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GTIM > SEC Filings for GTIM > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for GOOD TIMES RESTAURANTS INC


14-May-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2012. 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. For further discussion of our exposure to market risk, refer to Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and to the "Risk Factors" section of our Form S1 filing dated April 26, 2013.

Restaurant Locations

We currently operate or franchise a total of thirty-nine Good Times restaurants,
of which thirty-six are in Colorado, with thirty five in the Denver greater
metropolitan area and one in Silverthorne. Three 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 and two in Wyoming.

                                       Denver, CO   Colorado,
                              Total   Greater Metro   Other    Wyoming  North Dakota
Company-owned & Co-developed    26         25           1
Franchised                      10         10
Dual brand franchised           3                                 2          1
                                39         35           1         2          1



                                As of March 31,
                                 2013     2012
Company-owned restaurants         18       17
Co-developed                      7        7
Franchise operated restaurants    14       19
            Total restaurants:    39       43

Fiscal 2012: 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. In August we purchased a restaurant in Loveland, Colorado from the franchisee. We anticipate that franchisees may close one low volume franchised restaurant in fiscal 2013 and we may close one lower volume company operated restaurant, which would result in improved overall operating margins and more efficient allocation of overhead resources.

Fiscal 2013: In December 2012 a franchisee terminated its Good Times franchise agreement in the test dual brand concept and has stopped selling Good Times products at two Colorado locations. On December 31, 2012 we purchased a restaurant in Thornton, Colorado from the franchisee, and on May 1, 2013 we purchased a restaurant in Castle Rock, Colorado from the franchisee.

The following presents certain historical financial information of our operations. This financial information includes results for the three and six month periods ending March 31, 2013 and results for the three and six month periods ending March 31, 2012.

Results of Operations

Overview

Same store sales increased 3.1% for fiscal 2012, and have increased 6% in the first six months of fiscal 2013. This reflected the continuation of the positive momentum we experienced in fiscal 2011 when same store sales increased 6.2%. Same store sales were negatively impacted in the fourth quarter of fiscal 2012 by road construction and road closures at two of our restaurants. Factoring out the sales declines at the two affected locations, our same store sales would have increased approximately 1.2% in the fourth quarter of fiscal 2012 which would have been the ninth consecutive quarter of same store sales increases. These sales increases have been accomplished with lower advertising expenditures as a percentage of sales as we have refocused our marketing expenditures to more on-site and trade area activities, including new menu boards, point of purchase materials and facility improvements.

In the first quarter of fiscal 2013 we implemented a new limited item breakfast menu that we anticipate will generate incremental sales and additional profitability during the fiscal year. Consistent with our brand position of offering fresh, all natural, handcrafted products, we elected to come to market with authentic, Hatch Valley New Mexico green chile burritos at a price point of $2 each, which we believe is both an excellent value for our customer and is highly differentiated from any other offerings in the quick service restaurant category. Because we do not offer a broad breakfast menu, we are highly labor efficient for that day part resulting in a relatively low breakeven point and the potential for higher incremental profitability. We anticipate market wide advertising for the new day part later in fiscal 2013.

Our outlook for fiscal 2013 is cautiously optimistic based on the last two years 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 2012 compared to fiscal 2011 and we are continuing to manage our marketing communications to balance growth in customer traffic and the average customer expenditure.

Net Revenues

Net revenues for the three months ended March 31, 2013 increased $485,000 or 10.6% to $5,055,000 from $4,570,000 for the three months ended March 31, 2012.

Same store restaurant sales increased 7% during the three months ended March 31, 2013 for the restaurants that were open for the full three month periods ending March 31, 2013 and March 31, 2012. Restaurants are included in same store sales after they have been open a full fifteen months. Restaurant sales decreased $182,000 due to one company-owned store sold in fiscal 2012. Restaurant sales also increased $16,000 due to one non-traditional company-owned restaurant and decreased $40,000 due to one restaurant severely impacted by road closures, neither of which are included in same store restaurant sales. Breakfast was introduced system-wide in mid-November and same store sales for the three months ended March 31, 2013 increased approximately 8.7% as a result.

Franchise revenues for the three months ended March 31, 2013 decreased $23,000 to $78,000 from $101,000 for the three months ended March 31, 2012 due to a decrease in franchise royalties. Same store Good Times franchise restaurant sales increased 4.5% during the three months ended March 31, 2013 for the franchise restaurants that were open for the full periods ending March 31, 2013 and March 31, 2012. Dual branded franchise restaurant sales decreased 39% during the three months ended March 31, 2013, compared to the same prior year period largely due to the closure of two restaurants in December of 2012.

Net revenues for the six months ended March 31, 2013 increased $455,000 or 4.8% to $9,871,000 from $9,416,000 for the six months ended March 31, 2012.

Same store restaurant sales increased 6% during the six months ended March 31, 2013 for the restaurants that were open for the full six month periods ending March 31, 2013 and March 31, 2012. Restaurants are included in same store sales after they have been open a full fifteen months. Restaurant sales decreased $524,000 due to two company-owned stores sold in fiscal 2012. Restaurant sales also increased $10,000 due to one non-traditional company-owned restaurant and decreased $90,000 due to one restaurant severely impacted by road closures, neither of which are included in same store restaurant sales.

Franchise revenues for the six months ended March 31, 2013 decreased $27,000 to $173,000 from $200,000 for the six months ended March 31, 2012 due to a decrease in franchise royalties. Same store Good Times franchise restaurant sales increased 3.7% during the six months ended March 31, 2013 for the franchise restaurants that were open for the full periods ending March 31, 2013 and March 31, 2012. Dual branded franchise restaurant sales decreased 26.3% during the six

months ended March 31, 2013, compared to the same prior year period largely due to the closure of two restaurants in December of 2012.

Restaurant Operating Costs

Restaurant operating costs as a percent of restaurant sales were 96.9% during
the three months ended March 31, 2013 compared to 97.1% in the same prior year
period and were 96.2% during the six months ended March 31, 2013 compared to
96.8% in the same prior year period.

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

                                             Three months ended Six Months Ended
                                               March 31, 2013    March 31, 2013
Restaurant-level costs for the period ended               97.1%            96.8%
March 31, 2012
Increase  (decrease) in food and packaging                  .5%            (.3%)
costs
Increase in payroll and other employee                      .7%             1.0%
benefit costs
Decrease in occupancy and other operating                 (.3%)            (.7%)
costs
Decrease in depreciation and amortization                (1.1%)            (.6%)
Restaurant-level costs for the period ended               96.9%            96.2%
March 31, 2013

Food and Packaging Costs

For the three months ended March 31, 2013 our food and paper costs increased $202,000 to $1,753,000 (35.2% of restaurant sales) from $1,551,000 (34.7% of restaurant sales) compared to the same prior year period.

For the six months ended March 31, 2013 our food and paper costs increased $141,000 to $3,354,000 (34.6% of restaurant sales) from $3,213,000 (34.9% of restaurant sales) compared to the same prior year period. The six months ended March 31, 2013 includes approximately $49,000 for vendor rebates and credits.

For the three months ended March 31, 2013 food and paper costs increased as a percentage of restaurant sales compared to the same prior year period primarily due to increased discounting of our breakfast menu items during the introduction in November 2012 through February 2013. In fiscal 2012 our weighted food and packaging costs decreased slightly. The total menu price increases taken during fiscal 2012 were 1.6%, all of which were taken in the last five months of the fiscal year. We anticipate cost pressure on several core commodities, including beef, bacon and dairy for fiscal 2013. However, we anticipate our food and packaging costs as a percentage of sales will remain consistent with fiscal 2012 in fiscal 2013 from a combination of price increases, product sales mix changes and recipe modifications.

Payroll and Other Employee Benefit Costs

For the three months ended March 31, 2013 our payroll and other employee benefit costs increased $218,000 to $1,842,000 (37% of restaurant sales) from $1,624,000 (36.3% of restaurant sales) compared to the same prior year period. The increase is attributable to a net decrease of $80,000 in payroll and other employee benefits for the three months ending March 31, 2013 due to the sale of one company-owned restaurant in July of 2012, offset by: 1) an increase of $139,000 in payroll and other employee benefits for the three months ending March 31, 2013 due to the purchase of two franchise owned restaurants in August 2012 and January 2013, and 2) an increase of $159,000 due to increased same store sales compared to the same prior year period, as well as additional costs for the implementation of our breakfast program.

For the six months ended March 31, 2013 our payroll and other employee benefit costs increased $272,000 to $3,579,000 (36.9% of restaurant sales) from $3,307,000 (35.9% of restaurant sales) compared to the same prior year period. The increase is attributable to a net decrease of $212,000 in payroll and other employee benefits for the three months ending March 31, 2103 due to the sale of two company-owned restaurants in December of 2011, offset by: 1) an increase of $202,000 in payroll and other employee benefits for the three months ending March 31, 2013 due to the purchase of two franchise owned restaurants in August 2012 and January 2013, and 2) an increase of $282,000 due to increased same store sales compared to the same prior year period, as well as additional costs for the implementation of our breakfast program.

Occupancy and Other Operating Costs

For the three months ended March 31, 2013 our occupancy and other operating costs increased $98,000 to $1,062,000 (21.3% of restaurant sales) from $964,000 (21.6% of restaurant sales) compared to the same prior year period.

For the six months ended March 31, 2013 our occupancy and other operating costs increased $31,000 to $2,030,000 (20.9% of restaurant sales) from $1,999,000 (21.7% of restaurant sales) compared to the same prior year period.

The increase in both the three and six month periods ending March 31, 2013 are attributable to increases in rent, property taxes, utilities, restaurant repairs and bank credit card fees compared to the same prior year periods.

Depreciation and Amortization

For the three months ended March 31, 2013, our depreciation and amortization decreased $32,000 to $167,000 (3.4% of restaurant sales) from $199,000 (4.5% of restaurant sales) compared to the same prior year period.

For the six months ended March 31, 2013, our depreciation and amortization decreased $37,000 to $369,000 (3.8% of restaurant sales) from $406,000 (4.4% of restaurant sales) compared to the same prior year period.

The decrease in depreciation and amortization for the three and six month periods ended March 31, 2013 is attributable to a decrease in depreciation expense related to restaurants sold in the prior fiscal year as well as two sale leaseback transactions entered into in the current fiscal year. The decrease was offset by an increase in amortization expense for loan fees related to the termination of the Wells Fargo Bank note in October 2012.

General and Administrative Costs

For the three months ended March 31, 2013, general and administrative costs increased $44,000 to $396,000 (7.8% of total revenues) from $352,000 (7.7% of total revenues) for the same prior year period.

For the six months ended March 31, 2013, general and administrative costs increased $88,000 to $782,000 (7.9% of total revenues) from $694,000 (7.4% of total revenues) for the same prior year period.

The increase for the three and six month periods ended March 31, 2103 was mainly attributable to increases in payroll and employee benefit costs offset by decreases in professional services and travel costs.

Advertising Costs

For the three months ended March 31, 2013 advertising costs decreased $4,000 to $218,000 (4.4% of restaurant sales) from $222,000 (5% of restaurant sales) for the same prior year period.

For the six months ended March 31, 2013 advertising costs decreased $5,000 to $428,000 (4.4% of restaurant sales) from $433,000 (4.7% 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 restaurant sales and the percentage contribution for fiscal 2013 is slightly lower than the same prior year period.

Franchise Costs

For the three months ended March 31, 2013, franchise costs increased $2,000 to $16,000 (.3% of total revenues) from $14,000 (.3% of total revenues) for the same prior year period.

For the six months ended March 31, 2013, franchise costs increased $3,000 to $31,000 (.3% of total revenues) from $28,000 (.3% of total revenues) for the same prior year period.

Gain on Sale of Assets

For the three months ended March 31, 2013, our gain on the sale of assets increased $68,000 to $74,000 from $6,000 for the same prior year period.

For the six months ended March 31, 2013, our gain on the sale of assets increased $59,000 to $80,000 from $21,000 for the same prior year period.

The current three and six month periods ending March 31, 2013 includes a gain of $67,000 related to a sale leaseback transaction completed in January 2013.

Loss from Operations

We had a loss from operations of $325,000 in the three months ended March 31, 2013 compared to a loss from operations of $350,000 for the same prior year period.

We had a loss from operations of $622,000 in the six months ended March 31, 2013 compared to a loss from operations of $643,000 for the same prior year period.

The decrease in loss from operations for the three and six month periods is due primarily to the increase in net revenues offset by other matters discussed in the "Restaurant Operating Costs", "General and Administrative Costs", "Franchise Costs" and "Loss on Sales of Assets" sections of Item 2 above.

Net Loss

The net loss was $337,000 for the three months ended March 31, 2013 compared to a net loss of $396,000 for the same prior year period.

The net loss was $666,000 for the six months ended March 31, 2013 compared to a net loss of $747,000 for the same prior year period.

The change from the three and six month periods ended March 31, 2013 to March 31, 2012 was attributable to the decrease in our loss from operations for the three and six month periods ended March 31, 2013, as well as a decrease in net interest expense related to the decrease in our long term notes payable, compared to the same prior year period.

Liquidity and Capital Resources

Cash and Working Capital: As of March 31, 2013, we had a working capital excess of $324,000. 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 may be incurred in the future and possibly increase if and when new Good Times restaurants are opened. We believe that we will have sufficient capital to meet our working capital, long term debt obligations and recurring capital expenditure needs in fiscal 2013 and beyond. We will require additional capital sources for the development of new restaurants. 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 distribution and location of restaurants.

Financing:

Wells Fargo Note Payable: The balance of our loan from Wells Fargo Bank, N.A. ("Wells Fargo") at September 30, 2012 was $232,000. We used a portion of the proceeds received by the Company from the sale of Series C Convertible Preferred Stock to SII to pay in full the outstanding balance, along with the associated interest rate swap with Wells Fargo in October, 2012.

PFGI II LLC Promissory Note: In July 2008, we borrowed $2,500,000 from PFGI II, LLC ("PFGI II"), an unrelated third party, and issued a promissory note in the principal amount of $2,500,000 to PFGI II (the "PFGI II Note"). The PFGI II Note has subsequently been amended on several occasions. During 2012 and 2013, the interest rate on the note was 8.65%. In April 2012 PFGI II 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. The note balance at September 30, 2012 was $1,318,000. On November 30, 2012 we entered into a sale lease-back transaction on the Firestone property with net proceeds of $1,377,000 and we used $765,000 to pay down the PFGI II Note. The remaining balance of $541,000 was paid on January 25, 2013 from the proceeds of another sale leaseback transaction.

SII Investment Transaction: On September 28, 2012, we closed on an investment transaction with SII, in which the Company sold and issued to SII 355,451 shares of Series C Convertible Preferred Stock for an aggregate purchase price of $1,500,000 (or $4.22 per share) pursuant to the Purchase Agreement, with each share of Series C Convertible Preferred Stock convertible at the option of the holder into two shares of our Common Stock, subject to certain anti-dilution adjustments. As a result of this transaction, SII's beneficial ownership interest in the Company has increased to 61 percent. The proceeds from this transaction were used to pay approximately $40,000 of expenses related to the transaction and to repay $232,000 to Wells Fargo, with the balance of the proceeds going to increase the Company's working capital.

Capital Expenditures

We do not have any plans for any significant capital expenditures for the balance of fiscal 2013, other than normal recurring capital expenditures for existing restaurants and the possible exterior re-imaging and remodel of several company-owned restaurants. Additional commitments for the development of new restaurants in fiscal 2013 and beyond will depend on the Company's sales trends, cash generated from operations and our access to additional capital.

Cash Flows

Net cash used in operating activities was $331,000 for the six months ended March 31, 2013. The net cash used in operating activities for the six months ended March 31, 2013 was the result of a net loss of $666,000 as well as cash and non-cash reconciling items totaling $335,000 (comprised of depreciation and amortization of $369,000, stock-based compensation expense of $49,000, a gain on sale of assets of $80,000, accretion of deferred rent of $19,000, an accrued expense increase of $148,000, an increase in accounts payable of $117,000, an increase in prepaid expenses and receivables of $103,000 and a net increase in other operating assets and liabilities of $184,000).

Net cash used in operating activities was $176,000 for the six months ended March 31, 2012. The net cash used in operating activities for the six months ended March 31, 2012 was the result of a net loss of ($747,000) as well as cash and

non-cash reconciling items totaling $571,000 (comprised of depreciation and amortization of $406,000, stock-based compensation expense of $31,000, amortization of debt issuance costs of $13,000, an increase in other accrued liabilities of $137,000 and a net decrease in other operating assets and liabilities of $16,000).

Net cash provided by investing activities for the six months ended March 31, 2013 was $1,192,000 which reflects proceeds from sale leaseback transactions of $3,329,000 offset by the purchase of a franchise restaurant for $1,256,000, the purchase of real estate underlying a company-owned restaurant for $763,000 and $121,000 for miscellaneous restaurant related capital expenditures.

Net cash provided by investing activities for the six months ended March 31, 2012 was $170,000 which reflects proceeds from the sale of property of $305,000, payments of $24,000 for miscellaneous restaurant related capital expenditures, payments of $54,000 for the completion of the installation of new menu boards, $42,000 for the exterior reimaging of one restaurant and $15,000 in loans, net of repayments, to franchisees.

Net cash used in financing activities for the six months ended March 31, 2013 was $64,000, which includes net proceeds of $1,499,000 from the sale of preferred stock, net principal payments on notes payable, long term debt and capital leases of $1,571,000 and receivables from non-controlling interests of $8,000.

Net cash used in financing activities for the six months ended March 31, 2012 was $255,000, which includes principal payments on notes payable and long term debt of $231,000 and distributions to non-controlling interests of $24,000.

Contingencies

We remain contingently liable on various leases underlying restaurants that were previously sold to franchisees. We have never experienced any losses related to these contingent lease liabilities, however if a franchisee defaults on the payments under the leases, we would be liable for the lease payments as the assignor or sublessor of the lease. Currently we have not been notified nor are we aware of any leases in default under which we are contingently liable, however there can be no assurance that there will not be in the future, which could have a material effect on our future operating results.

Subsequent Events

On April 26, 2013 we filed an S1 Registration Statement with the Securities and Exchange Commission for the sale of units consisting of one share of common stock and one warrant, with each warrant being exercisable for one-half share of common stock.

As previously disclosed in the Company's current report on Form 8-K filed April 15, 2013, on April 9, 2013, we entered into a series of agreements with Bad Daddy's International, LLC, a North Carolina limited liability company ("BDI"), and Bad Daddy's Franchise Development, LLC, a North Carolina limited liability company ("BDFD"), to acquire the exclusive development rights for Bad Daddy's Burger Bar restaurants in Colorado, additional restaurant development rights for Arizona and Kansas, and a 48% voting ownership interest in the franchisor entity, BDFD (collectively, the "Bad Daddy's Transaction").

Additionally, in April 2013, we executed a Subscription Agreement for the purchase of 4,800 Class A Units of BDFD, representing a 48% voting membership interest in BDFD, for the aggregate subscription price of $750,000. The subscription price is payable in two equal installments, the first $375,000 installment on the date of execution of the Subscription Agreement, and the remaining $375,000 installment on or before the six month anniversary of the date of execution of the Subscription Agreement.

On May 1, 2013 we purchased a restaurant in Castle Rock, Colorado from a franchisee for total consideration of approximately $75,000, including the leasehold improvements, equipment and operating business.

Impact of Inflation

In fiscal 2012 our weighted food and packaging costs decreased slightly. The total menu price increases taken during fiscal 2012 were 1.6%, all of which were taken in the last five months of the fiscal year. We anticipate cost pressure on several core commodities, including beef, bacon and dairy for fiscal 2013.
However, we anticipate our food and packaging costs as a percentage of sales will remain consistent with fiscal 2012 in fiscal 2013 from a combination of price increases, product sales mix changes and recipe modifications. We are planning moderate price increases in fiscal 2013, which may or may not be sufficient to recover increased commodity costs or increases in other operating expenses.

Seasonality

Revenues of the Company are subject to seasonal fluctuation based primarily on weather conditions adversely affecting restaurant sales in December, January, February and March.

ITEM 3.

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