BT Brands, Inc. Form 10-Q Summary
Business Context and Reporting Period
BT Brands operates nine Burger Time restaurants and one Dairy Queen restaurant in Minnesota, North Dakota, and South Dakota. The company also owns properties held for sale. This unaudited quarterly report covers the 13 and 26 weeks ended June 28, 2020, compared with the periods ended June 30, 2019. The company is a smaller reporting company, an emerging growth company, and reported 8,095,004 common shares outstanding as of August 13, 2020.
Financial Performance and Position
| Metric | 13 Weeks Ended June 28, 2020 | 13 Weeks Ended June 30, 2019 | 26 Weeks Ended June 28, 2020 | 26 Weeks Ended June 30, 2019 |
|---|---|---|---|---|
| Sales | $2.396 million | $1.888 million | $3.700 million | $3.266 million |
| Income from operations | $350,156 | $6,492 | $270,379 | $(121,425) |
| Net income | $677,422 | $(37,688) | $561,178 | $(208,178) |
| Net income per share | $0.08 | $(0.00) | $0.07 | $(0.03) |
| Operating margin | 14.6% | 0.3% | 7.3% | (3.7)% |
- Second-quarter sales increased 26.9%; first-half sales increased 13.3%.
- Second-quarter restaurant-level EBITDA, a non-GAAP measure, was $513,203, or 21.4% of sales, compared with $231,252, or 12.2%, in the prior-year quarter. First-half restaurant-level EBITDA was $544,082, or 14.7%, compared with $290,314, or 8.9%.
- Operating improvements reflected higher drive-through sales, lower food costs as a percentage of sales, labor leverage, lower occupancy costs as a percentage of sales, and reduced general and administrative expenses.
- Net income included $466,758 of other income, principally the expected forgiveness of $460,400 of PPP loans, and $64,200 of interest income related to a related-party note. The filing records the anticipated PPP forgiveness as income although forgiveness had not yet been completed.
- Cash provided by operating activities was $876,600 for the first 26 weeks, compared with $84,985 in the prior-year period. Capital expenditures were $16,393.
- Cash was $1.091 million at June 28, 2020, compared with $258,101 at December 29, 2019. Working capital was $322,011, an $815,337 improvement from the year-end working-capital deficit.
- Total debt, before unamortized issuance costs, was $3.570 million, including $327,600 classified as current. Net long-term debt, excluding current maturities, was $3.186 million.
- Total liabilities exceeded assets, resulting in shareholders’ deficit of $835,137 at June 28, 2020, although this improved from a deficit of $1.396 million at year-end.
Material Changes Versus the Prior Comparable Period
- Sales growth was attributed primarily to increased demand at drive-through locations during COVID-19 restrictions, favorable weather, and reduced dining alternatives.
- Second-quarter food and paper costs declined to 37.4% of sales from 38.9%; labor costs declined to 25.5% from 30.1%; and restaurant operating costs declined to 74.4% from 82.8%.
- First-half general and administrative expense decreased 51.8%, to $183,163 from $293,168, primarily due to lower officer compensation and elimination of a general manager position.
- The company recorded a $100,000 impairment charge on assets held for sale in the second quarter of 2020, compared with $93,488 in the prior-year quarter.
- The company received $460,400 in PPP loans and a $27,500 interest-free Minnesota emergency loan. Two mortgage lenders suspended payments for three months, with interest continuing to accrue.
- The company’s common stock began quotation on the OTC Bulletin Board under the symbol BTBD during June 2020. The company was seeking DTC eligibility.
Guidance, Outlook, Risks, and Unusual Items
Management expects to have sufficient cash to meet obligations for at least one year from the issuance of the financial statements and prepared the statements on a going-concern basis. Management intends to pursue acquisitions of restaurant concepts and properties at attractive valuations as the economy stabilizes, including opportunities it believes may arise following the COVID-19 pandemic. No quantitative revenue or earnings guidance was provided.
- COVID-19 remains the principal uncertainty. Restaurants generally continued operating through drive-through service, with limited indoor seating and some limited hours. Management stated that the pandemic had been favorable to sales through the reporting date, but renewed restrictions, lower consumer spending, labor shortages, supply disruptions, or changing regulations could materially harm results and liquidity.
- PPP forgiveness is expected but remains subject to required documentation and program requirements. The company has already recognized the expected $460,400 forgiveness as other income.
- The company is exposed to beef and other commodity-price volatility and does not use futures or options to manage this risk.
- Related-party exposure includes a $168,200 current note and interest receivable from Next Gen Ice and a $75,000 long-term investment in its stock and warrants. The related note was due August 31, 2020.
- The company has substantial secured and related-party debt, personal guarantees by a shareholder, and negative shareholders’ equity.
- The company reported no material pending legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements.
Most Important Facts to Verify
- Confirm final PPP loan forgiveness and whether any portion must be repaid or reclassified from other income.
- Assess whether COVID-19-driven sales and margin gains were sustained after June 28, 2020 as restrictions and consumer behavior changed.
- Review debt maturities, lender payment deferrals, accrued interest, covenant compliance, and liquidity relative to required payments.
- Evaluate the recoverability and timing of sale of the Richmond, Indiana and St. Louis-area properties, including further impairment risk.
- Review collection of the related-party Next Gen Ice note and the valuation of the related investment and warrants.
- Reconcile the MD&A first-half operating-income figure of $270,791 with the financial statements, which report $270,379.