As of March 31, 2014, the total remaining unrecognized compensation cost related to unvested stock-based arrangements was $291,000 and is expected to be recognized over a period of 2.6 years.
There were no stock options exercised during the six months ended March 31, 2014.
Warrants
In connection with the public offering in August 2013 we issued 2,200,000 warrants to purchase 2,200,000 shares of our common stock (“A Warrants”) and an additional 2,200,000 warrants to purchase 1,100,000 shares of our common stock (“B Warrants”). Additionally we issued 330,000 A warrants to purchase 330,000 shares of common stock and 330,000 B warrants to purchase 165,000 of common stock to the underwriters in connection with the public offering. Each A Warrant is exercisable on or before August 16, 2018 for one share of common stock at an exercise price of $2.75 per share and two B Warrants are exercisable on or before May 16, 2014 for one share of common stock at an exercise price of $2.50 per share. Also in connection with the public offering we issued 154,000 representative warrants to purchase 154,000 of common stock at an exercise price of $3.125 to the underwriters. The representative warrants are exercisable beginning May 16, 2014 and expire on August 16, 2016.
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As of March 31, 2014 we received gross proceeds of $1,039,500 and incurred $59,500 of expenses related to the exercise of warrants. A summary of warrant activity for the six months ended March 31, 2014 is presented in the following table:
| | |
| Number of Shares | Weighted Average Exercise Price Per Share |
Outstanding-beg of year | 3,949,000 | $2.68 |
Issued | - | - |
Exercised | 415,400 | $2.50 |
Outstanding at Mar 31, 2014 | 3,533,600 | $2.71 |
Outstanding and exercisable at Mar 31, 2014 | 3,379,600 | $2.69 |
Preferred Stock
On March 28, 2014, Small Island Investments Limited converted all 355,451 shares of the Company’s Series C Convertible Preferred Stock, par value $0.01 per share, into 710,902 shares of the Company’s Common Stock, par value $0.001 per share. The effects of the conversion are to eliminate the Company’s payment of dividends on the Series C Convertible Preferred Stock and to eliminate the possible need for the Company to redeem the Series C Convertible Preferred Stock for a cash payment. The Company intends later in the year to register the issued Common Stock for resale.
Comprehensive Income (Loss)
Comprehensive income includes net income or loss, changes in certain assets and liabilities that are reported directly in equity such as adjustments resulting from unrealized gains or losses on held-to-maturity investments and certain hedging transactions. The Company’s comprehensive loss is equal to its net loss.
Contingent Liabilities and Liquidity
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 by the franchisees, 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.
Related Party Transactions
In April 2012 the Company entered into a financial advisory services agreement with Heathcote Capital LLC pursuant to which they were to provide the Company with exclusive financial advisory services in connection with a possible strategic transaction. Gary J. Heller, a member of the Company’s Board of Directors, is the principal of Heathcote Capital LLC. Accordingly, the agreement constitutes a related party transaction and was reviewed and approved by the Audit Committee of the Company’s Board of Directors. On March 25, 2013, the Company and Heathcote modified this agreement to exclude any transactions involving the Maxim Group LLC and for Heathcote to continue to provide non-exclusive financial advisory services to the Company. Total amounts paid to Heathcote Capital LLC were $27,900 and $48,600 in fiscal 2013 and fiscal 2012, respectively. On September 27, 2013, the Company and Heathcote further modified this agreement to provide for investor relations activities specifically related to the exercise of the outstanding warrants and the trading volume in the Company’s stock and other corporate finance projects as determined by the CEO of the company. The modification was approved by the Audit Committee of the Company’s Board of Directors. Total amounts paid to Heathcote Capital LLC for the six months ended March 31, 2014 were $52,500.
In April 2013 the Company entered into a management services agreement with BDFD pursuant to which the Company is providing general management services as well as accounting and administrative services. Income received from the agreement by the Company is fully recognized in income and then proportionately offset by the 48% equity investment in BDFD. Total amounts received from BDFD per the management services agreement were $11,000 in fiscal 2013 and $12,000 in the six month period ended March 31, 2014. In addition to the management services the Company performed scope of work services and total amounts received from BDFD for these services were $18,000 in fiscal 2013 and $30,000 in the six month period ended March 31, 2014.
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Impairment of Long-Lived Assets and Goodwill
Long-Lived Assets
We review our long-lived assets for impairment, including land, property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the capitalized costs of the assets to the future undiscounted net cash flows expected to be generated by the assets and the expected cash flows are based on recent historical cash flows at the restaurant level (the lowest level that cash flows can be determined).
An analysis was performed on a restaurant by restaurant basis for all Good Times restaurants at March 31, 2014. Assumptions used in preparing expected cash flows were as follows:
Sales projections are as follows: Fiscal 2014 sales are projected to increase 6% with respect to fiscal 2013 and for fiscal years 2015 to 2028 we have used annual increases of 2% to 3%. The 6% increase in fiscal 2014 is due to current trends. We believe the 2% to 3% increase in the fiscal years beyond 2014 is a reasonable expectation of growth and that it would be unreasonable to expect no growth in our sales. These increases include menu price increases in addition to any real growth. Historically our weighted menu prices have increased 1.5% to 6%.
Our variable and semi-variable restaurant operating costs are projected to increase proportionately with the sales increases as well as increasing an additional 1.5% per year consistent with inflation.
Our other fixed restaurant operating costs are projected to increase 1.5% to 2% per year.
Food and packaging costs are projected to decrease approximately .5% as a percentage of sales in relation to our fiscal 2013 food and packaging costs as a result of menu price increases and other menu initiatives.
Salvage value has been estimated on a restaurant by restaurant basis considering each restaurant’s particular equipment package and building size.
Given the results of our impairment analysis at March 31, 2014 there are no restaurants which are impaired as their projected undiscounted cash flows show recoverability of their asset values.
Our impairment analysis included a sensitivity analysis with regard to the cash flow projections that determine the recoverability of each restaurant’s assets. The results indicate that even with a 15% decline in our projected cash flows we would still not have any potential impairment issues. However if we elect to sublease, close or otherwise exit a restaurant location impairment could be required.
Each time we conduct an impairment analysis in the future we will compare actual results to our projections and assumptions, and to the extent our actual results do not meet expectations, we will revise our assumptions and this could result in impairment charges being recognized.
All of the judgments and assumptions made in preparing the cash flow projections are consistent with our other financial statement calculations and disclosures. The assumptions used in the cash flow projections are consistent with other forward-looking information prepared by the company, such as those used for internal budgets, discussions with third parties, and/or reporting to management or the board of directors.
Projecting the cash flows for the impairment analysis involves significant estimates with regard to the performance of each restaurant, and it is reasonably possible that the estimates of cash flows may change in the near term resulting in the need to write down operating assets to fair value. If the assets are determined to be impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value. Fair value would be determined using forecasted cash flows discounted using an estimated average cost of capital and the impairment charge would be recognized in income from operations.
Goodwill
As of March 31, 2014, the Company had $96,000 of goodwill related to the purchase of a franchise operation in fiscal 2012. The Company tests goodwill for impairment on an annual basis or whenever indications of impairment arise including, but not limited to, a significant decline in cash flows from store operations. Such tests could result in impairment charges. Given the results of our impairment analysis at March 31, 2014 the goodwill is not impaired.
Income Taxes
We account for income taxes using the liability method, whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are
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measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. The deferred tax assets are reviewed periodically for recoverability, and valuation allowances are adjusted as necessary.
The Company is subject to taxation in various jurisdictions. The Company continues to remain subject to examination by U.S. federal authorities for the years 2010 through 2013. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company's financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. No accrual for interest and penalties was considered necessary as of March 31, 2014.
Non-controlling Interests
Non-controlling interests are presented as a separate item in the equity section of the condensed consolidated balance sheet. The amount of consolidated net income or loss attributable to non-controlling interests is presented on the face of the condensed consolidated statement of operations. Changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions, while changes in ownership interest that do result in deconsolidation of a subsidiary require gain or loss recognition in net income based on the fair value on the deconsolidation date.
Investment in Affiliate
On April 15, 2013, the Company executed a Subscription Agreement for the purchase of 4,800 Class A Units of Bad Daddy’s Franchise Development, LLC (BDFD), representing a 48% non-controlling voting membership interest in BDFD, for the aggregate subscription price of $750,000. The subscription price was payable in two equal installments. The first $375,000 installment was paid on the date of execution of the Subscription Agreement and the remaining $375,000 installment was paid in December 2013.
The Company accounts for this investment using the equity method. For the six months ending March 31, 2014 the Company recorded a net loss of $113,000 for its share of the joint venture’s operating results. The carrying value at March 31, 2014 was $535,000, which is represented as Investment in Affiliate in the accompanying condensed consolidated balance sheets.
Subsequent Events
Subsequent to March 31, 2014 and through May 7, 2014 we received gross proceeds of $2,071,000 from the exercise of 161,900 and 1,300,500 A and B Warrants, respectively, for which we issued a total of 812,150 shares of our common stock.
Recent Accounting Pronouncements
There are no new accounting pronouncements that affect the Company.
Stock Transactions
None.
Segment Information
All of our Good Times Burgers and Frozen Custard restaurants (Good Times) compete in the quick-service drive-through dining industry while our Bad Daddy’s Burger Bar restaurant (Bad Daddy’s) competes in the full-service upscale casual dining industry. We believe that providing this additional financial information for each of our brands will provide a better understanding of our overall operating results. Income (loss) from operations represents revenues less restaurant operating costs and expenses, directly allocable general and administrative expenses, and other restaurant-level expenses directly associated with each brand including depreciation and amortization, pre-opening costs and losses or gains on disposal of property and equipment.
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The following tables present information about our reportable segments for the respective periods:
| | | | | | | |
| Three Months Ended March 31, | | Six Months Ended March 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenues | | | | | | | |
Good Times | $5,956,000 | | $ 5,055,000 | | $11,944,000 | | $9,871,000 |
Bad Daddy’s | 208,000 | | - | | 208,000 | | - |
| $6,164,000 | | $ 5,055,000 | | $12,152,000 | | $9,871,000 |
Income (loss) from operations | | | | | | | |
Good Times | ($1,000) | | ($325,000) | | $109,000 | | ($622,000) |
Bad Daddy’s | (381,000) | | - | | (577,000) | | - |
| ($382,000) | | ($325,000) | | ($468,000) | | ($622,000) |
Capital Expenditures | | | | | | | |
Good Times | $137,000 | | $ 658,000 | | $ 265,000 | | $ 2,140,000 |
Bad Daddy’s | 221,000 | | - | | 861,000 | | - |
| $358,000 | | $ 658,000 | | $ 1,126,000 | | $2,140,000 |
| | | |
| March 31, 2014 | | September 30, 2013 |
Property & Equipment, net | | | |
Good Times | $ 2,779,000 | | $ 2,803,000 |
Bad Daddy’s | 895,000 | | 48,000 |
| $ 3,674,000 | | $ 2,851,000 |
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:
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.
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.
Good Times 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.
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| | | | |
| 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 March 31, |
| 2014 | 2013 |
Company-owned restaurants | 18 | 18 |
Co-developed | 7 | 7 |
Franchise operated restaurants | 12 | 14 |
Total restaurants: | 37 | 39 |
Fiscal 2013: On March 31, 2013 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.
Bad Daddy’s Restaurant Locations
We currently operate one Bad Daddy’s Burger Bar restaurant in Denver, Colorado, which opened in February 2014.
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, 2014 and results for the three and six month periods ending March 31, 2013.
Results of Operations
Overview
Same store sales at our Good Times restaurants increased 12% for fiscal 2013, and have increased 17.6% in the first six months of fiscal 2014. These results reflect the continuation of the positive momentum we have experienced since fiscal 2011. The 17.6% increase in fiscal 2014 is comprised of a 10.3% increase in transactions, a 1.8% increase in our breakfast sales, a 2.3% increase in pricing and a 3.2% increase in menu mix.
In the first quarter of fiscal 2013 we implemented a new limited item breakfast menu at Good Times that generated incremental sales of approximately 9% in the six months ended March 31, 2014, compared to 7.2% for the same prior year period. 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 for Good Times is cautiously optimistic based on the last two years of positive sales trends and the results of our first two quarters; 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 March 31, 2014 increased $1,109,000 or 21.9% to $6,164,000 from $5,055,000 for the three months ended March 31, 2013, of which $901,000 came from the Good Times concept.
Good Times same store restaurant sales increased 17.8% during the three months ended March 31, 2014 for the restaurants that were open for the full three month periods ending March 31, 2014 and March 31, 2013. Restaurants are included in same store sales after they have been open a full fifteen months. Restaurant sales increased $205,000 due to one restaurant purchased from a franchisee in May of 2013. Restaurant sales decreased $192,000 due to one company-owned restaurant closed in September 2013.
Good Times franchise revenues for the three months ended March 31, 2014 increased $6,000 to $84,000 from
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$78,000 for the three months ended March 31, 2013 due to an increase in franchise royalties. Same store Good Times franchise restaurant sales increased 16.8% during the three months ended March 31, 2014 for the franchise restaurants that were open for the full periods ending March 31, 2014 and March 31, 2013. Dual branded franchise restaurant sales decreased 6% during the three months ended March 31, 2014, compared to the same prior year period.
Bad Daddy’s restaurant sales were $208,000 for the three month period ended March 31, 2014. Our first Bad Daddy’s location was opened in Denver, Colorado in February 2014.
Net revenues for the six months ended March 31, 2014 increased $2,281,000 or 23.1% to $12,152,000 from $9,871,000 for the six months ended March 31, 2013, of which $2,080,000 came from the Good Times concept.
Good Times same store restaurant sales increased 17.6% during the six months ended March 31, 2014 for the restaurants that were open for the full six month periods ending March 31, 2014 and March 31, 2013. Restaurants are included in same store sales after they have been open a full fifteen months. Restaurant sales increased $722,000 due to two restaurants purchased from franchisees in fiscal 2013. Restaurant sales decreased $357,000 due to one company-owned store closed in September 2013.
Franchise revenues for the six months ended March 31, 2014 decreased $7,000 to $166,000 from $173,000 for the six months ended March 31, 2013 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 17% during the six months ended March 31, 2014 for the franchise restaurants that were open for the full periods ending March 31, 2014 and March 31, 2013. Dual branded franchise restaurant sales decreased 23% during the six months ended March 31, 2014, 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 94.3% during the three months ended March 31, 2014 compared to 96.9% in the same prior year period and were 92.2% during the six months ended March 31, 2014 compared to 96.2% in the same prior year period. The current year includes 3.6% and 3.1% for the three and six months ended March 31, 2104, respectively, 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 March 31, 2014 | Six Months Ended March 31, 2014 |
Restaurant-level costs for the period ended March 31, 2013 | 96.9% | 96.2% |
Decrease in food and packaging costs | (1.6%) | (1.4%) |
Decrease in payroll and other employee benefit costs | (1.6%) | (2.4%) |
Decrease in occupancy and other operating costs | (2.3%) | (2.0%) |
Decrease in depreciation and amortization | (.7%) | (1.3%) |
Restaurant-level costs, before preopen costs, for the period ended March 31, 2014 | 90.7% | 89.1% |
Increase in preopening costs | 3.6% | 3.1% |
Restaurant-level costs for the period ended March 31, 2014 | 94.3% | 92.2% |
Food and Packaging Costs
For the three months ended March 31, 2014 food and paper costs for our Good Times concept increased $203,000 to $1,956,000 (33.3% of restaurant sales) from $1,753,000 (35.2% of restaurant sales) compared to the same prior year period.
For the six months ended March 31, 2014 food and paper costs for the Good Times concept increased $541,000 to $3,895,000 (33.1% of restaurant sales) from $3,354,000 (34.6% of restaurant sales) compared to the same prior year period.
For the three and six month periods ended March 31, 2014 food and paper costs for our Good Times concept decreased as a percentage of restaurant sales compared to the same prior year period primarily due to lower commodity costs compared to the same prior year periods. The weighted average menu price increases taken so far in fiscal 2014 are 1.9%. The total menu price increases taken during fiscal 2013 were 2.2%. As we anticipate cost pressure on several core commodities, particularly beef, bacon and dairy for fiscal 2014 we are planning additional moderate menu price increases for the balance of fiscal 2014. 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,
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product sales mix changes and recipe modifications.
For the three and six months ended March 31, 2014 food and paper costs as a percentage of restaurant sales for our Bad Daddy’s concept was 40.4% primarily due to higher than normal promotional discounting used to drive trial in our initial months of opening.
Payroll and Other Employee Benefit Costs
For the three months ended March 31, 2014 our payroll and other employee benefit costs for our Good Times concept increased $159,000 to $2,001,000 (34.1% of restaurant sales) from $1,842,000 (37% of restaurant sales) compared to the same prior year period. The $159,000 increase is attributable to a decrease of $91,000 in payroll and other employee benefits for the three months ending March 31, 2014 due to the closure of one company-owned restaurant in September of 2012, offset by: 1) an increase of $71,000 in payroll and other employee benefits for the three months ending March 31, 2014 due to the purchase of one franchise owned restaurant in May, 2013, and 2) an increase of $179,000 due to additional payroll costs as a result of increased same store sales compared to the same prior year period. Due to the semi-variable nature of payroll and other employee benefit costs these costs will decrease as a percentage of restaurant sales as restaurant sales increase.
For the six months ended March 31, 2014 our payroll and other employee benefit costs for our Good Times concept increased $404,000 to $3,983,000 (33.8% of restaurant sales) from $3,579,000 (36.9% of restaurant sales) compared to the same prior year period. The $404,000 increase is attributable to a decrease of $177,000 in payroll and other employee benefits for the six months ending March 31, 2014 due to the closure of one company-owned restaurant in September of 2012, offset by: 1) an increase of $234,000 in payroll and other employee benefits for the six months ending March 31, 2014 due to the purchase of two franchise owned restaurants in January and May, 2013, and 2) an increase of $347,000 due to additional payroll costs as a result of increased same store sales compared to the same prior year period. Due to the semi-variable nature of payroll and other employee benefit costs these costs will decrease as a percentage of restaurant sales as restaurant sales increase.
For the three and six months ended March 31, 2014 payroll and other employee benefit costs for our Bad Daddy’s concept were $151,000 (72.6% of restaurant sales) for our first restaurant which opened in February 2014. Payroll and other employee benefit costs are abnormally high due to the lower opening sales volume and the inclusion of costs related to a regional manager. We anticipate that these costs as a percentage of restaurant sales will decline for the balance of the fiscal year as sales increase and an additional location is opened in July 2014.
Occupancy and Other Operating Costs
For the three months ended March 31, 2014 our occupancy and other operating costs for our Good Times concept increased $37,000 to $1,099,000 (18.7% of restaurant sales) from $1,062,000 (21.3% of restaurant sales) compared to the same prior year period.
For the six months ended March 31, 2014 our occupancy and other operating costs for our Good Times concept increased $171,000 to $2,201,000 (18.7% of restaurant sales) from $2,030,000 (20.9% of restaurant sales) compared to the same prior year period.
The increase for the Good Times concept in the three and six month periods ending March 31, 2014 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. Due to the fixed nature of occupancy costs they will decrease as a percentage of restaurant sales as restaurant sales increase.
For the three and six months ended March 31, 2014 occupancy and other operating costs for our Bad Daddy’s concept were $60,000 and $62,000, respectively, which are related to our first restaurant that opened in February 2014.
Preopening Costs
For the three and six month periods ended March 31, 2014 our new store preopening costs were $221,000 and $369,000, respectively, 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 March 31, 2014, our depreciation and amortization for our Good Times concept decreased $21,000 to $146,000 (2.5% of restaurant sales) from $167,000 (3.4% of restaurant sales) compared to the same prior year period.
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For the six months ended March 31, 2014, our depreciation and amortization for our Good Times concept decreased $80,000 to $289,000 (2.5% of restaurant sales) from $369,000 (3.8% of restaurant sales) compared to the same prior year period.
The decrease in the three and six month periods ended March 31, 2014 for our Good Times concept 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.
For the three and six month periods ended March 31, 2014 depreciation and amortization for our Bad Daddy’s concept was $14,000.
General and Administrative Costs
For the three months ended March 31, 2014, general and administrative costs increased $150,000 to $546,000 (8.9% of total revenues) from $396,000 (1.7% of total revenues) for the same prior year period.
For the six months ended March 31, 2014, general and administrative costs increased $272,000 to $1,054,000 (8.7% of total revenues) from $782,000 (7.9% of total revenues) for the same prior year period.
The increase for the three and six month periods ended March 31, 2014 was mainly attributable to increases in payroll and employee benefit costs, training costs, professional services and financial relations costs. In particular our financial relations costs increased $56,000 for the six month period ended March 31, 2014 compared to the same prior year period.
Advertising Costs
For the three months ended March 31, 2014 advertising costs increased $35,000 to $253,000 (4.2% of restaurant sales) from $218,000 (4.4% of restaurant sales) for the same prior year period.
For the six months ended March 31, 2014 advertising costs increased $59,000 to $487,000 (4.1% of restaurant sales) from $428,000 (4.4% of restaurant sales) for the same prior year period.
Advertising costs for our Good Times concept consists 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 and six month periods ended March 31, 2014 remained the same as the prior year period.
Advertising costs of $20,000 for the three and six month periods ended March 31, 2014 are attributable to our Bad Daddy’s concept and consisted primarily of menu development and printing costs as well as direct mail costs.
Franchise Costs
For the three months ended March 31, 2014, franchise costs increased $4,000 to $20,000 (.3% of Good Times total revenues) from $16,000 (.3% of Good Times total revenues) for the same prior year period.
For the six months ended March 31, 2014, franchise costs increased $11,000 to $42,000 (.4% of Good Times total revenues) from $31,000 (.3% of Good Times total revenues) for the same prior year period.
Gain on Sale of Assets
For the three months ended March 31, 2014, our gain on the sale of restaurant assets decreased $68,000 to $6,000 from $74,000 for the same prior year period.
For the six months ended March 31, 2014, our gain on the sale of restaurant assets decreased $68,000 to $12,000 from $80,000 for the same prior year period.
The prior year periods include a gain of $68,000 on the sale of one Good Times restaurant in a sale leaseback transaction.
Loss from Operations
We had a consolidated loss from operations of ($382,000) in the three months ended March 31, 2014 compared to a consolidated loss from operations of ($325,000) for the same prior year period.
We had a consolidated loss from operations of ($468,000) in the six months ended March 31, 2014 compared to a consolidated loss from operations of ($622,000) for the same prior year period.
Our loss from operations for the Good Times concept decreased by $324,000 to $1,000 in the three months ended March 31, 2014 from $325,000 in the same prior year period.
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Our Good Times concept had income from operations of $109,000 in the six month period ended March 31, 2014 compared to a loss from operations of $622,000 in the same prior year period, which represents a $731,000 increase over the prior period.
The decrease in loss from operations for the Good Times concept 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" and “Franchise Costs” sections of Item 2 above.
Our loss from operations for the Bad Daddy’s concept was $381,000 and $577,000 for the three and six month periods ended March 31, 2014, respectively. The loss was due to matters discussed in the "Restaurant Operating Costs" and "General and Administrative 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 and six month periods ended March 31, 2014 was $41,000 and $113,000, respectively. 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 ($425,000) for the three months ended March 31, 2014 compared to a net loss of ($337,000) for the same prior year period.
The net loss was ($584,000) for the six months ended March 31, 2014 compared to a net loss of ($666,000) for the same prior year period.
The change from the three and six month periods ended March 31, 2014 to March 31, 2013 was primarily attributable to the change in our loss from operations for the three and six month periods ended March 31, 2014, 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 March 31, 2014, we had a working capital excess of $4,019,000. 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. Additionally we issued 330,000 A warrants to purchase 330,000 shares of common stock and 330,000 B warrants to purchase 165,000 of common stock to the underwriters in connection with the public offering with the same terms as the A and B warrants sold in the offering. Also in connection with the public offering we issued 154,000 representative warrants to purchase 154,000 of common stock at an exercise price of $3.125 to the underwriters. The representative warrants are exercisable beginning May 16, 2014 and expire on August 16, 2016. As of May 7, 2014 we have received $3,050,000 in net proceeds from the exercise of 165,900 A warrants and 2,131,300 B warrants.
We intend to use the net proceeds from this offering as well as the warrant exercise proceeds 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.
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Capital Expenditures
Planned capital expenditures for the balance of fiscal 2014 include those discussed above as well as normal recurring capital expenditures for existing Good Times restaurants and new point of sale equipment for our Good Times locations. 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 $146,000 for the six months ended March 31, 2014. The net cash provided by operating activities for the six months ended March 31, 2014 was the result of a net loss of $584,000 as well as cash and non-cash reconciling items totaling $730,000 (comprised of depreciation and amortization of $303,000, stock-based compensation expense of $64,000, an affiliate investment loss of $113,000, an increase in accounts payable and accrued liabilities of $162,000, a decrease in receivables of $127,000 and a net increase in other operating assets and liabilities of $39,000).
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 investing activities for the six months ended March 31, 2014 was $1,486,000 which reflects $375,000 paid to BDFD for our affiliate investment, payments received on loans to franchisees of $15,000 and $1,126,000 in purchases of property and equipment. Purchases of property and equipment include $861,000 in costs for the development of our first Bad Daddy’s Burger Bar locations in Colorado, $159,000 for the reimaging of existing Good Times Burgers & Frozen Custard restaurants and $106,000 for miscellaneous Good Times restaurant related capital expenditures.
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 financing activities for the six months ended March 31, 2014 was $791,000, which includes principal payments on notes payable, long term debt and capital leases of $21,000, distributions to non-controlling interests of $76,000, preferred dividends of $60,000, stock sale costs of $31,000 and proceeds from the exercise of warrants of $979,000.
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.
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 at our Good Times locations was 1.9%. 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.
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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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this report on form 10Q, the Company’s Chief Executive Officer and Controller (its principal executive officer and principal financial officer, respectively) have concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
