GTIM

Good Times Restaurants Inc. - 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Good Times Restaurants Inc. for the period ended December 31, 2008. The company operates and franchises 52 restaurants, primarily in Colorado. The reporting period coincides with a significant economic downturn, leading to a dramatic change in sales trends and the suspension of most restaurant development.

Key Financial Metrics

Margin Analysis: Restaurant operating costs rose to 99.0% of restaurant sales in Q1 2009, compared to 89.6% in the prior year period, driven by declining sales volume and increased commodity costs.

Material Changes vs. Prior Period

• Revenue Decline: Total net revenues decreased 8.9% ($550,000). Same-store sales for company-owned restaurants dropped 14.8%, attributed to the macroeconomic environment, reduced consumer discretionary spending, and aggressive competitor discounting.
• Increased Losses: The net loss more than tripled to $766,000. This was driven by a $414,000 increase in operating losses and a $119,000 unrealized loss on an interest rate swap.
• Cash Flow Deterioration: Net cash used in operating activities increased significantly from $52,000 to $673,000, reflecting the net loss and a $264,000 decrease in accounts payable.
• Cost Structure: While food costs increased slightly in absolute dollars, they rose as a percentage of sales (33.7% vs 30.6%) due to sales volume decline. Payroll costs as a percentage of sales also increased (37.5% vs 35.3%) due to the semi-variable nature of labor costs against lower sales.

Guidance, Outlook, and Risks

• Debt Covenant Default: The company is in default of technical loan covenants (EBITDA Coverage Ratio and Tangible Net Worth) with Wells Fargo Bank, N.A. regarding a $932,000 note. The bank has issued a Reservation of Rights letter but is not currently accelerating the loan. The entire debt balance is classified as current.
• Liquidity Concerns: The company has a working capital deficit of $3,642,000, largely due to a $2,500,000 development line of credit maturing in July 2009. Management intends to raise up to $500,000 for working capital but has no agreements in place.
• Outlook: Management remains cautious for fiscal 2009, anticipating continued economic pressure and competitive pricing. They are implementing cost-cutting measures, including eliminating executive positions and reducing labor hours, to save approximately $450,000 annually.
• Asset Sales: A fully developed site in Firestone, Colorado ($1,595,000), is being marketed for a sale-leaseback transaction to reduce the line of credit balance.
• Contingencies: The company remains contingently liable on land leases for restaurants previously sold to franchisees.

Investor Verification Checklist

• Covenant Compliance: Verify the status of the Wells Fargo Bank covenant waiver or modification and the timeline for achieving the required EBITDA coverage ratio.
• Financing Status: Confirm if the planned $500,000 working capital raise has been secured or if alternative financing is available before the July 2009 line of credit maturity.
• Asset Sale Progress: Monitor the status of the sale-leaseback transaction for the Firestone, Colorado location to determine if it will successfully reduce the $2.5M debt obligation.
• Same-Store Sales Trend: Track subsequent quarterly same-store sales to determine if the 14.8% decline is stabilizing or worsening.
• Interest Rate Swap: Review the impact of the $119,000 unrealized loss on the interest rate swap and whether this non-cash item will persist if the loan covenant default continues.