BT Brands, Inc. — Form 10-Q Summary
Business Context and Reporting Period
BT Brands, Inc. operates ten fast-food restaurants in the North Central United States: nine Burger Time locations and one Dairy Queen location. The company also owns properties held for sale. The filing covers the 13 weeks ended March 29, 2020, compared with the 13 weeks ended March 31, 2019. The company is a smaller reporting company and emerging growth company.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales | $1.303 million | $1.378 million |
| Operating loss | $79,777 | $129,177 |
| Net loss | $116,244 | $170,490 |
| Net loss per share | $0.01 | $0.02 |
| Net cash provided by operating activities | $81,438 | $(25,640) |
| Restaurant-level EBITDA | $(1,598) | $59,119 |
| Restaurant-level EBITDA margin | Approximately 0.0% | 4.2% |
Sales declined 5.4%. Total costs and expenses were $1.383 million, or 106.1% of sales, compared with 109.3% in the prior-year period. The net loss margin improved to 8.9% from 12.4%, while the operating loss margin improved to 6.1% from 9.3%.
At March 29, 2020, cash was $310,134 and total assets were $2.654 million. Current liabilities were $909,387, producing a working-capital deficit of $535,201. Total debt, including current maturities and before considering subsequent financing, was approximately $3.499 million, consisting of $243,784 in current maturities and $3.255 million of long-term debt.
Cash increased by $52,033 during the quarter, from $258,101 to $310,134. Operating cash flow was supported principally by a $161,767 increase in accounts payable. Investing cash flow was $(28,000), reflecting an advance to related company Next Gen Ice. Financing cash flow was $(1,405), comprising $50,000 of new debt proceeds and $51,405 of principal payments.
Material Changes Versus the Prior Comparable Period
- Sales decreased $74,403, primarily because the West St. Paul location was closed for approximately seven weeks following a fire and because of weather conditions.
- Food and paper costs decreased in dollars but increased to 41.4% of sales from 40.7%, partly due to an approximately 18% increase in average beef prices.
- Labor costs decreased slightly to $483,309 but increased to 37.1% of sales from 35.3% because minimum staffing levels did not decline proportionately with sales.
- Occupancy and other operating expenses declined to $248,762, or 19.1% of sales, from $272,215, or 19.8%.
- Depreciation and amortization declined 24.5% to $46,115.
- General and administrative expense declined 51.8% to $66,216, primarily due to lower officer compensation and elimination of a general manager position.
- Operating loss and net loss improved, but restaurant-level EBITDA declined from positive $59,119 to negative $1,598.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide quantitative revenue or earnings guidance. Its stated growth strategy is to pursue acquisitions of restaurant concepts and properties, expand Burger Time locations, increase comparable-store sales and profits, and leverage centralized management.
COVID-19 materially affected operations. The company continued operating its locations primarily through drive-through service, with limited hours and restricted walk-up and indoor seating. The filing cites potential product and labor shortages, changing government restrictions, reduced consumer spending, changing dining patterns, and uncertainty regarding the duration and ultimate financial impact of the pandemic.
Two mortgage lenders agreed to suspend loan payments for three months beginning in March 2020; interest continued to accrue and suspended amounts were to become balloon payments at the end of the mortgage terms. In May 2020, after quarter-end, the company received $460,400 of PPP loans bearing 1% interest, consisting of $418,900 borrowed by BTND and $41,500 by its Dairy Queen subsidiary. Forgiveness was possible but not assured. The Dairy Queen subsidiary also borrowed $27,500 under a Minnesota emergency loan program, with potential forgiveness of up to 50%.
Management stated that it expected available cash, lender payment relief, and government-program financing to provide sufficient funds for obligations for the following twelve months. Nevertheless, the company had recurring losses, a working-capital deficit, negative shareholders’ equity of $1.513 million, and substantial debt. The filing states that no adjustments were made for the possibility that the company may not continue as a going concern.
The company advanced $28,000 to related party Next Gen Ice during the quarter; the advance was repaid in April 2020. Existing related-party notes totaled $179,000 and were extended to August 31, 2020, with additional security, warrants, and equity interests provided to the company.
The company reported no material pending legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements. It identified commodity-price risk, particularly beef costs; a 10% increase in beef costs was estimated to increase annual food costs by approximately $98,000.
Important Facts for Investors to Verify
- Whether PPP loans and the Minnesota emergency loan qualify for partial or full forgiveness, and the remaining repayment obligations.
- The duration and financial effect of COVID-19 operating restrictions, including sales trends after March 29, 2020.
- Whether lender payment deferrals and balloon-payment terms materially increase future liquidity requirements.
- The company’s ability to address its $535,201 working-capital deficit, negative shareholders’ equity, and approximately $3.499 million of debt.
- The collectability, maturity, and collateral supporting the related-party Next Gen Ice notes and other related-party transactions.
- The status and expected proceeds from properties held for sale, including the Richmond, Indiana property and the St. Louis-area property.
- The filing’s stated working-capital comparison to year-end, which contains an apparent arithmetic inconsistency; the reported March 29, 2020 deficit is $535,201.