Business context and reporting period
Good Times Restaurants Inc. operates and franchises Good Times Burgers & Frozen Custard and Bad Daddy’s Burger Bar. This Form 10-Q covers the first quarter of fiscal 2016, the three months ended December 31, 2015, compared with the three months ended December 31, 2014. Results include Bad Daddy’s International (BDI), acquired in May 2015; the prior-year reported period did not include the acquired North Carolina restaurants.
Financial results and position
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net revenue | $13.838 | $7.855 |
| Operating loss | $(0.930) | $(0.363) |
| Net loss | $(0.961) | $(0.361) |
| Net loss attributable to common shareholders | $(1.124) | $(0.410) |
| Loss per common share | $(0.09) | $(0.04) |
| Net cash used in operations | $(0.596) | $(0.213) |
| Capital expenditures (cash-flow statement) | $3.955 | $1.752 |
Revenue grew 76.2%, primarily from the BDI acquisition and Bad Daddy’s expansion. Operating loss equaled about 6.7% of revenue versus 4.6% a year earlier; net loss equaled about 6.9% versus 4.6%. The filing reports food and packaging costs at 33.0% of restaurant sales (35.4% prior year), payroll and benefits at 34.9% (32.6%), and occupancy and other operating costs at 16.9% (17.2%). Preopening costs rose to $0.725 million from $0.237 million, principally for new Bad Daddy’s locations.
Good Times same-store sales increased 4.8%; Bad Daddy’s same-store sales increased 6.8%. The company reported segment operating losses of $0.067 million for Good Times, $0.719 million for Bad Daddy’s, and $0.144 million for corporate, compared with respective losses of $0.096 million, $0.267 million, and zero in the prior period.
Cash and cash equivalents were $8.997 million at December 31, 2015, down from $13.809 million at September 30, 2015. Working capital was positive by $3.716 million. Balance-sheet current and long-term debt totaled $3.663 million; capital lease obligations totaled $0.008 million. The company separately disclosed a $1.186 million outstanding United Capital loan and a $2.414 million acquisition note; the filing text does not clearly reconcile these disclosures to the balance-sheet debt classification. The United Capital loan bears 6.69% interest, and the company said it was in compliance with its covenants.
Material changes and notable items
- Revenue increased by $5.983 million: management attributed $4.462 million to acquired North Carolina Bad Daddy’s restaurants, $1.088 million to Colorado Bad Daddy’s, and $0.433 million to Good Times.
- Cash used in investing activities was $3.947 million, largely reflecting restaurant development and remodeling. Capital expenditures were concentrated in Bad Daddy’s Colorado development.
- Cash used in financing activities was $0.269 million, including $0.219 million of distributions to non-controlling interests. The prior-year period included $3.233 million of net warrant proceeds.
- The May 2015 BDI acquisition cost $21.402 million, funded with $18.988 million cash and a one-year secured $2.414 million note. The company also raised approximately $20.6 million net in a May 2015 common-stock offering.
- There were no goodwill or long-lived asset impairments reported for the quarter. No income tax provision or benefit was recorded because valuation allowances offset deferred tax assets.
Outlook, risks, and contingencies
Management described the fiscal 2016 Good Times outlook as cautiously optimistic, while emphasizing that sales depend on factors including marketing and customer spending. It expected Good Times advertising costs to be slightly higher than fiscal 2015 as a percentage of sales, approximately 4.3%. Management expected food costs to remain consistent with the quarter as a percentage of sales for the remainder of fiscal 2016, but warned that commodity-cost pressure, especially in beef and bacon, could raise that percentage. The company said it expected sufficient capital for fiscal 2016 working capital, debt obligations, and recurring capital expenditures; it provided no specific earnings or revenue guidance.
Key risks include integrating BDI and realizing expected benefits, expanding in a new region and restaurant segment, competition and discounting, labor availability and wage costs, commodity inflation, and seasonal weather effects. The company remains contingently liable on leases assigned or subleased to franchisees; it reported no known defaults. It also noted that disclosure controls had been inadequate at September 30, 2015 for recording certain construction liabilities in the proper period; a project-level review process was implemented, and management concluded quarter-end disclosure controls were effective. Legal proceedings were described as incidental and not expected to have a material impact.
Important facts for investors to verify
- How much of reported growth and future revenue depends on BDI acquisitions versus organic sales and new-unit openings.
- Whether Bad Daddy’s unit economics and segment losses improve as new restaurants mature and preopening costs subside.
- The cash runway and funding needs given operating cash use, planned development spending, and the decline in cash during the quarter.
- The exact composition, maturity, and repayment terms of reported debt, including the acquisition note and United Capital loan.
- Progress integrating BDI, maintaining covenant compliance, and preventing construction-related liabilities from being recorded in the wrong period.