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GTIM > SEC Filings for GTIM > Form 10-Q on 12-Aug-2013All Recent SEC Filings

Show all filings for GOOD TIMES RESTAURANTS INC

Form 10-Q for GOOD TIMES RESTAURANTS INC


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



                               As of June 30,
                                2013    2012
Company-owned restaurants        19      17
Co-developed                      7       7
Franchise operated restaurants   13      18
            Total restaurants:   39      42

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.

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. 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.

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, 2013 and results for the three and nine month periods ending June 30, 2012.

Results of Operations

Overview

Same store sales increased 3.1% for fiscal 2012, and have increased 9.5% in the first nine months of fiscal 2013. These results reflect the continuation of the positive momentum we experienced in fiscal 2011 when same store sales increased 6.2%.

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 began market wide advertising for the new day part in July 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 approximately 6% in fiscal 2012 compared to fiscal 2011, and has increased nominally in the first nine months of fiscal 2013 compared to fiscal 2012. 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 June 30, 2013 increased $1,239,000 or 23.6% to $6,487,000 from $5,248,000 for the three months ended June 30, 2012.

Same store restaurant sales increased 15.2% during the three months ended June 30, 2013 for the restaurants that were open for the full three month periods ending June 30, 2013 and June 30, 2012. Restaurants are included in same store sales after they have been open a full fifteen months. Restaurant sales decreased $178,000 due to one company-owned store sold in fiscal 2012. Restaurant sales increased $46,000 due to one non-traditional company-owned restaurant and 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 2012 and same store sales for the three months ended June 30, 2013 increased approximately 7.2% as a result.

Franchise revenues for the three months ended June 30, 2013 decreased $32,000 to $93,000 from $125,000 for the three months ended June 30, 2012 due to a decrease in franchise royalties which was partially related to the purchase of two franchised restaurants. Same store Good Times franchise restaurant sales increased 14.7% during the three months ended June 30, 2013 for the franchise restaurants that were open for the full periods ending June 30, 2013 and June 30, 2012. Dual branded franchise restaurant sales decreased 35% during the three months ended June 30, 2013, compared to the same prior year period largely due to the closure of two restaurants in December of 2012.

Net revenues for the nine months ended June 30, 2013 increased $1,694,000 or 11.6% to $16,358,000 from $14,664,000 for the nine months ended June 30, 2012.

Same store restaurant sales increased 9.5% during the nine months ended June 30, 2013 for the restaurants that were open for the full nine month periods ending June 30, 2013 and June 30, 2012. Restaurants are included in same store sales after they have been open a full fifteen months. Restaurant sales decreased $701,000 due to two company-owned stores sold in fiscal 2012. Restaurant sales also increased $36,000 due to one non-traditional company-owned restaurant and decreased $71,000 due to one restaurant severely impacted by road closures, neither of which are included in same store restaurant sales.

Franchise revenues for the nine months ended June 30, 2013 decreased $59,000 to $266,000 from $325,000 for the nine months ended June 30, 2012 due to a decrease in franchise royalties which was partially related to the purchase of two franchised restaurants. Same store Good Times franchise restaurant sales increased 7.5% during the nine months ended June 30, 2013 for the franchise restaurants that were open for the full periods ending June 30, 2013 and June 30, 2012. Dual branded franchise restaurant sales decreased 29% during the nine months ended June 30, 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 87.2% during
the three months ended June 30, 2013 compared to 90.1% in the same prior year
period and were 92.6% during the nine months ended June 30, 2013 compared to
94.4% in the same prior year period.

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

                                                  Three months      Nine months
                                                      ended            ended
                                                  June 30, 2013    June 30, 2013
Restaurant-level costs for the period ended                 90.1%            94.4%
June 30, 2012
Decrease in food and packaging costs                        (.5%)            (.4%)
Increase in payroll and other employee benefit                  -              .5%
costs
Decrease in occupancy and other operating costs            (1.6%)           (1.2%)
Increase in preopening costs                                  .5%              .2%
Decrease in depreciation and amortization                  (1.3%)            (.9%)
Restaurant-level costs for the period ended                 87.2%            92.6%
June 30, 2013

Food and Packaging Costs

For the three months ended June 30, 2013 our food and paper costs increased $401,000 to $2,149,000 (33.6% of restaurant sales) from $1,748,000 (34.1% of restaurant sales) compared to the same prior year period.

For the nine months ended June 30, 2013 our food and paper costs increased $542,000 to $5,503,000 (34.2% of restaurant sales) from $4,961,000 (34.6% of restaurant sales) compared to the same prior year period. The nine months ended June 30, 2013 includes approximately $49,000 for vendor rebates and credits.

For the three and nine month periods ended June 30, 2013 food and paper costs decreased as a percentage of restaurant sales compared to the same prior year period primarily due to lower commodity costs. The weighted average menu price increases taken so far in fiscal 2013 are 1.2%. The total menu price increases taken during fiscal 2012 were 1.6%. 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 June 30, 2013 our payroll and other employee benefit costs increased $419,000 to $2,104,000 (32.9% of restaurant sales) from $1,685,000 (32.9% of restaurant sales) compared to the same prior year period. The $419,000 increase is attributable to a net decrease of $80,000 in payroll and other employee benefits for the three months ending June 30, 2013 due to the sale of one company-owned restaurant in July of 2012, offset by: 1) an increase of $208,000 in payroll and other employee benefits for the three months ending June 30, 2013 due to the purchase of three franchise owned restaurants in August, 2012 and January and May, 2013, and 2) an increase of $291,000 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 and a state mandated minimum wage increase in January 2013.

For the nine months ended June 30, 2013 our payroll and other employee benefit costs increased $691,000 to $5,683,000 (35.3% of restaurant sales) from $4,992,000 (34.8% of restaurant sales) compared to the same prior year period. The increase is attributable to a net decrease of $292,000 in payroll and other employee benefits for the nine months ending June 30, 2103 due to the sale of two company-owned restaurants in fiscal 2012, offset by: 1) an increase of $411,000 in payroll and other employee benefits for the nine months ending June 30, 2013 due to the purchase of three franchise owned restaurants in August, 2012 and January and May, 2013, and 2) an increase of $572,000 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 and a state mandated minimum wage increase in January 2013.

Occupancy and Other Operating Costs

For the three months ended June 30, 2013 our occupancy and other operating costs increased $142,000 to $1,126,000 (17.6% of restaurant sales) from $984,000 (19.2% of restaurant sales) compared to the same prior year period.

For the nine months ended June 30, 2013 our occupancy and other operating costs increased $174,000 to $3,156,000 (19.6% of restaurant sales) from $2,982,000 (20.8% of restaurant sales) compared to the same prior year period.

The increases in both the three and nine month periods ending June 30, 2013 are partially attributable to the purchase of the three franchise owned restaurants as well as increases in rent, property taxes, utilities, restaurant repairs and bank credit card fees compared to the same prior year periods.

Preopening Costs

For the three and nine month periods ended June 30, 2013 our new store preopening costs were $29,000 compared to $0 for the same prior year periods. All of the preopening costs are for payroll, employee benefits and travel and are related to the first Bad Daddy's restaurant being developed by BD of Colorado, LLC that is anticipated to open in late 2013.

Depreciation and Amortization

For the three months ended June 30, 2013, our depreciation and amortization decreased $32,000 to $169,000 (2.6% of restaurant sales) from $201,000 (3.9% of restaurant sales) compared to the same prior year period.

For the nine months ended June 30, 2013, our depreciation and amortization decreased $70,000 to $537,000 (3.3% of restaurant sales) from $607,000 (4.2% of restaurant sales) compared to the same prior year period.

The decreases in both the three and nine month periods ended June 30, 2013 are 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 June 30, 2013, general and administrative costs increased $57,000 to $390,000 (6% of total revenues) from $333,000 (6.3% of total revenues) for the same prior year period.

For the nine months ended June 30, 2013, general and administrative costs increased $144,000 to $1,171,000 (7.2% of total revenues) from $1,027,000 (7.0% of total revenues) for the same prior year period.

The increase for the three and nine month periods ended June 30, 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 June 30, 2013 advertising costs increased $70,000 to $275,000 (4.3% of restaurant sales) from $205,000 (4% of restaurant sales) for the same prior year period.

For the nine months ended June 30, 2013 advertising costs increased $66,000 to $704,000 (4.4% of restaurant sales) from $638,000 (4.5% 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 remained the same as the prior year period.

Franchise Costs

For the three months ended June 30, 2013, franchise costs increased $3,000 to $17,000 (.3% of total revenues) from $14,000 (.3% of total revenues) for the same prior year period.

For the nine months ended June 30, 2013, franchise costs increased $6,000 to $48,000 (.3% of total revenues) from $42,000 (.3% of total revenues) for the same prior year period.

Gain on Sale of Assets

For the three months ended June 30, 2013, our gain on the sale of assets was unchanged at $6,000 compared to the same prior year period.

For the nine months ended June 30, 2013, our gain on the sale of assets increased $59,000 to $86,000 from $27,000 for the same prior year period.

The nine month period ending June 30, 2013 includes a gain of $67,000 related to a sale leaseback transaction completed in January 2013.

Loss from Operations

We had income from operations of $234,000 in the three months ended June 30, 2013 compared to income from operations of $84,000 for the same prior year period.

We had a loss from operations of $387,000 in the nine months ended June 30, 2013 compared to a loss from operations of $558,000 for the same prior year period.

The decrease in loss from operations for the three and nine 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.

Affiliate Investment Loss

The net loss from affiliate investment activities consists of the Company's share of net earnings or loss of its affiliates as they occur. The Company's net investment loss for the three months ending June 30, 2013 was $23,000. The loss from investment activities is related to our 48% ownership in the Bad Daddy's Franchise Development, LLC which is a result of initial costs of developing the Bad Daddy's franchise program.

Net Loss

The net income was $111,000 for the three months ended June 30, 2013 compared to a net loss of ($13,000) for the same prior year period.

The net loss was $614,000 for the nine months ended June 30, 2013 compared to a net loss of $776,000 for the same prior year period.

The change from the three and nine month periods ended June 30, 2013 to June 30, 2012 was primarily attributable to the decrease in our loss from operations for the three and nine month periods ended June 30, 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 June 30, 2013, we had a working capital excess of $118,000. 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 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 provided by operating activities was $173,000 for the nine months ended June 30, 2013. The net cash provided by operating activities for the nine months ended June 30, 2013 was the result of a net loss of $459,000 as well as cash and non-cash reconciling items totaling $632,000 (comprised of depreciation and amortization of $537,000, stock-based compensation expense of $73,000, a gain on sale of assets of $86,000, accretion of deferred rent of $30,000, an increase in accounts payable of $235,000, an increase in deposits and other assets of $229,000 and a net increase in other operating assets and liabilities of $72,000).

Net cash used in operating activities was $63,000 for the nine months ended June 30, 2012. The net cash used in operating activities for the nine months ended June 30, 2012 was the result of a net loss of ($710,000) as well as cash and non-cash reconciling items totaling $647,000 (comprised of depreciation and amortization of $607,000, stock-based compensation expense of $49,000, amortization of debt issuance costs of $19,000 and a net decrease in other operating assets and liabilities of $28,000).

Net cash provided by investing activities for the nine months ended June 30, 2013 was $672,000 which reflects proceeds from sale leaseback transactions of $3,329,000 offset by the purchase of a two franchise restaurants for $1,331,000, the purchase of real estate underlying a company-owned restaurant for $763,000, $193,000 for miscellaneous restaurant related capital expenditures and a $375,000 investment in an affiliate.

Net cash provided by investing activities for the nine months ended June 30, 2012 was $149,000 which reflects proceeds from the sale of property of $305,000, payments of $33,000 for miscellaneous restaurant related capital expenditures, payments of $59,000 for the completion of the installation of new menu boards, $56,000 for the exterior reimaging of one restaurant and $8,000 in loans, net of repayments, to franchisees.

Net cash used in financing activities for the nine months ended June 30, 2013 was $137,000, 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 $1,582,000 and distributions to non-controlling interests of $54,000.

Net cash used in financing activities for the nine months ended June 30, 2012 was $364,000, which includes principal payments on notes payable and long term debt of $287,000 and distributions to non-controlling interests of $77,000.

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.

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. The weighted average menu price increases taken so far in fiscal 2013 are 1.2%. 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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