BT Brands, Inc. Form 10-Q Summary
Business Context and Reporting Period
BT Brands operates restaurant businesses, including nine Burger Time restaurants, one Dairy Queen franchise, Keegan’s Seafood Grille, and Pie In The Sky Coffee and Bakery. The company also owns 41.2% of Bagger Dave’s Burger Tavern, which operates six restaurants. This unaudited Form 10-Q covers the 13 and 26 weeks ended July 3, 2022, compared with the periods ended July 4, 2021.
Financial Performance and Position
| Metric | 26 Weeks Ended July 3, 2022 | 26 Weeks Ended July 4, 2021 |
|---|---|---|
| Sales | $5.598 million | $4.324 million |
| Income from operations | $84,773 | $610,672 |
| Net income (loss) | $(49,625) | $347,440 |
| Operating margin | 1.5% | 14.1% |
| Net margin | (0.9%) | 8.0% |
| Cash flow from operations | $498,068 | $496,251 |
| Cash balance at period end | $8.296 million | $1.721 million |
- Second-quarter sales were $3.525 million, up from $2.383 million, but the company reported a $92,275 net loss versus $212,516 of net income in the prior-year quarter.
- Second-quarter operating income declined to a loss of $4,148 from income of $387,177. Restaurant-level EBITDA, a non-GAAP measure, was $560,795, or 15.9% of sales, compared with $556,716, or 23.4%.
- For the first half, restaurant-level EBITDA was $1.010 million, or 18.0% of sales, compared with $987,420, or 22.8%. Management cautions that this measure excludes corporate expenses, depreciation, amortization, and impairment charges.
- Cash used in investing activities was $4.579 million, primarily for the Keegan’s acquisition, the PIE acquisition, the Bagger Dave’s investment, capital expenditures, and marketable securities purchases. Total cash declined by $4.090 million during the first half.
- At July 3, 2022, current assets were $9.060 million and current liabilities were $1.388 million. Management reported working capital of approximately $7.7 million.
- Total debt, net of issuance costs, was approximately $2.922 million, consisting primarily of mortgage notes at a fixed 3.45% rate through June 2031. Current maturities were $171,358, and long-term debt was $2.750 million.
- Operating lease liabilities totaled approximately $1.150 million, including leases entered into for Keegan’s and PIE.
Material Changes Versus the Prior Comparable Period
- Sales increased 29.5% for the first half, principally because the acquired restaurants contributed approximately $1.775 million of revenue. Burger Time revenue declined approximately 11.6% for the first half and approximately 20.1% in the second quarter.
- Burger Time sales were affected by customer activity returning toward pre-pandemic patterns, adverse weather, labor shortages, reduced operating hours, and store closures.
- Labor costs increased to 31.9% of sales for the first half from 27.4%, and to 33.5% from 26.1% in the second quarter, reflecting higher wages and staffing difficulties.
- General and administrative expense increased 238.4% for the first half to $746,717, primarily due to public-company costs, stock-based compensation, and long-term management employment agreements.
- Food and paper costs improved as a percentage of sales to 36.3% from 37.8% for the first half and to 37.2% from 38.1% in the second quarter, partly due to the lower-cost PIE operation.
- The company completed the $1.15 million Keegan’s acquisition on March 2, 2022, the approximately $1.16 million PIE acquisition on May 11, 2022, and the $1.26 million purchase of a 41.2% interest in Bagger Dave’s on June 2, 2022.
Outlook, Risks, Contingencies, and Unusual Items
- Management intends to continue evaluating strategic and opportunistic restaurant acquisitions, increase same-store sales, and expand brand awareness. No quantitative earnings or revenue guidance was provided.
- Management expects continued inflationary pressure during the remainder of 2022, including higher beef, food, labor, occupancy, and other operating costs. Competitive conditions may limit the company’s ability to pass through cost increases.
- Labor shortages and wage inflation may reduce operating hours, constrain sales, and pressure margins. COVID-19 and future variants could affect customer traffic, staffing, supply availability, and operations.
- Acquisition-related risks include identifying suitable targets, completing due diligence, integrating operations, retaining employees, operating unfamiliar concepts and geographies, and developing adequate financial and management controls.
- On August 4, 2022, after the reporting period, BT Brands purchased the Van Stephan Village Bier Garten restaurant and related assets for $6.9 million in cash and entered into a five-year lease with renewal options.
- Marketable securities had a $607,988 cost and a $527,750 fair value at July 3, 2022, resulting in an $80,238 unrealized loss. The company also recognized a $14,172 equity-method loss from its affiliate investment.
- The company reported no significant asserted or potential legal claims and no pending or threatened legal proceedings. It reported no off-balance-sheet arrangements.
- Disclosure controls and procedures were determined not to be effective at a reasonable assurance level because of a previously disclosed material weakness involving segregation of duties and risk assessment and monitoring of internal controls. Controls for acquired businesses were still being integrated.
Important Facts for Investors to Verify
- Confirm the final purchase-price accounting for Keegan’s and PIE, which remained provisional at July 3, 2022, including goodwill and intangible-asset valuations.
- Assess the funding impact and liquidity requirements of the $6.9 million post-period Village Bier Garten acquisition.
- Monitor Burger Time same-store sales, labor availability, operating hours, food inflation, and the company’s ability to maintain pricing.
- Evaluate whether higher corporate costs and stock-based compensation can be absorbed as the acquired restaurants mature.
- Review the financial condition, governance influence, and related-party aspects of the 41.2% Bagger Dave’s investment and the company’s investments in Next Gen Ice.
- Track remediation of the material weakness and the inclusion of newly acquired businesses in the year-end internal-control assessment.