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GTIM > SEC Filings for GTIM > Form 10-Q on 14-Feb-2014All Recent SEC Filings

Show all filings for GOOD TIMES RESTAURANTS INC

Form 10-Q for GOOD TIMES RESTAURANTS INC


14-Feb-2014

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, 2013. 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, 2013.

Restaurant Locations

We currently operate or franchise a total of thirty-seven Good Times
restaurants, of which thirty-four are in the Denver, Colorado greater
metropolitan area. 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.

                               Total Denver, CO Greater Metro Wyoming North Dakota
Company-owned & Co-developed    25              25
Franchised                       9              9
Dual brand franchised            3                               2         1
                                37              34               2         1



                               As of December 31,
                                 2013      2012
Company-owned restaurants         18        17
Co-developed                       7         7
Franchise operated restaurants    12        15
            Total restaurants:    37        39

Fiscal 2013: 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. In September 2013 we closed a company-owned restaurant operating in Silverthorne, Colorado whose lease term had ended.

Fiscal 2014: In December 2013 a Good Times franchisee closed a low volume restaurant in Lakewood, Colorado. On February 3, 2014 we opened our first Bad Daddy's Burger Bar restaurant in Denver, Colorado.

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

Results of Operations

Overview

Same store sales increased 11.95% for fiscal 2013, and have increased 17.4% in the first three months of fiscal 2014. These results reflect the continuation of the positive momentum we have experienced since fiscal 2011. Same store sales have increased 18.2% over the last two fiscal years.

In the first quarter of fiscal 2013 we implemented a new limited item breakfast menu that generated incremental sales of approximately 9% in the three months ended December 31, 2013. 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 higher incremental profitability.

Our outlook for fiscal 2014 is cautiously optimistic based on the last two years of positive sales trends and the results of our first quarter; however our sales trends are influenced by many factors and we begin to compare to higher prior year sales trends in April 2014. Our average transaction decreased slightly in fiscal 2013 compared to fiscal 2012 due to the implementation of breakfast which has a lower average transaction than our other day parts. 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 December 31, 2013 increased $1,171,000 or 24.3% to $5,988,000 from $4,817,000 for the three months ended December 31, 2012.

Same store restaurant sales increased 17.4% during the three months ended December 31, 2013 for the restaurants that were open for the full three month periods ending December 31, 2013 and December 31, 2012. Restaurants are included in same store sales after they have been open a full fifteen months. Restaurant sales increased $474,000 due to two restaurants purchased from franchisees in fiscal 2013. Restaurant sales decreased $166,000 due to one company-owned store closed in September 2013.

Franchise revenues for the three months ended December 31, 2013 decreased $13,000 to $82,000 from $95,000 for the three months ended December 31, 2012 due to a decrease in franchise royalties which was related to our purchase of two franchised restaurants. Same store Good Times franchise restaurant sales increased 16.7% during the three months ended December 31, 2013 for the franchise restaurants that were open for the full periods ending December 31, 2013 and December 31, 2012. Dual branded franchise restaurant sales decreased 35% during the three months ended December 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 90% during the
three months ended December 31, 2013 compared to 95.5% in the same prior year
period, the current year includes 2.5% of preopening costs related to our
initial Bad Daddy's Burger Bar restaurants in Colorado.

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

                                                              Three months ended
                                                              December 31, 2013
Restaurant-level costs for the period ended December 31, 2012       95.5%
Decrease in food and packaging costs                                (1.1%)
Decrease in payroll and other employee benefit costs                (3.2%)
Decrease in occupancy and other operating costs                     (1.8%)
Increase in preopening costs                                         2.5%
Decrease in depreciation and amortization                           (1.9%)
Restaurant-level costs for the period ended December 31, 2013       90.0%

Food and Packaging Costs

For the three months ended December 31, 2013 our food and paper costs increased $339,000 to $1,939,000 (32.8% of restaurant sales) from $1,600,000 (33.9% of restaurant sales) compared to the same prior year period.

For the three month period ended December 31, 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 2014 are 1.7%. The total menu price increases taken during fiscal 2013 were 2.2%. We anticipate cost pressure on several core commodities, including beef, bacon and dairy for fiscal 2014. However, we anticipate our food and packaging costs as a percentage of sales will be slightly lower in fiscal 2014 than 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 December 31, 2013 our payroll and other employee benefit costs increased $244,000 to $1,982,000 (33.6% of restaurant sales) from $1,738,000 (36.8% of restaurant sales) compared to the same prior year period. The $244,000 increase is attributable to a net decrease of $86,000 in payroll and other employee benefits for the three months ending December 31, 2013 due to the closure of one company-owned restaurant in September of 2012, offset by:
1) an increase of $154,000 in payroll and other employee benefits for the three months ending December 31, 2013 due to the purchase of two franchise owned restaurants in January and May, 2013, and 2) an increase of $176,000 due to additional payroll costs as a result of increased same store sales compared to the same prior year period.

Occupancy and Other Operating Costs

For the three months ended December 31, 2013 our occupancy and other operating costs increased $135,000 to $1,104,000 (18.7% of restaurant sales) from $969,000 (20.5% of restaurant sales) compared to the same prior year period.

The increase in the three month period ending December 31, 2013 is partially attributable to the purchase of the two franchise owned restaurants in fiscal 2013 as well as increases in rent, property taxes, utilities, restaurant repairs and bank credit card fees compared to the same prior year periods, offset by a decrease in costs due to the closure of one company-owned restaurant in September of 2012.

Preopening Costs

For the three month period ended December 31, 2013 our new store preopening costs were $148,000 compared to $0 for the same prior year period. All of the preopening costs are related to the initial Bad Daddy's restaurants being developed by BD of Colorado, LLC the first of which opened in February 2014.

Depreciation and Amortization

For the three months ended December 31, 2013, our depreciation and amortization decreased $59,000 to $143,000 (2.4% of restaurant sales) from $202,000 (4.3% of restaurant sales) compared to the same prior year period.

The decrease in the three month period ended December 31, 2013 is mainly attributable to a decrease in amortization expense as loan fees related to the termination of the Wells Fargo Bank note were recorded in October 2012, as well as declining depreciation expense in our aging company-owned and co-developed restaurants.

General and Administrative Costs

For the three months ended December 31, 2013, general and administrative costs increased $122,000 to $508,000 (8.5% of total revenues) from $386,000 (8% of total revenues) for the same prior year period.

The increase for the three month period ended December 31, 2103 was mainly attributable to increases in payroll and employee benefit costs, training costs, professional services and financial relations costs.

Advertising Costs

For the three months ended December 31, 2013 advertising costs increased $24,000 to $234,000 (4% of restaurant sales) from $210,000 (4.4% of restaurant sales) for the same prior year period.

Advertising costs consist primarily of contributions made to the advertising materials fund and regional advertising cooperative based on a percentage of restaurant sales, the percentage contribution for the three month period ended December 31, 2013 remained the same as the prior year period.

Franchise Costs

For the three months ended December 31, 2013, franchise costs increased $7,000 to $22,000 (.4% of total revenues) from $15,000 (.3% of total revenues) for the same prior year period.

Gain on Sale of Assets

For the three months ended December 31, 2013, our gain on the sale of assets was unchanged at $6,000 compared to the same prior year period.

Loss from Operations

We had a loss from operations of ($86,000) in the three months ended December 31, 2013 compared to a loss from operations of ($297,000) for the same prior year period.

The decrease in loss from operations for the three month period is due primarily to the increase in net revenues offset by other matters discussed in the "Restaurant Operating Costs", "General and Administrative Costs" and "Franchise Costs" 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 December 31, 2013 was $72,000. 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 loss was ($159,000) for the three months ended December 31, 2013 compared to a net loss of ($330,000) for the same prior year period.

The change from the three month period ended December 31, 2013 to December 31, 2012 was primarily attributable to the decrease in our loss from operations for the three month periods ended December 31, 2013, as well as a decrease in net interest expense related to the decrease in our long term notes payable, offset by our affiliate investment loss.

Liquidity and Capital Resources

Cash and Working Capital: As of December 31, 2013, we had a working capital excess of $3,653,000. 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 or Bad Daddy's 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 2014 and beyond.

Financing:

Public Offering: On August 21, 2013 we completed a public offering of 2,200,000 shares of common stock, together with warrants to purchase 2,200,000 shares of our common stock ("A Warrants") and additional warrants to purchase 1,100,000 shares of our common stock ("B Warrants") with a per unit purchase price of $2.50. One share of common stock was sold together with one A Warrant, with each A Warrant being exercisable on or before August 16, 2018 for one share of common stock at an exercise price of $2.75 per share, and together with one B Warrant, with two B Warrants being exercisable on or before May 16, 2014 for one share of common stock at an exercise price of $2.50 per share.

We intend to use the net proceeds from this offering for the remodeling and reimaging of existing Good Times Burgers & Frozen Custard restaurants; for the development of new Bad Daddy's Burger Bar restaurants through BD of Colorado LLC; as working capital reserves and for future investment at the discretion of our Board of Directors.

Capital Expenditures

Planned capital expenditures for the balance of fiscal 2014 include those discussed above as well as normal recurring capital expenditures for existing restaurants Additional commitments for the development of new restaurants in fiscal 2014 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 $295,000 for the three months ended December 31, 2013. The net cash provided by operating activities for the three months ended December 31, 2013 was the result of a net loss of $159,000 as well as cash and non-cash reconciling items totaling $454,000 (comprised of depreciation and amortization of $143,000, stock-based compensation expense of $32,000, an affiliate investment loss of $72,000, an increase in accounts payable and accrued liabilities of $102,000, a decrease in receivables of $109,000 and a net increase in other operating assets and liabilities of $4,000).

Net cash used in operating activities was $26,000 for the three months ended December 31, 2012. The net cash used in operating activities for the three months ended December 31, 2012 was the result of a net loss of ($330,000) as well as cash and non-cash reconciling items totaling $304,000 (comprised of depreciation and amortization of $202,000, stock-based compensation expense of $24,000, a deferred gain of $6,000, accretion of deferred rent of $8,000, an accrued expense increase of $83,000 and a net increase in other operating assets and liabilities of $7,000).

Net cash used in investing activities for the three months ended December 31, 2013 was $1,137,000 which reflects $375,000 paid to BDFD for our affiliate investment and $766,000 in purchases of property and equipment. Purchases of property and equipment includes $629,000 in costs for the development of our first Bad Daddy's Burger Bar location in Cherry Creek, Colorado, $77,000 for the reimaging of existing Good Times Burgers & Frozen Custard restaurants and $60,000 for miscellaneous restaurant related capital expenditures.

Net cash used in investing activities for the three months ended December 31, 2012 was $104,000 which reflects proceeds from a sale leaseback transaction of $1,377,000 offset by the purchase of a franchise restaurant for $656,000, the purchase of real estate underlying a company-owned restaurant for $763,000 and $63,000 for miscellaneous restaurant related capital expenditures.

Net cash used in financing activities for the three months ended December 31, 2013 was $93,000, which includes principal payments on notes payable, long term debt and capital leases of $10,000, distributions to non-controlling interests of $43,000, preferred dividends of $30,000 and stock sale costs of $10,000.

Net cash provided by financing activities for the three months ended December 31, 2012 was $477,000, which includes proceeds of $1,500,000 from the sale of preferred stock, principal payments on notes payable and long term debt of $1,020,000 and distributions to non-controlling interests of $3,000.

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

The weighted average menu price increase taken so far in fiscal 2014 was 1.7%. The total menu price increases taken during fiscal 2013 were 2.2%. We anticipate cost pressure on several core commodities, including beef, bacon and dairy for fiscal 2014. However, we anticipate our food and packaging costs as a percentage of sales will be slightly lower in fiscal 2014 than in fiscal 2013 from a combination of price increases, product sales mix changes and recipe modifications. We are planning additional moderate price increases in fiscal 2014, 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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