Good Times Restaurants Inc. annual report, FY2012

Good Times Restaurants Inc. — FY2012 Form 10-K

Reporting period: Fiscal year ended September 30, 2012; the filing also discusses fourth-quarter FY2012 performance. The company operates and franchises Good Times Burgers & Frozen Custard, primarily in Colorado. It reported 39 restaurants at year-end, including company-owned, co-developed, franchised and dual-brand locations.

Financial performance and liquidity

Metric	FY2012	FY2011
Total revenue	$19.706 million	$20.603 million
Restaurant sales	$19.274 million	$20.183 million
Loss from operations	$474,000	$665,000
Net loss	$668,000	$895,000
Net loss attributable to Good Times	$777,000; $0.29 per share	$1.013 million; $0.42 per share
Cash from operating activities	$(22,000)	$(539,000)
Cash from investing activities	$594,000	$954,000
Cash from financing activities	$(803,000)	$3,000

Restaurant-level operating costs were 93.5% of restaurant sales, versus 95.8% in FY2011, implying restaurant-level margin of approximately 6.5% versus 4.2%. Food and packaging costs improved to 34.2% of restaurant sales from 35.9%.
Same-store sales increased 3.1% for FY2012 after a 6.2% increase in FY2011. Fourth-quarter same-store sales declined 1%; management estimated that excluding two locations affected by road construction and closures, they would have risen approximately 1.2%.
Average sales per company-operated restaurant were $807,000, compared with $779,000 in FY2011. Total revenue nevertheless fell 4.4%, mainly reflecting restaurant sales lost from locations sold and closed.
At September 30, 2012, cash was $616,000, working capital was positive $848,000, total assets were $7.061 million and stockholders’ equity was $3.260 million. Accumulated deficit was $18.457 million.
Debt and capital lease obligations totaled approximately $1.725 million, including $1.586 million classified as current and $139,000 long term. The $1.318 million PFGI II note bore 8.65% interest; its remaining balance was due in early 2013. The Wells Fargo balance of $232,000 was repaid after year-end.
Net cash declined by $231,000 during FY2012. Investing cash inflow included $913,000 of asset-sale proceeds; operating cash flow remained slightly negative despite the narrower net loss.

Material changes and significant transactions

Revenue declined from FY2011, while same-store sales rose; restaurant sales were reduced by sales and closures of company-operated locations. The company sold two company-operated restaurants and reported two franchise closures during FY2012.
On September 28, 2012, Good Times issued 355,451 Series C convertible preferred shares to controlling investor Small Island Investments Limited (SII) for $1.5 million. The proceeds were received October 1, after year-end; the balance sheet showed a $1.5 million preferred-stock-sale receivable. The proceeds helped repay Wells Fargo debt and support working capital.
SII committed to purchase an additional 118,483 preferred shares for $500,000 by March 31, 2013, subject to the board determining the funds were needed to maintain Nasdaq equity compliance and giving 45 days’ notice. SII’s preferred shares carry an 8% annual dividend, convertible into two common shares each; the rate increases to 15% if not converted within the specified period. SII held approximately 60.9% of total voting shares after the issuance.
A Firestone, Colorado property classified as held for sale at $1.38 million was sold in a sale-leaseback on November 30, 2012. Proceeds included a $765,000 PFGI II principal payment, with the remainder supporting working capital. Further sale-leasebacks and a franchisee-restaurant purchase were planned or pending after year-end.

Outlook, risks and other matters

Management described its FY2013 outlook as cautiously optimistic, citing recent positive sales trends but a challenging macroeconomic environment. Plans included launching breakfast and all-natural hand-breaded chicken, remodeling older restaurants, modest menu price increases and continued cost management. Management expected food costs as a percentage of sales to remain broadly consistent with FY2012 and advertising expense to be about 4.3% of restaurant sales.
Management anticipated breakfast could generate incremental sales of at least 6%; this is an expectation, not a reported result. Reimaging of older restaurants was expected to cost approximately $40,000 per drive-through-only restaurant, subject to available funding.
The company has incurred losses in most fiscal years since inception and reported an accumulated deficit of $18.457 million. It cited dependence on sustained comparable-sales growth, food and labor costs, competition, limited access to capital, restaurant-site availability, and franchisee performance as important risks.
Additional risks include potential liabilities on leases assigned or subleased to franchisees, future impairment charges if restaurant performance falls short, and Nasdaq’s minimum equity and share-price requirements. No material legal proceedings were reported.
Management reported effective disclosure controls and internal control over financial reporting as of September 30, 2012. The auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.

Most important facts for investors to verify

Whether FY2013 comparable sales and the breakfast launch met management’s expectations, including the stated incremental-sales target.
Whether the remaining $500,000 SII preferred-stock investment was completed, and the ongoing dividend, voting-control and potential common-stock dilution effects.
Whether the PFGI II balance was repaid as scheduled and whether subsequent sale-leasebacks produced the expected proceeds and lease obligations.
Whether operating cash flow improved enough to fund working capital and maintenance needs without further asset sales or financing.
Whether the reported restaurant cost improvements and no-impairment conclusion remained supportable as actual results compared with management’s projections.