Business Context and Reporting Period
Company: Good Times Restaurants Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2011
Business Overview: The Company operates and franchises 43 Good Times restaurants, primarily in Colorado. The Company is a smaller reporting company. As of February 14, 2012, there were 2,726,214 shares of common stock outstanding.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2011 | Three Months Ended Dec 31, 2010 |
|---|---|---|
| Total Revenues | $4,846,000 | $5,085,000 |
| Net Loss | ($350,000) | ($388,000) |
| Net Loss Applicable to Common Shareholders | ($367,000) | ($405,000) |
| Loss Per Share (Basic & Diluted) | ($0.13) | ($0.25) |
| Net Cash Used in Operating Activities | ($128,000) | ($294,000) |
| Cash and Cash Equivalents (End of Period) | $758,000 | $1,251,000 |
| Total Debt (Current + Long-Term) | $2,099,000 | Filing text does not provide a clear comparative total for 2010 |
| Working Capital | ($601,000) Deficit | Filing text does not provide a clear comparative value |
Margin Analysis: Restaurant operating costs were 96.6% of restaurant sales for the quarter ended December 31, 2011, compared to 96.4% in the prior year period. Food and packaging costs were 35.0% of sales.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $239,000 (4.7%) primarily due to the sale of two company-owned stores in fiscal 2011 and one in December 2011. However, same-store sales for company-owned restaurants increased by 3.4%.
- Improved Loss Position: Net loss applicable to common shareholders improved by $38,000 (9.4%) compared to the prior year, driven by a reduction in net interest expense of $58,000.
- Asset Sales: The Company sold a company-owned restaurant in Littleton, Colorado, in December 2011 for net proceeds of $308,000, recognizing a $9,000 gain.
- Debt Reduction: $100,000 of the proceeds from the Littleton sale was used to prepay principal on the Wells Fargo Bank note. The outstanding balance on this loan was reduced to $349,000 as of January 2, 2012.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Outlook
Management expresses optimism for fiscal 2012 based on 17 months of positive sales trends. The Company plans to sell, sublease, or close lower-performing restaurants to improve operating margins and free up capital. The Company anticipates continued cost pressure on commodities (beef, bacon, dairy) but expects food costs as a percentage of sales to decrease due to menu price increases and recipe modifications.
Material Risks and Contingencies
- Debt Covenant Compliance: The Company was previously in default of certain covenants with Wells Fargo Bank. An amendment was executed in December 2011 waiving defaults but imposing new requirements: tangible net worth of at least $2.5 million by December 31, 2012, and specific EBITDA coverage ratios starting in the quarter ended June 30, 2012. Failure to meet these could result in loan acceleration.
- Liquidity Strategy: The Company is pursuing a sale-leaseback transaction and the sale of another restaurant to pay off a $1.64 million PFGI II loan and add approximately $400,000 in working capital. These transactions are subject to contingencies.
- Contingent Liabilities: The Company remains contingently liable on leases for restaurants previously sold to franchisees. No defaults are currently known, but future defaults could materially affect results.
- Impairment Risk: While no impairment was recorded as of December 31, 2011, management notes that a 15% decline in projected cash flows would not trigger impairment. However, closing or subleasing locations could require impairment charges.
Key Facts for Investor Verification
- Covenant Compliance: Verify the Company's ability to meet the $2.5 million tangible net worth requirement by December 31, 2012, and the EBITDA coverage ratios required by the amended Wells Fargo agreement.
- Transaction Closing: Confirm the closing of the sale-leaseback transaction (Firestone, CO) and the sale of the second restaurant, which are critical to paying off the $1.64 million PFGI II loan and improving working capital.
- Same-Store Sales Trend: Monitor whether the 3.4% same-store sales growth is sustainable given the competitive landscape and macroeconomic environment.
- Franchisee Defaults: Assess the risk of franchisee defaults on underlying leases, which would create contingent liabilities for the Company.
- Capital Expenditures: Verify that capital expenditures remain limited to normal recurring needs and re-imaging, as significant new development is contingent on additional financing.