General

This Form 10-Q contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and the disclosure of risk factors in the Company's form 10-K for the fiscal year ended September 30, 2011. Also, documents subsequently filed by us with the SEC and incorporated herein by reference may contain forward-looking statements. We caution investors that any forward-looking statements made by us are not guarantees of future performance and actual results could differ materially from those in the forward-looking statements as a result of various factors, including but not limited to the following:

(I) We compete with numerous well established competitors who have substantially greater financial resources and longer operating histories than we do. Competitors have increasingly offered selected food items and combination meals, including hamburgers, at discounted prices, and continued discounting by competitors may adversely affect revenues and profitability of Company restaurants.

(II) We may be negatively impacted if we experience consistent same store sales declines. Same store sales comparisons will be dependent, among other things, on the success of our advertising and promotion of new and existing menu items. No assurances can be given that such advertising and promotions will in fact be successful.

We may also be negatively impacted by other factors common to the restaurant industry such as: changes in consumer tastes away from red meat and fried foods; increases in the cost of food, paper, labor, health care, workers' compensation or energy; inadequate number of hourly paid employees; and/or decreases in the availability of affordable capital resources. We caution the reader that such risk factors are not exhaustive, particularly with respect to future filings.

Restaurant Locations

We currently operate or franchise a total of forty-one Good Times restaurants,
of which thirty-eight are in Colorado, with thirty seven in the Denver greater
metropolitan area and one in Silverthorne. Five of these restaurants are "dual
brand", operated pursuant to a Dual Brand Test Agreement with Taco John's
International, of which there is one in North Dakota, two in Wyoming, and two in
Colorado.

                                    Denver, CO                              North
                           Total   Greater Metro   Colorado Other Wyoming   Dakota
Good Times co-owned &       23          22               1
co-developed
Good Times franchised       13          13
Dual brand franchised        5           2                           2        1

Total                       41          37               1           2        1


                               As of June 30,
                                2012    2011
Company-owned restaurants        17      19
Co-developed restaurants          7       7
Franchise operated restaurants   18      21
             Total restaurants   42      47

Fiscal 2011: In December 2010 terminated a franchise agreement with a franchisee operating a Good Times restaurant in Grand Junction, Colorado and closed the restaurant. In September 2011 the company terminated a franchise agreement with a franchisee operating a Good Times restaurant in Longmont, Colorado. In February 2011 we sold one dual branded company-owned restaurant in Colorado Springs, Colorado, and in May 2011 we sold one company-owned Good Times restaurant in Colorado Springs, Colorado as part of our exit from that market.

Fiscal 2012: In December 2011 a franchisee's franchise agreement expired for a restaurant operating in Boise, Idaho and the franchisee closed the restaurant. Also in December 2011 we sold one company-owned restaurant in Littleton, Colorado for cash. In April 2012 a franchisee closed a restaurant in Colorado Springs, Colorado as part of our exit from that market. In July 2012 we sold one company-owned restaurant in Loveland, Colorado. We anticipate that franchisees may close one low volume franchised restaurants in fiscal 2012 and we may close one lower volume company operated restaurants, which would result in improved overall operating margins and more efficient allocation of overhead resources.

The following presents certain historical financial information of our operations. This financial information includes results for the three and nine month periods ending June 30, 2012 and results for the three and nine month periods ending June 30, 2011.

Results of Operations

Net Revenues

Net revenues for the three months ended June 30, 2012 decreased $165,000 (3%) to $5,248,000 from $5,413,000 for the three months ended June 30, 2011. Same store restaurant sales increased $158,000 (3.4%) during the three months ended June 30, 2012 for the restaurants that were open for the full three month periods ending June 30, 2012 and June 30, 2011. Restaurants are included in same store sales after they have been open a full fifteen months and only Good Times restaurants are included with dual branded restaurants excluded. Restaurant sales decreased $287,000 due to two company-owned restaurants sold in fiscal 2011 and one company-owned restaurant sold in December, 2011. Restaurant sales decreased $34,000 due to one company-owned dual branded restaurant not included in same store sales. Restaurant sales also decreased $13,000 due to one non-traditional company-owned restaurant not included in same store sales.

Net revenues for the nine months ended June 30, 2012 decreased $537,000 (3.5%) to $14,664,000 from $15,201,000 for the nine months ended June 30, 2011. Same store restaurant sales increased $578,000 (4.6%) during the nine months ended June 30, 2012 for the restaurants that were open for the full nine month periods ending June 30, 2012 and June 30, 2011. Restaurants are included in same store sales after they have been open a full fifteen months and only Good Times restaurants are included with dual branded restaurants excluded. Restaurant sales decreased $1,017,000 due to two company-owned restaurant sold in fiscal 2011 and one company-owned restaurant sold in December, 2011. Restaurant sales decreased $45,000 due to one company-owned dual branded restaurant not included in same store sales. Restaurant sales also decreased $65,000 due to one non-traditional company-owned restaurant not included in same store sales.

The positive same store sales results for the first three fiscal quarters of 2012 reflect the continuation of the positive momentum we have experienced beginning in the last fiscal quarter of 2010 and continuing through all of fiscal 2011 as a result of new product introductions, brand communication and operational execution.

Our outlook for fiscal 2012 is optimistic based on the last twenty-three months' of positive sales trends, however our sales trends are influenced by many factors and the macroeconomic environment remains challenging for smaller restaurant chains. Our average transaction increased in fiscal 2011 compared to fiscal 2010 and has continued to increase in fiscal 2012. We are continuing to manage our marketing communications to balance growth in customer traffic and their average expenditure.

Franchise revenues for the three months ended June 30, 2012 increased $11,000 to $125,000 from $114,000 for the three months ended June 30, 2011 primarily due to franchise renewal fees of $13,000 collected in the three months ended June 30, 2012. Same store Good Times franchise restaurant sales increased 1% during the three months ended June 30, 2012 for the franchise restaurants that were open for the full periods ending June 30, 2012 and June 30, 2011. Dual branded franchise restaurant sales decreased (1%) during the three months ended June 30, 2012, compared to the same prior year period. In April 2012 a franchisee closed a restaurant in Colorado Springs, Colorado as part of our exit from that market.

Franchise revenues for the nine months ended June 30, 2012 increased $12,000 to $325,000 from $313,000 for the nine months ended June 30, 2011 primarily due to franchise renewal fees of $13,000 collected in the three months ended June 30, 2012. Same store Good Times franchise restaurant sales increased 3.2% during the nine months ended June 30, 2012 for the franchise restaurants that were open for the full periods ending June 30, 2012 and June 30, 2011. Dual branded franchise restaurant sales increased 1.2% during the nine months ended June 30, 2012, compared to the same prior year period. In September 2011 the company terminated a franchise agreement with a franchisee operating a Good Times restaurant in Longmont, Colorado.

Restaurant Operating Costs

Restaurant operating costs as a percent of restaurant sales were 90.1% during
the three months ended June 30, 2012 compared to 92.8% in the same prior year
period and were 94.5% during the nine months ended June 30, 2011 compared to
96.3% in the same prior year period.

The changes in restaurant-level costs are explained as follows:

                                           Three Months Ended   Nine months Ended
                                             June 30, 2012        June 30, 2012
Restaurant-level costs for the period                    92.8%               96.3%
ended June 30, 2011
Decrease in food and packaging costs                    (2.3%)              (1.3%)
Decrease in payroll and other employee                   (.6%)               (.5%)
benefit costs
Decrease in occupancy and other operating                   0%               (.2%)
costs
Increase in depreciation and amortization                  .2%                 .2%
Restaurant-level costs for the period                    90.1%               94.5%
ended June 30, 2012

Food and Packaging Costs

For the three months ended June 30, 2012 our food and paper costs decreased $180,000 to $1,748,000 (34.1% of restaurant sales) from $1,928,000 (36.4% of restaurant sales) compared to the same prior year period.

For the nine months ended June 30, 2012 our food and paper costs decreased $384,000 to $4,961,000 (34.6% of restaurant sales) from $5,345,000 (35.6% of restaurant sales) compared to the same prior year period.

The overall decrease in food and packaging costs for both the three and nine month periods is primarily due to lower sales compared to the same prior year period. In addition our food and packaging costs as a percentage of restaurant sales has decreased in fiscal 2012 from a combination of price increases, product sales mix changes and recipe modifications.

In fiscal 2011 our weighted food and packaging costs increased approximately 5% and we implemented a total of 4.7% in menu price increases during the same period. We anticipate continued cost pressure on several core commodities, including beef, bacon and dairy for the balance of fiscal 2012. However, we anticipate our food and packaging costs as a percentage of sales will be consistent with the lower costs realized in the three month period ended June 30, 2012.

Payroll and Other Employee Benefit Costs

For the three months ended June 30, 2012 our payroll and other employee benefit costs decreased $91,000 to $1,685,000 (32.9% of restaurant sales) from $1,776,000 (33.5% of restaurant sales) compared to the same prior year period. Payroll and other employee benefits decreased $101,000 in the three months ending June 30, 2012 due to the sale of two company-owned restaurants in fiscal 2011 and one company-owned restaurant sold in December, 2011. The $101,000 decrease was offset by a $10,000 increase in payroll and employee benefit costs in the remaining restaurants due to increased sales compared to the same prior year period.

For the nine months ended June 30, 2012 our payroll and other employee benefit costs decreased $269,000 to $4,992,000 (34.8% of restaurant sales) from $5,261,000 (35.3% of restaurant sales) compared to the same prior year period. Payroll and other employee benefits decreased $368,000 in the nine months ending June 30, 2012 due to the sale of two company-owned restaurants in fiscal 2011 and one company-owned restaurant sold in December, 2011. The $368,000 decrease was offset by a $99,000 increase in payroll and employee benefit costs in the remaining restaurants due to increased sales and an increase in the Colorado state minimum wage on January 1, 2012, compared to the same prior year period.

Occupancy and Other Operating Costs

For the three months ended June 30, 2012 our occupancy and other operating costs decreased $34,000 to $984,000 (19.2% of restaurant sales) from $1,018,000 (19.2% of restaurant sales) compared to the same prior year period.

For the nine months ended June 30, 2012 our occupancy and other operating costs decreased $140,000 to $2,982,000 (20.8% of restaurant sales) from $3,122,000 (21.0% of restaurant sales) compared to the same prior year period.

The decrease in occupancy and other operating costs in both the three and nine month periods compared to the same prior year period is primarily due to the sale of two company-owned restaurants in fiscal 2011 and one company-owned restaurant sold in December. The decrease was offset by increases in rent, utilities, repairs and maintenance and bank supplies and fees in the remaining restaurants, compared to the same prior year period.

Depreciation and Amortization

For the three months ended June 30, 2012, our depreciation and amortization increased $3,000 to $201,000 (3.9% of restaurant sales) from $198,000 (3.7% of restaurant sales) compared to the same prior year period.

For the nine months ended June 30, 2012, our depreciation and amortization increased $2,000 to $607,000 (4.2% of restaurant sales) from $605,000 (4.1% of restaurant sales) compared to the same prior year period.

Depreciation and amortization decreased $17,000 and $61,000 for the three and nine month periods ended June 30, 2012, respectively, due to the restaurants closed in fiscal 2011 and 2012. The decreases in both periods were offset by an increase related to the restaurant reclassified in fiscal 2011 from held for sale to held and used.

General and Administrative Costs

For the three months ended June 30, 2012, general and administrative costs increased $21,000 to $333,000 (6.3% of total revenues) from $312,000 (5.8% of total revenues) for the same prior year period.

For the nine months ended June 30, 2012, general and administrative costs increased $38,000 to $1,027,000 (7% of total revenues) from $989,000 (6.5% of total revenues) for the same prior year period.

The increases in both the three and nine month periods ended June 30, 2012 are primarily due to increases payroll and other employee benefit costs and professional services.

Advertising Costs

For the three months ended June 30, 2012 advertising costs increased $66,000 to $205,000 (4.0% of restaurant sales) from $139,000 (2.6% of restaurant sales) for the same prior year period. In the three months ended June 30, 2011 there was a refund of $91,000 of excess year-to-date contributions paid to the advertising cooperative.

For the nine months ended June 30, 2012 advertising costs increased $85,000 to $638,000 (4.5% of restaurant sales) from $553,000 (3.7% of restaurant sales) for the same prior year period.

Contributions are made to the advertising materials fund and regional advertising cooperative based on a percentage of sales.

Franchise Costs

For the three months ended June 30, 2012, franchise costs decreased $2,000 to $14,000 (.3% of total revenues) from $16,000 (.3% of total revenues) for the same prior year period.

For the nine months ended June 30, 2012, franchise costs decreased $11,000 to $42,000 (.3% of total revenues) from $53,000 (.3% of total revenues) for the same prior year period.

Gain on Sale of Assets

For the three months ended June 30, 2012, our gain on the sale of assets decreased $63,000 to $6,000 from $69,000 for the same prior year period. The prior year period includes the recognition of a $63,000 gain on the sale of one company-owned restaurant sold in May 2011.

For the nine months ended June 30, 2012, our gain on the sale of assets decreased $140,000 to $27,000 from $167,000 for the same prior year period. The current nine month period ending June 30, 2012 includes a gain of $9,000 related to the sale of one company-owned restaurant in December 2011 while the prior year period includes a gain of $134,000 related to the sale of two company-owned restaurants in February and May of 2011.

Income (Loss) from Operations

We had income from operations of $84,000 in the three months ended June 30, 2012 compared to income from operations of $95,000 for the same prior year period. We had a loss from operations of ($558,000) in the nine months ended June 30, 2012 compared to a loss from operations of ($560,000) for the same prior year period.

The changes in the income and loss from operations for the three and nine month periods are due primarily to an overall decrease in costs as discussed in the "Restaurant Operating Costs", "General and Administrative Costs" and "Franchise Costs", offset by the "Gain on Sales of Assets" sections of Item 2 above.

Net Income (Loss)

The net income was $37,000 for the three months ended June 30, 2012 compared to net income of $40,000 for the same prior year period. The change from the three month period ended June 30, 2012 to June 30, 2011 was primarily attributable to the decrease in income from operations for the three months ended June 30, 2012, as well as a decrease in net interest expense of $7,000 and an increase in other expenses compared to the same prior year period.

The net loss was ($710,000) for the nine months ended June 30, 2012 compared to a net loss of ($737,000) for the same prior year period. The change from the nine month period ended June 30, 2012 to June 30, 2011 was primarily attributable to a decrease in net interest expense of $71,000 off set by an increase in other expenses of $37,000 compared to the same prior year period. Net interest expense for the nine months ended June 30, 2012 includes non-cash amortization of debt issuance costs of $19,000 compared to $41,000 in the same prior year period. A decrease in our long term notes payable accounts for the remaining $49,000 decrease in net interest expense, compared to the same prior year period.

Liquidity and Capital Resources

Cash and Working Capital

As of June 30, 2012, we had $569,000 in cash and cash equivalents on hand. We currently plan to use the cash balance, any cash generated from operations and proceeds from the sale of a restaurant for our working capital needs in fiscal 2012. We believe that we will have sufficient capital to meet our working capital, long term debt obligations and recurring capital expenditure needs in fiscal 2012. Additionally, we may sell or sublease select underperforming company operated restaurants if we believe the realizable asset value is greater than the long term cash flow value or if the asset does not fit our longer term goal for distribution and location of restaurants.

As of June 30, 2012, we had a working capital deficit of $869,000 due to normal recurring accounts payable and other accrued liabilities exceeding our cash and other current assets as well as 2011 property taxes of approximately $163,000 due in July 2012. Because restaurant sales are collected in cash and accounts payable for food and paper products are paid two to four weeks later, restaurant companies often operate with working capital deficits. We anticipate that working capital deficits will be incurred in the future and could possibly increase as new Good Times' restaurants are opened.

We sold one company-owned restaurant in Littleton, Colorado to an unrelated third party. The sale closed on December 29, 2011 with net proceeds of $308,000 which resulted in a $9,000 gain on the sale. As described below $100,000 of the proceeds were used to prepay principal on our Wells Fargo Bank note.

Subsequent to June 30, 2012 we sold one company-owned restaurant in Loveland, Colorado to an unrelated third party. The sale closed on July 9, 2012 with net proceeds of $605,000 which resulted in an $80,000 gain on the sale. We used $300,000 of the net proceeds to prepay principal on our PFGI II, LLC note to release the collateral held by PFGI II on the property that was sold.

Liquidity

As discussed herein, and as reported on its Form 8K filed June 13, 2013, Good Times Restaurants Inc. (the "Company") entered into a Securities Purchase Agreement (the "Purchase Agreement") with Small Island Investments Limited, a Bermuda corporation (the "Investor"), pursuant to which the Company has agreed to sell and issue to the Investor 473,934 shares (the "Shares") of a new series of the Company's preferred stock, par value $0.001 per share, to be designated as "Series C Convertible Preferred Stock" ("Series C Preferred Stock"), at a purchase price of $4.22 per share, or an aggregate purchase price of $2,000,001.48. Each share of the Series C Preferred Stock is convertible into two shares of the Company's common stock, par value $0.001 per share ("Common Stock"). The closing of the investment transaction (the "Investment Transaction") under the Purchase Agreement (the "Closing") is subject to certain conditions, including the receipt of stockholder approval of the Investment Transaction. The Company expects the Closing to occur promptly following the satisfaction of such condition and prior to September 30, 2012.

As discussed herein, in December 2011 the Company amended its note payable to Wells Fargo Bank. At the time the Company was not in compliance with certain loan covenants. Under terms of the amended note agreement, the Company is required to have tangible net worth of not less than $2.5 million as of December 31, 2012, which is greater than the Company's current tangible net worth. However, as discussed above we have entered into a Stock Purchase Agreement for $2,000,000 of convertible preferred stock which will increase our net worth in excess of the $2,500,000 requirement. Additionally, a condition of the amended note agreement requires any remaining balance on the note to be paid from any proceeds of the sale of stock in the Company. We anticipate paying off the remaining balance of $276,000 prior to September 30, 2012. In addition, for the quarter ended June 30, 2012, the Company was required to have an EBITDA coverage ratio of .3 to 1 (and increasing thereafter). As of June 30, 2012 the Company was in compliance with the required EBITDA coverage ratio of .3 to 1.

Financing Activities

Wells Fargo Note Payable: In May 2007 we borrowed $1,100,000 from Wells Fargo Bank (the "Bank") under a note payable with an eight year term with a floating interest rate at .50% below prime. We simultaneously entered into an interest rate swap transaction with Wells Fargo Bank for the full $1,100,000 with a fixed interest rate of 7.77% for the full eight year term coinciding with the note payable. As previously disclosed in the Company's current report on Form 8-K filed December 17, 2010, we entered into a new Credit and Loan Agreement that modified the loan covenants and provided additional collateral to Wells Fargo for the then remaining loan balance of $528,552. In addition to the normal recurring principal payments we have made principal payments of $90,000 in fiscal 2011 from the proceeds of the sale of two company-owned restaurants in Colorado Springs, Colorado to further reduce the note payable thereby reducing certain collateral under the modified Credit and Loan Agreement.

On December 27, 2011, Good Times Restaurants Inc. and its subsidiary Good Times Drive Thru Inc. (together, the "Company") entered into a First Amendment To Amended and Restated Credit Agreement and Waiver of Defaults and a Second Amended and Restated Term Note in the principal amount of $470,874 (together the Amendments") with the Bank. The Amendments were conditional upon the closing of the sale of the Littleton restaurant described under Recent Events and provide for a reduction in the principal amount of the loan by an additional $100,000 from the proceeds of that sale, the release of collateral associated with that restaurant and a modification to the repayment terms and maturity date of the loan to December 31, 2013. The Amendments waived the current covenant defaults asserted by the Bank and modify certain financial covenants in the Credit Agreement requiring the Company to have a Net Worth not less than $2,500,000 as of December 31, 2012 and thereafter and an EBITDA Coverage Ratio not less than
(i) 0.30 to 1.00 as of the end of the third quarter ending June 30, 2012, (ii) 0.70 to 1.00 as of the end of the fiscal year ending September 30, 2012, and
(iii) .90 to 1.00 as of the end of each fiscal quarter thereafter, determined on a rolling 4-quarter basis. The Company is required to prepay the Term Loan up to the full outstanding principal balance of the note (in addition to any and all other obligations due to Bank including the Interest Rate Swap) upon the sale of any stock or other equity interest in the Company. There was not any change to the interest rate or fees payable to the Bank under the Amendment and the re-amortized loan balance was $276,000 as of June 30, 2012. Repayment of the loan is secured by equipment in various restaurants owned by the Company.

PFGI II LLC Promissory Note: In July 2008, we entered into a $2,500,000 promissory note with an unrelated third party (PFGI II, LLC) and amended that note on April 20, 2009 extending the maturity to July 10, 2010. Effective January 2, 2010, the Company entered into an agreement to amend its loan with PFGI II LLC. The maturity date was extended to December 31, 2012, the interest rate was increased to 8.65% and monthly payments of principal and interest are payable beginning January 31, 2010, based upon a 25 year amortization prior to maturity. In April 2012 PFGI II, LLC agreed to extend the loan to December 31, 2013 on the existing note terms if a sale leaseback has not been completed on the Firestone property and subject to the prepayment of $300,000 from the proceeds of the sale of a restaurant that occurred on July 9, 2012.

In connection with the agreement, the Company issued a three-year warrant dated January 2, 2010 to PFGI II, LLC which provides that PFGI II, LLC may at any time from January 2, 2010 until December 31, 2012 purchase up to 37,537 shares of the Company's common stock at an exercise price of $3.33 per share. The number of shares purchasable upon exercise of the warrant and the exercise price are subject to customary anti-dilution adjustments upon the occurrence of any stock dividends, stock splits, reverse stock splits, recapitalizations, reclassifications, stock combinations or similar events. The fair value of the warrant issued to PFGI II, LLC was determined to be $79,000 with the following assumptions; 1) risk free interest rate of 1.7%, 2) an expected life of 3 years, and 3) an expected dividend yield of zero. The fair value of $79,000 was charged to the note discount and credited to Additional Paid in Capital. The note discount is being amortized over the term of thirty nine months and charged to interest expense.

The promissory note originally constituted a revolving line-of-credit for the . . .