Business Context and Reporting Period
Company: Good Times Restaurants Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2009
Business Overview: The Company operates and franchises 51 Good Times restaurants, primarily in Colorado. The reporting period reflects a challenging macroeconomic environment, adverse weather conditions in Colorado, and increased competitive discounting.
Key Financial Metrics
| Metric | Q1 2010 (Ended Dec 31, 2009) | Q1 2009 (Ended Dec 31, 2008) |
|---|---|---|
| Total Net Revenues | $4,983,000 | $5,646,000 |
| Restaurant Operating Costs | $4,923,000 | $5,450,000 |
| Loss from Operations | ($612,000) | ($640,000) |
| Net Loss (Applicable to Common Shareholders) | ($634,000) | ($766,000) |
| Loss Per Share (Basic & Diluted) | ($0.16) | ($0.20) |
| Cash and Cash Equivalents | $450,000 | $815,000 (Beginning of Period) |
| Net Cash Used in Operating Activities | ($349,000) | ($673,000) |
| Total Debt (Current + Long-Term) | $3,483,000 | $3,505,000 |
| Working Capital | ($1,659,000) Deficit | N/A |
Note: Restaurant operating costs as a percentage of sales increased to 101.1% in Q1 2010 from 99.0% in the prior year period.
Material Changes vs. Prior Period
- Revenue Decline: Total net revenues decreased 11.7% ($663,000). Same-store restaurant sales declined 11.4%, attributed to the economic recession, competitor discounting, and adverse weather (record snowfall in October and December 2009).
- Cost Structure: While total restaurant operating costs decreased in absolute dollars, they rose as a percentage of sales due to the revenue decline. Payroll costs increased as a percentage of sales (38.0% vs 37.5%) due to the semi-variable nature of labor costs against lower volume.
- Net Loss Improvement: Net loss applicable to common shareholders improved by $132,000 (17.2%) compared to the prior year, driven by a reduction in operating loss and a $129,000 decrease in unrealized losses on an interest rate swap.
- Store Count: Total restaurants decreased from 52 to 51 due to the closure of a franchise location in Thornton, Colorado.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance
Management maintains a cautious outlook for Fiscal 2010. The Company anticipates continued economic pressure on consumer spending and competitive pricing. Fiscal 2010 sales are projected to be down 3-5% compared to Fiscal 2009. The Company is not planning a broader $1 menu strategy.
Material Risks and Contingencies
- Debt Covenant Default: The Company is in default of technical covenants (EBITDA Coverage Ratio and Tangible Net Worth) on its $816,000 Wells Fargo Bank note. While not in payment default, the entire note is classified as a current liability. The bank has issued a Reservation of Rights letter and is not currently accelerating the loan, but the Company requires a "Required Corrective Action" plan.
- Liquidity Constraints: The Company has a working capital deficit of approximately $1.66 million. Cash on hand is $450,000. Management states it does not currently have a source of financing to repay the Wells Fargo note if accelerated.
- Strategic Alternatives: A Special Committee has been formed to explore strategic alternatives to enhance shareholder value and reduce the costs of being a public entity. Mastodon Ventures, Inc. has been hired as a strategic advisor.
- Recent Financing: Subsequent to the period end, the Company secured a $200,000 convertible loan (with an additional $200,000 available) from related parties (Golden Bridge, LLC and others) at 12-14% interest to fund working capital. Additionally, the PFGI II, LLC loan maturity was extended to December 31, 2012.
- Assets Held for Sale: $1.595 million in assets related to a Firestone, Colorado site are classified as held for sale pending a sale-leaseback transaction.
Investor Verification Checklist
- Debt Covenant Status: Verify if the Company has successfully negotiated a waiver or corrective action plan with Wells Fargo Bank to remove the current liability classification of the $816,000 note.
- Liquidity Runway: Assess the sufficiency of the $450,000 cash balance and the newly secured $200,000+ related party loan to cover operating losses and debt service obligations.
- Strategic Process: Monitor updates regarding the Special Committee's search for strategic alternatives or potential sale of the company.
- Same-Store Sales Trend: Track whether the 11.4% same-store sales decline stabilizes or worsens in subsequent quarters given the competitive discounting environment.
- Asset Sale Progress: Confirm the status of the sale-leaseback transaction for the Firestone, Colorado property, which is critical for debt reduction.