Business Context and Reporting Period
BT Brands, Inc. filed this Form 10-Q for the 13 weeks and 39 weeks ended October 2, 2022, compared with periods ended October 3, 2021. The company operated nine Burger Time restaurants, one Dairy Queen franchise, and three recently acquired restaurants: Keegan’s Seafood Grille, Pie In The Sky Coffee and Bakery, and Village Bier Garten. BT Brands also owned 41.2% of Bagger Dave’s Burger Tavern, which operates six restaurants. The company is a smaller reporting company and emerging growth company.
Financial Highlights
| Metric | 13 Weeks Ended October 2, 2022 | 13 Weeks Ended October 3, 2021 | 39 Weeks Ended October 2, 2022 | 39 Weeks Ended October 3, 2021 |
|---|---|---|---|---|
| Sales | $4.024 million | $2.281 million | $9.622 million | $6.605 million |
| Income from operations | $9 thousand | $359 thousand | $94 thousand | $969 thousand |
| Net income (loss) | $(175) thousand | $236 thousand | $(225) thousand | $583 thousand |
| Net margin | (4.3%) | 10.3% | (2.3%) | 8.9% |
| Restaurant-level EBITDA | $467 thousand | $494 thousand | $1.480 million | $1.439 million |
| Restaurant-level EBITDA margin | 11.6% | 21.6% | 15.4% | 21.8% |
Third-quarter sales increased 76.4%, while nine-month sales increased 45.7%, primarily due to the acquired restaurants. Burger Time sales declined approximately 14% in the quarter and approximately 11% for the nine-month period.
For the nine months, food and paper costs were 37.8% of sales versus 39.1% previously. Labor costs increased to 32.5% from 27.2%, occupancy and other operating costs increased to 14.4% from 12.0%, and general and administrative expense increased to $1.036 million from $295 thousand. The company attributed higher corporate costs partly to its transition to being a public company, management agreements, stock-based compensation, and legal and accounting costs.
Cash provided by operating activities was $485 thousand, compared with $931 thousand in the prior-year period. Investing cash flow was $(5.654) million, including $3.0 million for three restaurant acquisitions, $1.260 million for the Bagger Dave’s investment, $229 thousand invested in a related company, and $809 thousand for marketable securities. Financing cash flow was $(51) thousand.
Financial Position, Debt and Liquidity
- Cash was $7.166 million at October 2, 2022, compared with $12.386 million at January 2, 2022. Marketable securities were $653 thousand.
- Working capital was approximately $6.8 million, down approximately $4.8 million from year-end, primarily due to acquisitions and the Bagger Dave’s investment.
- Total current assets were $8.078 million and current liabilities were $1.240 million.
- Long-term debt, including current maturities and net of issuance costs, totaled approximately $2.868 million. The principal bank notes bear a fixed 3.45% rate through June 2031 and are secured by mortgages on ten operating locations.
- Operating lease liabilities totaled approximately $1.571 million, including $218 thousand current and $1.354 million noncurrent. Management reported approximately $4.4 million of mortgage obligations and $1.5 million of capitalized lease obligations as contractual obligations, with monthly lease and mortgage payments of approximately $47 thousand.
- Shareholders’ equity was $10.581 million, compared with $10.628 million at January 2, 2022. Shares outstanding increased to 6,461,118 from 6,447,506, primarily from warrant exercises.
Material Changes, Outlook and Risks
- BT Brands used proceeds from its November 2021 initial public offering to acquire Keegan’s in March, PIE in May, Village Bier Garten in August, and a 41.2% interest in Bagger Dave’s in June. The acquisition accounting remained provisional for certain acquired assets and goodwill.
- Management intends to continue evaluating strategic and opportunistic restaurant acquisitions, expand into additional concepts and geographies, improve same-store sales, and increase brand awareness through digital marketing and technology.
- Management cited labor shortages, higher wages, food and commodity inflation, rising beef costs, competitive pricing pressure, and difficulty fully passing cost increases to customers. Staffing constraints resulted in reduced operating hours and isolated daily closures.
- Customer purchasing patterns at Burger Time returned toward pre-pandemic levels after unusually strong COVID-era performance. Management expects future margin improvement to depend on operating enhancements, equipment, pricing, and higher volumes.
- Results are seasonal: PIE benefits from late-spring through early-fall tourism, while the Florida restaurants generally benefit from colder-weather tourism. Weather and holiday closures affect Burger Time sales.
- Marketable securities generated a $155 thousand unrealized loss in the nine-month period. The company also recorded a $136 thousand equity-method loss from Bagger Dave’s and a $136 thousand loss related to its affiliate investment presentation in cash-flow adjustments.
- A Burger Time location in West St. Paul, Minnesota was permanently closed on November 6, 2022, after the quarter ended; the company is considering alternative uses for the site.
- Disclosure controls and procedures were not effective as of October 2, 2022 because of previously reported material weaknesses involving segregation of duties and risk assessment and monitoring of internal controls. Acquired businesses were still being integrated into the control framework.
- The filing reports no pending or threatened material legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether the newly acquired restaurants can offset declining Burger Time sales and improve consolidated operating margins.
- The sustainability of labor, food, occupancy, and corporate costs, particularly as inflation and staffing pressures continue.
- The final purchase-price allocations, goodwill, intangible values, and lease obligations for the three acquisitions.
- The financial performance and carrying value of the 41.2% Bagger Dave’s investment, including the recorded equity-method losses.
- The company’s ability to fund additional acquisitions while maintaining cash liquidity and servicing debt and lease obligations.
- Remediation of the material weaknesses in internal control over financial reporting and the integration of controls at acquired businesses.
- The impact of the West St. Paul closure, seasonality, weather, COVID-related disruptions, and competitive pricing on future results.