BT Brands, Inc. quarterly report, Q2 FY2023

BT Brands, Inc. Form 10-Q Summary

Business Context and Reporting Period

BT Brands, Inc. operates restaurant businesses in the eastern two-thirds of the United States. As of July 2, 2023, the company reported 18 restaurants, including eight Burger Time restaurants, one Dairy Queen franchise, Village Bier Garten, Keegan’s Seafood Grille, Pie In The Sky Coffee and Bakery, and a 41.2% equity interest in Bagger Dave’s, which operates six restaurants. The filing covers the 13 and 26 weeks ended July 2, 2023, compared with the comparable periods ended July 3, 2022. The financial statements are unaudited.

Key Financial Metrics

Metric	13 weeks ended July 2, 2023	Prior comparable period	26 weeks ended July 2, 2023	Prior comparable period
Sales	$4.00 million	$3.52 million	$7.07 million	$5.60 million
Income (loss) from operations	$(79,548)	$(4,148)	$(330,306)	$84,773
Net loss	$(233,734)	$(92,275)	$(375,520)	$(49,625)
Net loss per share	$(0.04)	$(0.01)	$(0.06)	$(0.01)
Cash flow from operating activities	Not separately provided for the quarter	$(111,747)	$498,068

Second-quarter sales increased 13.5%; first-half sales increased 26.3%, primarily from restaurants acquired during 2022.
First-half restaurant-level EBITDA, a non-GAAP measure, was $970,713 versus $1.01 million, with margin declining to 13.7% from 18.0%.
Second-quarter food and paper costs increased to 40.2% of sales from 37.2%; labor costs increased to 35.3% from 33.5%. For the first half, food and paper costs rose to 41.0% from 36.3%, and labor costs rose to 37.0% from 31.9%.
Cash and cash equivalents were $5.70 million at July 2, 2023, compared with $2.15 million at January 1, 2023. Working capital was approximately $5.94 million.
Marketable securities were $1.23 million, down from $5.99 million at year-end, primarily reflecting sales of investments and Treasury Bills.
Total debt was approximately $2.58 million before unamortized debt issuance costs, including $164,866 of current maturities. The company also reported $1.91 million of noncurrent operating lease obligations.
Total assets were $15.15 million and shareholders’ equity was $9.60 million at July 2, 2023.

Material Changes Versus the Prior Comparable Period

Revenue grew because three acquired restaurants contributed approximately $2.03 million in second-quarter sales and approximately $3.7 million in first-half sales. This benefit was partly offset by lower Burger Time sales and the closure of the West St. Paul location.
Profitability deteriorated despite revenue growth. The first-half operating result declined from $84,773 of income to a $330,306 loss, while net loss increased from $49,625 to $375,520.
Higher food costs, labor shortages, wage inflation, weaker Burger Time traffic, and poor margins at Keegan’s pressured results. The filing states that ground beef costs were approximately 40% higher in the second quarter than in the prior-year quarter.
Occupancy and other operating costs benefited from the reversal of approximately $180,000 of previously accrued St. Louis property taxes after the property was transferred to the taxing authority in lieu of payment.
First-half equity in the loss of Bagger Dave’s increased to $145,050 from $14,172. Bagger Dave’s reported approximately $3.98 million of first-half sales and a $352,000 loss.
Cash increased by $3.55 million during the first half, primarily due to $5.86 million of proceeds from marketable securities and other investing activity. Cash was reduced by debt repayments, the repayment of a $791,370 broker margin loan, and a $250,225 treasury-stock purchase.
The company purchased no treasury shares in the prior-year comparable period and held 215,000 treasury shares at July 2, 2023, versus 65,000 at January 1, 2023.

Outlook, Risks, Contingencies, and Unusual Items

Management expects food-cost inflation to moderate during the remainder of 2023, but notes that competitive conditions may limit the ability to pass cost increases through menu pricing. Beef and egg costs had trended down slightly in 2023.
Management identified labor availability, wage inflation, food and commodity costs, competition, consumer discretionary spending, weather, food safety, supply interruptions, reliance on a small number of suppliers and one distribution company, and the execution and financing of acquisitions as material risks.
The company continues to evaluate acquisition opportunities but provides no quantitative revenue or earnings guidance.
The West St. Paul property was sold in February 2023 for a $313,688 gain. The Richmond, Indiana property remained held for sale, with management stating that it expected to sell it at or above carrying value.
Operating leases required approximately $2.34 million of future minimum payments as of July 2, 2023. Mortgage-related debt payments were approximately $32,000 per month, and future lease payments were approximately $25,000 per month.
The company reported no significant asserted or potential legal claims and no pending legal proceedings. All federal and state tax periods since inception remained open for inspection.
Management concluded that disclosure controls and procedures were not effective because the company lacked sufficient accounting resources and segregation of duties and had not performed an effective risk assessment or monitored internal controls over financial reporting.
A contingent incentive award could result in 250,000 common shares being earned by senior executives if the share price reaches $8.50 for 20 consecutive trading days while the participants remain employed. The company recognized $41,300 of related stock-based compensation in the first half of 2023.

Important Facts for Investors to Verify

Whether acquired restaurants, particularly Keegan’s, PIE, and Village Bier Garten, can achieve sustainable margins and offset continuing food, labor, and occupancy pressures.
The source and sustainability of cash liquidity, including the significant contribution from investment and Treasury Bill sales rather than operating cash flow.
Whether operating cash flow returns to positive levels after the first-half use of $111,747 and whether debt and lease obligations can be serviced from restaurant operations.
The financial condition and funding needs of Bagger Dave’s, including the company’s 41.2% share of its losses.
The valuation and liquidity of marketable securities, the NGI investment, and other noncurrent investments.
Progress in remediating ineffective disclosure controls, segregation-of-duties deficiencies, and financial reporting oversight.
The potential dilution and expense implications of outstanding options, warrants, and the 250,000-share contingent incentive award.