level cost ratios supported operating profitability, but quarterly net income was slightly lower than the prior-year $40,000.
- Nine-month net loss attributable to the company improved to $776,000 from $811,000. Lower interest expense helped; lower gains on asset sales partly offset improvement.
- Reported restaurant sales declined largely because of restaurant sales and closures. The company sold a Littleton restaurant in December 2011; two company-operated restaurants were sold in fiscal 2011.
- Advertising expense rose to $205,000 for the quarter and $638,000 for nine months, partly reflecting a prior-year advertising-cooperative refund. General and administrative expense also increased.
Liquidity, outlook, risks, and unusual items
- The company agreed to sell $2.0 million of Series C convertible preferred stock to Small Island Investments Limited, subject to stockholder approval and other conditions. Each preferred share converts into two common shares. Management expected closing before September 30, 2012 and planned to use proceeds in part to repay the remaining Wells Fargo balance; the transaction was not yet completed at the filing date.
- Wells Fargo had previously identified covenant defaults, which were waived under amended terms. Covenants included minimum tangible net worth of $2.5 million by December 31, 2012 and rising EBITDA coverage requirements. The company reported compliance with the 0.30-to-1.00 coverage requirement for the June quarter. It expected the preferred-stock proceeds to support the net-worth requirement.
- After quarter-end, the company sold its Loveland restaurant for $605,000 net proceeds and an $80,000 gain, using $300,000 to reduce its PFGI II debt. It was also marketing a Firestone sale-leaseback expected to generate about $1.4 million net, but stated there was no assurance it would be completed.
- Management was optimistic about fiscal 2012 sales based on recent positive trends, but cited a challenging macroeconomic environment and anticipated pressure on beef, bacon, and dairy costs. It planned no significant capital spending beyond recurring needs and possible restaurant re-imaging; additional development depends on sales, cash generation, and access to capital.
- Risks include intense competition and discounting, sales declines, food and labor cost increases, staffing availability, limited access to capital, and seasonal weakness in winter months. The company also remains contingently liable on certain leases of restaurants sold to franchisees; it reported no known franchisee lease defaults. Its impairment analysis found no impaired restaurants, but results depend on estimates and projected cash flows.
- Management said disclosure controls were effective and reported no significant changes in internal control. Ordinary-course legal proceedings were not expected to have a material impact.
Important facts for investors to verify
- Whether the preferred-stock investment closed, the final proceeds and terms, and the resulting dilution and ownership effects.
- Whether the company met subsequent Wells Fargo net-worth and EBITDA covenants and repaid the anticipated loan balance.
- Cash generation and working-capital needs, given the cash decline and working-capital deficit.
- Whether restaurant sales growth and improved cost ratios persisted, especially amid commodity inflation and restaurant closures.
- Completion and financial impact of the Loveland sale and any Firestone sale-leaseback.
- The filing contains inconsistent comparative cash-flow figures: the cash-flow statement reports 2011 operating cash use of $638,000, while MD&A states $550,000; the filing text does not provide a clear reconciliation.