Business Context and Reporting Period
Company: Good Times Restaurants Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2010
Business Overview: The Company operates and franchises a chain of casual dining restaurants, primarily in Colorado. As of December 31, 2010, the Company operated 48 total restaurants (20 company-owned, 7 co-developed, 21 franchised). The reporting period includes a significant change of control following an investment transaction with Small Island Investments Limited (SII).
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2010 | Three Months Ended Dec 31, 2009 |
|---|---|---|
| Total Revenues | $5,085,000 | $4,751,000 |
| Net Loss (Continuing Ops) | ($384,000) | ($611,000) |
| Net Loss (Total) | ($388,000) | ($682,000) |
| Net Loss Per Share (Basic/Diluted) | ($0.25) | ($0.49) |
| Cash and Cash Equivalents | $1,251,000 | $450,000 |
| Working Capital | ($228,000) Deficit | N/A |
| Total Debt (Current + Long-Term) | $2,298,000 | N/A |
| Operating Cash Flow | ($294,000) Used | ($349,000) Used |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7% ($334,000) year-over-year, driven by a 13.4% increase in same-store restaurant sales. This marks a reversal of nine consecutive quarters of same-store sales declines.
- Profitability Improvement: The loss from operations improved significantly from ($541,000) to ($285,000). Restaurant operating costs as a percentage of sales decreased from 99.8% to 96.4%.
- Cost Management: Payroll costs decreased as a percentage of sales (37.5% to 35.3%) due to higher sales volume and salary reductions implemented in July 2010. Advertising costs dropped 19.6% ($53,000) due to reduced contribution percentages.
- Liquidity Position: Cash and cash equivalents increased by $822,000 to $1,251,000, primarily due to proceeds from a common stock sale and asset sales, offset by debt repayments.
- Capital Structure: The Company completed a one-for-three reverse stock split effective December 31, 2010. Outstanding shares decreased from approximately 8.18 million to 2.73 million.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management expresses a more optimistic outlook for fiscal 2011 based on positive sales trends over the last eight months. The strategic focus is on maximizing profitability in the core Colorado market. The Company plans to sell, sublease, or close additional lower-performing restaurants to optimize asset value. Future growth in new store development is contingent upon securing additional capital sources.
Recent Developments and Contingencies
- Change of Control: SII purchased 1,400,000 shares for $2.1 million, becoming the beneficial owner of approximately 51.4% of the Company. SII designated four new Board members.
- Debt Restructuring: Proceeds from the SII transaction were used to repay short-term loans ($585,000) and reduce accrued liabilities. The Company renegotiated its Wells Fargo loan covenants, regaining compliance and reclassifying the debt from current to long-term.
- Asset Sales: The Company entered into agreements to sell two company-owned restaurants in Colorado Springs, with estimated net proceeds of $260,000 and a gain of $70,000.
- Discontinued Operations: The Company continues to incur lease obligations for two closed locations (Commerce City and Denver), with a recorded liability of $138,000.
Risk Factors
- Competition: Intense competition from well-established chains with greater financial resources offering discounted prices.
- Commodity Costs: Food and packaging costs increased 11% in fiscal 2010. While menu prices were raised, future cost pressures remain a risk.
- Contingent Liabilities: The Company remains contingently liable on land leases for restaurants previously sold to franchisees.
- Liquidity: Despite improved cash balances, the Company currently has a working capital deficit of $228,000 due to property taxes payable in April 2011.
Investor Verification Checklist
- Debt Covenant Compliance: Verify continued compliance with the modified Wells Fargo loan covenants (Tangible Net Worth, Debt-to-Equity, EBITDA Coverage).
- Asset Sale Execution: Confirm the closing of the two Colorado Springs restaurant sales and the realization of the estimated $260,000 net proceeds.
- Cost Control Sustainability: Monitor whether food and packaging costs can be reduced as a percentage of sales in fiscal 2011 as projected by management.
- Working Capital Needs: Assess the Company's ability to fund operations and capital improvements given the current working capital deficit and reliance on future asset sales.
- Franchisee Performance: Track the performance of franchised locations, as the Company anticipates potential closures of up to two low-volume franchised restaurants in fiscal 2011.