BT Brands, Inc. — Form 10-Q Summary
Business context and reporting period
BT Brands, Inc. operated 11 restaurants as of April 3, 2022: nine Burger Time locations, one Dairy Queen, and Keegan’s Seafood Grille in Florida. The company’s fiscal first quarter covered 13 weeks ended April 3, 2022, compared with the 13 weeks ended April 4, 2021. The interim financial statements are unaudited and prepared under U.S. GAAP.
Financial results and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales | $2.073 million | $1.941 million | +6.8% |
| Income from operations | $88,921 | $223,495 | -60.2% |
| Operating margin | 4.3% | 11.5% | Down 7.2 points |
| Net income | $42,650 | $134,924 | -68.4% |
| Net margin | 2.0% | 6.9% | Down 4.9 points |
| Restaurant-level EBITDA | $449,397 | $383,689 | +17.1% |
| Restaurant-level EBITDA margin | 21.6% | 19.8% | Up 1.8 points |
| Net cash from operating activities | $337,394 | $242,292 | +39.3% |
Food and paper costs declined to 34.8% of sales from 37.7%, aided by prior menu price increases and favorable ground-beef pricing. Labor costs increased to $607,710, or 29.3% of sales, from 29.1%. Occupancy and other operating expenses rose to 14.2% of sales from 13.3%, primarily due to winter heating and snow-removal costs. General and administrative expense increased to $291,061, or 14.0% of sales, from $105,338, largely because of public-company costs, higher officer compensation, and additional staffing following the November 2021 IPO.
Cash was $11.074 million at April 3, 2022, compared with $12.386 million at January 2, 2022. Working capital was approximately $9.906 million. Marketable securities were $254,100, reflecting a $6,746 unrealized loss from cost. Total assets were $15.414 million and shareholders’ equity was $10.779 million.
Total debt was approximately $3.008 million before unamortized debt issuance costs, consisting primarily of bank notes secured by company properties. Current maturities were $171,357 and long-term debt, net of current maturities and issuance costs, was $2.791 million. The company reported approximately $3 million of contractual obligations, with required monthly debt payments of approximately $32,000.
Cash flow and liquidity
Operating activities generated $337,394 of cash. Investing activities used $1.682 million, including $1.150 million for the Keegan’s acquisition, $229,000 invested in related company Next Gen Ice, $260,846 for marketable securities, and $10,164 for property and equipment. Financing activities provided $32,629, including $74,866 from warrant exercises, partially offset by $42,237 of debt principal payments. Cash therefore declined by $1.312 million during the quarter.
Management identified operating cash flow and cash on hand as the primary liquidity sources. The company stated that it does not require significant working capital, but future acquisitions and growth depend on continued access to capital. The company had no off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Sales increased 6.8%, largely because Keegan’s contributed approximately $345,000 during its first month under company ownership. Burger Time sales declined because labor shortages curtailed operating hours and weather was less favorable.
- Operating income and net income fell substantially because corporate general and administrative costs increased following the IPO.
- Restaurant-level EBITDA improved despite lower consolidated operating income, indicating stronger reported restaurant-level performance before corporate costs and depreciation.
- Cash from operations increased, but cash declined because of acquisition spending, the Next Gen Ice investment, and purchases of marketable securities.
- Shares outstanding increased from 6,447,506 at January 2, 2022 to 6,461,118 at April 3, 2022 following warrant exercises.
Guidance, outlook, risks, contingencies, and unusual items
Management planned to implement a menu price increase in the second quarter of 2022 to address inflation. Beef costs had increased approximately 13.7% per pound since 2020; management estimated that a 10% increase in beef costs would add approximately $175,000 to annual food costs. The company does not hedge commodity prices and may be unable to fully recover higher food, labor, energy, and construction costs through pricing.
The company’s strategy is to pursue opportunistic acquisitions of restaurant concepts and individual properties, increase same-store sales, and build brand awareness. Keegan’s was acquired on March 2, 2022 for $1.150 million in cash, with provisional goodwill of $200,000. The acquisition included a 131-month operating lease with a present value of approximately $616,517 and future minimum payments of approximately $762,000.
After quarter-end, on May 11, 2022, the company acquired the assets of Pie In The Sky Coffee and Bakery in Woods Hole, Massachusetts for $1.174 million in cash and entered into a five-year triple-net lease with renewal options. Purchase-price allocation had not been finalized.
Key risks include labor shortages and wage inflation, food and commodity cost inflation, supply disruptions, dependence on a limited number of suppliers and one distribution company, severe weather, competition from larger restaurant chains, food-safety incidents, COVID-19 effects, acquisition integration and financing risks, and the possibility that comparable-store sales may decline after pandemic-related sales gains.
Management concluded that disclosure controls and procedures were not effective as of April 3, 2022 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. Management was developing accounting-process and internal-control improvements.
Most important facts for investors to verify
- Whether Keegan’s and the subsequent Pie Coffee acquisition generate sustainable sales and cash flow after acquisition and lease costs.
- Whether the sharp increase in corporate general and administrative expense moderates as the public-company infrastructure matures.
- The company’s ability to fund additional acquisitions while servicing approximately $3 million of debt and new lease obligations.
- The effect of planned price increases, labor availability, wage inflation, and food-cost inflation on traffic, sales, and margins.
- Completion of the Keegan’s purchase-price allocation and any resulting changes to goodwill or other acquired assets.
- Remediation and future testing of the company’s ineffective disclosure controls and internal controls over financial reporting.
- Related-party investment exposure to Next Gen Ice, including the $229,000 2022 investment and associated preferred stock and warrants.