BT Brands, Inc. FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2019, a 52-week year, compared with the 52-week year ended December 30, 2018. This is an annual filing, not a standalone fourth-quarter filing. BT Brands operated ten restaurants: nine Burger Time locations and one Dairy Queen franchise, primarily in the upper Midwest.
Business Context
The Company operates drive-through and take-out quick-service restaurants, generally without indoor seating. Its strategy is to grow through acquisitions of restaurant concepts and individual properties, development or conversion of Burger Time locations, increased comparable-store sales, and expanded marketing and technology initiatives.
Key Financial Metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Sales | $6.481 million | $7.051 million | Down 8.1% |
| Loss from operations | $222,048 | Income of $240,815 | Declined by $462,863 |
| Net income (loss) | $(368,577) | $20,803 | Declined by $389,380 |
| Net loss per share | $(0.05) | $0.00 | Unfavorable change |
| Restaurant-level EBITDA | $693,612 | $802,358 | Down 13.5% |
| Restaurant-level EBITDA margin | 10.7% | 11.3% | Down 60 basis points |
| Cash flow from operations | $50,489 | $49,116 | Up $1,373 |
Restaurant-level EBITDA is a non-GAAP measure that excludes corporate general and administrative expenses, depreciation and amortization, impairment charges, and pre-opening costs. It should not be viewed as a substitute for GAAP operating income.
Margins, Costs, Liquidity and Debt
- Food and paper costs were $2.574 million, or 39.7% of sales, compared with 40.2% in 2018.
- Labor costs were $2.140 million, or 33.0% of sales, compared with 31.7% in 2018. Tight labor markets and higher starting wages increased labor pressure.
- Occupancy costs declined to $718,905 from $847,274; other operating expenses increased to $353,502 from $328,709.
- General and administrative expenses increased 22.4% to $607,585, including a $40,000 write-off of deferred offering costs and a $48,500 goodwill impairment.
- Cash was $258,101 at year-end, down from $663,511. Working capital was negative by approximately $468,000.
- Total debt before unamortized issuance costs was approximately $3.558 million; reported current maturities were $277,666 and long-term debt was $3.221 million.
- Mortgage payments totaled approximately $31,128 per month. Most secured debt carried fixed interest rates of 4.75%; other notes carried rates of 5.0%, 5.5% or 8.0%, with one adjustable-rate note.
- Shareholders’ deficit was $1.396 million at December 29, 2019, compared with $1.041 million at the prior year-end.
Material Changes Versus FY2018
- Sales declined primarily because the Richmond, Indiana restaurant was closed at the end of 2018. Average Burger Time unit sales declined to approximately $669,000 from $698,000.
- The Company moved from a small profit to a substantial net loss. FY2018 benefited from a $158,358 gain on the sale of property; FY2019 included a $93,488 impairment charge related to property held for sale.
- Interest expense increased to $207,841 from $176,955.
- Cash declined by $405,410, principally reflecting $276,899 of net debt principal payments and a $179,000 investment in related-party notes receivable.
- The Company issued 9,000 incentive shares to employees and adopted a 2019 incentive plan reserving up to 500,000 common shares for awards.
- Average customer transactions increased by approximately 2%, according to management, partly due to less aggressive promotional pricing. The filing text contains an apparent typographical error in the stated percentage.
Guidance, Outlook, Risks and Unusual Items
- Management had no specific acquisition planned but intended to pursue acquisitions and new restaurant opportunities if adequate financing became available.
- The Company targeted approximately $325,000 to $535,000 of cash investment per new Burger Time restaurant and an approximate 30% annualized cash-on-cash return by the second full year, although management cautioned that these targets may not be achieved.
- Management expected beef prices to remain stable or decrease in 2020, but noted that labor shortages, minimum-wage increases, food costs and competitive pricing could pressure margins.
- COVID-19 was declared a global pandemic after year-end. Restaurants remained open for drive-through service, although some hours were curtailed. Management stated that the pandemic could reduce traffic, impair staffing and supplies, disrupt deliveries, or lead to required closures.
- The Company prepared its financial statements on a going-concern basis. Management stated that bank offers to defer approximately three months of loan payments, totaling about $93,600, were incorporated into its cash forecast and expected to provide sufficient liquidity for one year from issuance of the financial statements. The filing also states that additional financing may be required and may not be available on acceptable terms.
- The Company invested $179,000 in convertible notes of Next Gen Ice, an entity controlled in part by the Company’s chief executive officer. The maturity was extended to August 31, 2020; the Company received security interests and equity warrants in connection with the extension.
- Approximately 83% of purchases came from one vendor, with $222,926 payable to that vendor at year-end. The Sysco distribution agreement was scheduled to expire June 3, 2020.
- A 10% increase in beef costs was estimated to increase annual food costs by approximately $98,000.
- The common stock had no public trading market as of the filing, and the Company could not assure that OTC Markets quotation or an active market would develop.
Investor Verification Items
- Verify post-filing liquidity, loan-payment deferrals, debt maturities and the Company’s ability to address its negative working capital and going-concern risks.
- Assess the actual financial impact of COVID-19 on restaurant sales, operating hours, staffing, supply availability and margins.
- Review the terms, collectability and collateral supporting the $179,000 related-party Next Gen Ice notes, including the subsequent maturity extension and warrants.
- Reconcile the filing’s differing references to restaurant counts and the apparent typographical error in the stated 2% average-transaction increase.
- Evaluate the effect of the Richmond and other properties held for sale, including the $93,488 impairment charge and potential sale proceeds.
- Review related-party debt, management compensation, personal guarantees and the concentration of purchases with the primary vendor.
- Confirm whether the common stock obtained OTC quotation and whether a liquid trading market developed after the filing date.