BT Brands, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the 13 and 26 weeks ended July 4, 2021, compared with June 28, 2020. BT Brands operated ten restaurants: nine Burger Time locations and one Dairy Queen location in Minnesota, North Dakota, and South Dakota. The company focuses primarily on drive-through and take-out quick-service restaurants.
The company had 4,047,502 common shares outstanding as of August 16, 2021. The interim financial statements are unaudited.
Financial Performance and Key Metrics
| Metric | 13 Weeks Ended July 4, 2021 | 13 Weeks Ended June 28, 2020 | 26 Weeks Ended July 4, 2021 | 26 Weeks Ended June 28, 2020 |
|---|---|---|---|---|
| Sales | $2.383 million | $2.396 million | $4.324 million | $3.700 million |
| Income from operations | $382,516 | $350,156 | $610,672 | $270,379 |
| Net income | $212,516 | $677,422 | $347,440 | $561,178 |
| Basic and diluted EPS | $0.05 | $0.17 | $0.09 | $0.14 |
| Operating margin | 16.0% | 14.6% | 14.1% | 7.2% |
| Restaurant-level EBITDA | $556,718 | $613,203 | $945,048 | $644,462 |
| Restaurant-level EBITDA margin | 23.4% | 25.6% | 21.8% | 17.4% |
Six-month sales increased 16.9%, primarily due to favorable effects from dining restrictions, generally favorable weather, and higher customer demand. Second-quarter sales declined slightly, while average Burger Time unit sales were approximately $237,200, essentially unchanged year over year. The average customer transaction increased approximately 4% to about $11.50, principally following a 2020 menu price increase.
Six-month operating performance improved as food and paper costs declined to 37.9% of sales from 38.8%, labor costs declined to 27.5% from 29.6%, and occupancy costs declined to 7.0% from 9.0%. Second-quarter food, labor, and other operating costs increased as percentages of sales because of inflationary pressure, tighter labor markets, higher wages, and other operating costs.
Second-quarter net income fell sharply despite higher operating income because the prior-year period included $64,200 of interest income and $466,758 of other income related principally to PPP loan forgiveness. The 2021 six-month period also had no comparable other income and incurred higher interest expense.
Cash Flow, Liquidity, and Debt
- Cash was $1.721 million at July 4, 2021, compared with $1.321 million at January 3, 2021.
- Working capital was $898,303, an increase of $526,610 from year-end.
- Operating cash flow was $496,251 for the first 26 weeks, compared with $876,600 in the prior-year period. The decline primarily reflects the absence of $466,758 of prior-year PPP-related other income.
- Capital expenditures were $67,003, producing net investing cash outflow of $67,003.
- Net financing cash outflow was $29,575, reflecting $3.107 million of new debt proceeds, $3.078 million of principal repayments, and debt issuance costs.
- Total long-term debt, net of issuance costs and current maturities, was $3.044 million; contractual debt obligations were approximately $3.268 million, with monthly required payments of approximately $24,000.
- In June 2021, substantially all property mortgages were refinanced. The new notes totaled $3.107 million, carry a fixed 3.45% rate for ten years, mature in 2036, and replaced notes principally bearing 4.75% interest.
Total liabilities exceeded assets, resulting in shareholders’ deficit of $354,883 at July 4, 2021, although the deficit improved from $702,323 at January 3, 2021 because of year-to-date net income.
Material Changes, Outlook, Risks, and Unusual Items
- Management expects continued inflationary pressure in food costs, including beef, and reported that ground beef pricing had recently increased from approximately $2.51 to $2.61 per pound.
- Labor shortages and wage pressure have made staffing more difficult and could reduce margins. Management stated that a $15 minimum wage would adversely affect profitability.
- The COVID-19 pandemic and variants, including Delta, remain material uncertainties affecting customer traffic, staffing, supply availability, operating hours, and potential government restrictions or closures.
- Management cautioned that sales could decline as pandemic restrictions ease and restaurant operations return toward pre-pandemic norms. Increased competition from restaurants that expanded take-out and delivery capabilities is also a risk.
- The company plans to pursue opportunistic acquisitions, increase same-store sales, improve brand awareness, and potentially develop or convert additional Burger Time locations. Execution depends on access to capital on acceptable terms.
- The Richmond, Indiana property remains held for sale at $258,751. Management believes it can be sold at or above its carrying value. No impairment charge was recorded in 2021; the prior-year period included a $100,000 impairment charge.
- The company reported no pending legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements.
- Disclosure controls and procedures were not effective at a reasonable assurance level because previously reported material weaknesses remained, including inadequate segregation of duties and ineffective risk assessment and monitoring of internal controls over financial reporting.
Most Important Facts for Investors to Verify
- Whether post-pandemic sales remain at or above the elevated 2020 and early-2021 levels after restrictions and consumer behavior normalize.
- The effect of food inflation, beef prices, labor shortages, wage increases, and minimum-wage changes on restaurant-level and consolidated margins.
- Debt service capacity under approximately $3.268 million of contractual obligations and the terms of the 3.45% refinancing.
- Whether operating cash flow can sustain debt service, maintenance capital expenditures, and potential acquisitions.
- The resolution of the disclosed internal-control material weaknesses.
- The recoverability and eventual sale price of the Richmond, Indiana property.
- The extent to which reported six-month growth benefited from temporary pandemic-related conditions and favorable weather.