Business Context and Reporting Period
Company: Good Times Restaurants Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: The Company operates and franchises Good Times restaurants, primarily in Colorado. As of June 30, 2010, the Company operated 49 total restaurants (20 company-owned, 7 co-developed, 22 franchised). The Company is currently exploring strategic alternatives to enhance shareholder value and reduce the costs of being a public entity.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Nine Months Ended June 30, 2010 |
|---|---|---|
| Total Revenues | $5,565,000 | $15,102,000 |
| Net Loss (Continuing Ops) | ($507,000) | ($1,985,000) |
| Net Loss (Total) | ($633,000) | ($2,582,000) |
| Net Loss Per Share (Basic/Diluted) | ($0.14) | ($0.62) |
| Cash and Cash Equivalents | $522,000 | $522,000 (Ending Balance) |
| Working Capital | Deficit of $2,378,000 | Deficit of $2,378,000 |
| Total Debt (Current + Long-Term) | $3,728,000 | $3,728,000 |
| Operating Cash Flow (9 Months) | N/A | ($708,000) Used |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 7.7% ($464,000) for the three months and 9.4% ($1,575,000) for the nine months ended June 30, 2010, compared to the prior year. Same-store sales declined 6.3% (three months) and 9.0% (nine months) due to macroeconomic pressures and competitive discounting.
- Increased Losses: The net loss applicable to common shareholders increased significantly to $565,000 for the quarter and $2,403,000 for the nine months, compared to $180,000 and $1,427,000 in the prior year periods, respectively.
- Operating Costs: Restaurant operating costs as a percentage of sales increased to 93.9% (three months) and 98.7% (nine months) from 91.8% and 95.2% in the prior year, driven by higher food costs (up 6.2% weighted average) and lower sales volumes.
- Discontinued Operations: The Company closed two locations (Commerce City and Denver) and sold one co-developed restaurant in June 2010, resulting in a loss from discontinued operations of $126,000 (three months) and $597,000 (nine months).
Guidance, Outlook, Risks, and Contingencies
- Liquidity Risk: The Company has a working capital deficit of $2,378,000. Management states that if additional operating capital is not raised during the remainder of fiscal 2010, the Company may not be able to satisfy liabilities as they come due.
- Debt Covenants: The Company is in default of technical loan covenants (EBITDA coverage and Tangible Net Worth) with Wells Fargo Bank regarding a $755,000 note. While not in payment default, the entire note is classified as a current liability. The Bank has issued a Reservation of Rights letter but is not currently accelerating the loan.
- Bridge Loans: The Company relies on two bridge loans ($185,000 due July 15, 2010, and $400,000 due December 31, 2010) which are expected to be repaid via a larger recapitalization event.
- Strategic Alternatives: A Special Committee has been formed to explore strategic alternatives, including potential transactions to reduce the cost of being a public entity. No assurance is given that these alternatives will be consummated.
- Outlook: Management maintains a cautious outlook for fiscal 2010, anticipating continued economic pressure on consumer spending and competitive pricing. Same-store sales declines moderated slightly in June and July 2010 (down 1.8% and 1.6% respectively).
Investor Verification Checklist
- Debt Restructuring: Verify the status of the Wells Fargo covenant default and whether a "Required Corrective Action" has been agreed upon to prevent acceleration of the $755,000 note.
- Capital Raising: Confirm progress on the "larger recapitalization event" required to repay the $585,000 in bridge loans maturing in July and December 2010.
- Same-Store Sales Trend: Monitor subsequent quarterly reports to see if the moderation in same-store sales declines (1.8% in June/July) continues or if the 9% decline trend resumes.
- Strategic Alternatives: Track updates from the Special Committee regarding potential mergers, acquisitions, or delisting efforts.
- Asset Sales: Verify the successful sublease or sale of the closed Denver location to mitigate the estimated $35,000 liability and future lease obligations.