Business Context and Reporting Period
Company: Good Times Restaurants Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2009
Business Overview: The Company operates and franchises "Good Times Burgers & Frozen Custard" drive-through restaurants, primarily in Colorado. It is a holding company for its subsidiary, Good Times Drive Thru Inc. The Company operates 51 restaurants (21 company-owned, 9 joint venture, 21 franchised) as of December 2009.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Total Net Revenues | $23,749,000 | $25,882,000 |
| Restaurant Sales | $23,213,000 | $25,244,000 |
| Loss from Operations | ($1,352,000) | ($946,000) |
| Net Loss | ($1,646,000) | ($1,076,000) |
| Loss Per Share (Basic & Diluted) | ($0.42) | ($0.28) |
| Cash and Cash Equivalents | $815,000 | $1,414,000 |
| Working Capital Deficit | ($1,200,000) | ($2,082,000) |
| Total Debt (Current & Long-Term) | $3,505,000 | $3,150,000 |
| Accumulated Deficit | ($13,805,000) | ($12,159,000) |
Margins: Restaurant operating costs as a percent of restaurant sales increased to 95.2% in 2009 from 91.1% in 2008. Food and packaging costs rose to 33.7% of sales from 31.7%.
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 8.2% to $23.7 million. Same-store sales declined 12.4% due to the macroeconomic recession, reduced consumer spending, and aggressive competitor discounting.
- Increased Losses: Net loss widened by approximately 53% to $1.65 million. This was driven by lower sales, higher food costs, and increased interest expense ($248,000 increase) due to higher borrowings and an $87,000 unrealized loss on an interest rate swap.
- Cost Management: Selling, General, and Administrative (SG&A) expenses decreased by $707,000 (19.8%) due to reduced advertising spend and the elimination of the Vice President of Marketing position. Payroll costs decreased $642,000 due to sales volume and efficiency improvements.
- Debt Structure: The Company extended the maturity of its $2.5 million line of credit with PFGI II, LLC to December 2012. A new $185,000 related-party loan was secured from Golden Bridge, LLC.
Guidance, Outlook, Risks, and Unusual Items
Going Concern Warning
The auditors have expressed substantial doubt about the Company's ability to continue as a going concern. This is due to recurring operating losses, a working capital deficit, and the classification of an $846,000 Wells Fargo note as a current liability due to covenant defaults (EBITDA coverage and Tangible Net Worth).
Strategic Alternatives
The Board formed a Special Committee and hired Mastodon Ventures, Inc. to explore strategic alternatives to enhance shareholder value and reduce the costs of being a public entity. No specific alternatives have been recommended yet.
Outlook and Initiatives
- Same-Store Sales: Management aims to reverse the 12.4% decline in same-store sales by introducing lower price points ($1.25–$1.99), fresh hand-cut fries, and a "Get Back to What's Good" marketing campaign.
- Liquidity Needs: The Company anticipates needing an additional $300,000 to $500,000 in working capital between January and April 2010. It is pursuing rent concessions and potential sale-leaseback transactions.
- Debt Covenants: The Company is in technical default on its Wells Fargo loan but is not in payment default. The bank has issued a Reservation of Rights letter but is not currently accelerating the loan.
Investor Verification Checklist
- Covenant Compliance: Verify if the Company has successfully negotiated a "Required Corrective Action" with Wells Fargo to cure the EBITDA and Tangible Net Worth covenant defaults.
- Capital Raising: Confirm whether the Company has secured the anticipated $300,000–$500,000 in working capital or additional financing to meet obligations in early 2010.
- Strategic Outcome: Monitor the progress of the Special Committee and Mastodon Ventures regarding potential restructuring, sale, or delisting of the company.
- Same-Store Sales Trend: Track quarterly same-store sales data to determine if the new menu pricing and product initiatives are reversing the 12.4% decline.
- Asset Sales: Verify the status of the sale-leaseback marketing for the Firestone, Colorado restaurant and the Aurora, Colorado land parcel, which are critical for debt reduction.