BT Brands, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
BT Brands, Inc. owns and operates nine Burger Time restaurants and one Dairy Queen franchise in the upper Midwest. Fiscal 2020 covered 53 weeks ended January 3, 2021, compared with 52 weeks ended December 29, 2019. The Company reincorporated from Delaware to Wyoming on December 18, 2020, and completed a 1-for-2 reverse stock split effective January 25, 2021; all share and per-share data were retroactively adjusted.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Sales | $8.160 million | $6.481 million | +25.9% |
| Income (loss) from operations | $529,368 | $(373,548) | Improved |
| Net income (loss) | $791,992 | $(466,577) | Improved |
| Basic and diluted EPS | $0.20 | $(0.12) | Improved |
| Restaurant-level EBITDA | $1.597 million | $699,611 | +128.2% |
| Restaurant-level EBITDA margin | 19.6% | 10.8% | +8.8 percentage points |
| Net cash provided by operating activities | $1.397 million | $50,489 | Improved |
| Cash at period end | $1.321 million | $258,101 | Increased |
| Total debt, before debt issuance costs | $3.238 million | $3.558 million | Decreased |
Sales growth began in March 2020 and was attributed primarily to COVID-19-related restrictions on indoor dining, which increased demand for drive-through restaurants. Average Burger Time unit sales increased approximately 25%, from $669,000 to $839,000. The average customer transaction increased approximately 4%, principally due to a mid-2020 price increase.
Operating performance benefited from higher sales volume and operating leverage. Food and paper costs declined to 37.9% of sales from 39.7%, labor costs declined to 28.6% from 33.0%, and total restaurant operating costs declined to 80.4% of restaurant sales from 89.2%. General and administrative expense increased 22.6% to $687,524, primarily because of executive bonus compensation.
Working capital was $371,693 at January 3, 2021, compared with a prior-year deficit of $471,995. Total assets were $3.389 million and shareholders’ deficit was $702,323. Monthly mortgage payments totaled approximately $31,128. Most mortgage debt carried fixed interest rates of 4.75%, with two notes at 5.50% and one adjustable-rate note subject to a 4.00% floor.
Material changes versus the prior comparable period
- Revenue, operating income, net income, cash flow and restaurant-level EBITDA all improved materially.
- COVID-19 shifted customer demand toward drive-through service and temporarily benefited sales, although some locations experienced temporary closures and reduced hours.
- Interest expense declined to $177,757 from $207,841.
- Impairment charges totaled $190,493 in 2020, including $100,000 related to the Richmond, Indiana property and $90,493 related to the St. Louis, Missouri property. Fiscal 2019 included $93,488 of asset impairment and a $200,000 goodwill impairment charge.
- The Company repaid approximately $179,000 of related-party notes receivable from Next Gen Ice, Inc. in August 2020 and repaid an approximately $207,000 related-party borrowing from BTND Trading in August 2020.
- Debt declined principally through scheduled principal payments and repayment of the related-party borrowing. Two mortgage lenders deferred three months of payments totaling $93,602; the deferred amounts were added to balloon payments at maturity.
Guidance, outlook, risks and unusual items
Management did not provide specific revenue or earnings guidance. Its strategy is to grow through acquisitions of individual restaurants or multi-unit restaurant concepts, development or conversion of additional Burger Time locations, and improved comparable-store sales. Execution is dependent on obtaining additional financing; no specific acquisition was planned as of the filing.
The Company expects sufficient cash to meet obligations for more than one year and believes it can meet working capital, recurring capital expenditure and debt obligations through fiscal 2021; management’s plans indicate working capital needs could be met through 2022. Additional equity or debt financing may nevertheless be required for acquisitions or expansion, and such financing may be unavailable or dilutive.
COVID-19 remains a significant uncertainty. Management cautioned that sales gains may not persist as economic activity normalizes, while renewed restrictions, customer isolation, staffing shortages, supply interruptions or mandatory closures could adversely affect results. Other principal risks include competition from larger chains, food and commodity inflation, labor and minimum-wage increases, reliance on a small number of suppliers, food safety incidents, adverse weather, regulatory requirements and difficulties integrating acquisitions.
PPP proceeds of $460,400 were recognized in other income after the Company determined forgiveness was reasonably assured; the loans were forgiven in full in 2021. Total pandemic-related loans received in May 2020 were $487,900, including a $27,500 interest-free Minnesota emergency loan. The filing also reports $103,623 of interest income, including $75,000 attributed to equity received in connection with the modification of related-party notes.
Management identified material weaknesses in internal control over financial reporting, including inadequate segregation of duties, ineffective risk assessment and monitoring, and inadequate controls over deferred income taxes associated with acquired assets. Prior-period financial statements were revised for errors in the 2018 Share Exchange accounting and related goodwill and deferred tax liability. The independent auditor expressed an unqualified opinion on the consolidated financial statements but did not attest to internal control effectiveness.
Most important facts for investors to verify
- Whether the COVID-19-related sales uplift and 19.6% restaurant-level EBITDA margin are sustainable after customer behavior and restaurant operations normalize.
- The Company’s ability to fund acquisitions and expansion without materially diluting shareholders or increasing leverage.
- The terms, maturity dates and collateral coverage of approximately $3.238 million of gross debt, including deferred mortgage payments and personal guarantees by the CEO.
- The status and realizable value of the Richmond, Indiana and St. Louis, Missouri properties held for sale.
- Remediation of the disclosed material weaknesses and the reliability of future financial reporting.
- Exposure to beef prices, labor shortages, minimum-wage increases and dependence on Sysco, which represented approximately 83% of fiscal 2020 purchases.
- The filing contains minor numerical inconsistencies: the cash-flow statement reports net income of $791,922 and ending cash of $1,321,174, while the income statement and balance sheet report $791,992 and $1,321,244, respectively. The filing text does not clearly resolve these differences.
- There was no public trading market for the common stock as of the filing, and the Company had 4,047,502 shares outstanding and 53 record holders in March 2021.