Good Times Restaurants, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2013. The company operated or franchised 39 Good Times restaurants at quarter-end, compared with 43 a year earlier. Results are unaudited.
Financial performance
| Metric | Three months ended March 31, 2013 | Six months ended March 31, 2013 | Prior-year comparable |
|---|---|---|---|
| Total revenue | $5.055 million | $9.871 million | $4.570 million / $9.416 million |
| Operating loss | $325,000 | $622,000 | $350,000 / $643,000 |
| Net loss | $337,000 | $666,000 | $396,000 / $747,000 |
| Loss attributable to common shareholders | $355,000 | $724,000 | $395,000 / $763,000 |
| Basic and diluted loss per share | $0.13 | $0.27 | $0.14 / $0.28 |
Quarterly revenue increased 10.6%; six-month revenue increased 4.8%. Same-store restaurant sales rose 7% for the quarter and 6% for the six months. Breakfast, introduced system-wide in mid-November, contributed to sales growth; management attributed approximately 8.7% same-store sales growth in the quarter to breakfast. Restaurant operating costs were 96.9% of restaurant sales for the quarter and 96.2% for the six months, versus 97.1% and 96.8%, respectively, in the prior-year periods. Payroll costs rose as a share of sales, partly reflecting breakfast launch costs. Operating losses narrowed modestly, helped by higher sales and gains on asset sales.
For the six months, operating cash flow was negative $331,000, compared with negative $176,000. Investing activities provided $1.192 million, including $3.329 million of sale-leaseback proceeds, while financing activities used $64,000. Cash increased to $1.413 million from $616,000 at September 30, 2012. Working capital was positive $324,000.
At March 31, total long-term debt and capital lease obligations were approximately $158,000, versus approximately $1.725 million at September 30, 2012. The company repaid its Wells Fargo borrowing and the PFGI II note using preferred-stock and sale-leaseback proceeds. Total assets were $5.083 million and stockholders’ equity was $2.590 million at quarter-end.
Material changes and transactions
- Two sale-leaseback transactions and the preferred-stock financing supplied liquidity and funded debt repayments. A $67,000 gain from a January sale-leaseback contributed to the period’s asset-sale gains.
- The company bought a franchise-operated restaurant in December 2012 for $1.256 million, partly funded by a short-term note that was repaid with sale-leaseback proceeds. It also purchased the underlying real estate of an existing restaurant and subsequently completed a sale-leaseback.
- In April 2013, the company agreed to acquire Bad Daddy’s Burger Bar development rights in Colorado, with additional rights in Arizona and Kansas, and a 48% voting interest in the franchisor for $750,000. It paid the first $375,000 installment; the remaining $375,000 was due within six months. The company also filed an S-1 to register an offering of common-stock-and-warrant units.
- On May 1, 2013, the company acquired a Castle Rock, Colorado restaurant for approximately $75,000.
Outlook, risks and contingencies
Management described its FY2013 outlook as cautiously optimistic based on recent positive sales trends, while noting the challenging environment for smaller restaurant chains. It expected to require additional capital to develop company-owned restaurants and said it might sell, sublease or close selected underperforming locations. Management anticipated commodity cost pressure, particularly for beef, bacon and dairy, and planned moderate price increases; it cautioned that price increases might not offset cost inflation. It expected food and packaging costs as a percentage of sales to remain around FY2012 levels, based on pricing, sales mix and recipe changes. No quantified earnings or revenue guidance was provided.
The company reported no restaurant asset impairment at March 31, 2013, based on projected cash flows; its sensitivity analysis indicated no potential impairment with a 15% decline in projected cash flows. Actual results below assumptions, or decisions to exit locations, could require impairment charges. The company remains contingently liable on leases for restaurants sold to franchisees; it reported no known defaults but could be responsible for payments if a franchisee defaults. Other disclosed risks include competition and discounting, weak same-store sales, food, labor and other cost inflation, staffing challenges, and limited access to capital. Management stated disclosure controls were effective and reported no significant changes in internal controls.
Most important facts for investors to verify
- Whether same-store sales momentum and breakfast contribution persist, and whether restaurant-level cost ratios improve.
- Whether operating cash flow can improve without continued reliance on asset sales, sale-leasebacks or external financing.
- The terms, dilution impact and completion status of the proposed stock-and-warrant offering, and the preferred stock’s 8% dividend, conversion terms and potential future 15% rate.
- Whether the Bad Daddy’s transaction and development plans generate returns sufficient to justify their capital requirements.
- Whether any franchisee lease defaults, restaurant closures or weaker-than-projected cash flows lead to additional liabilities or impairment charges.