BT Brands, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
BT Brands, Inc. operates quick-service, casual dining, seafood, bakery, and entertainment restaurants primarily in the eastern two-thirds of the United States. The filing covers the 13 weeks ended April 2, 2023, compared with the 13 weeks ended April 3, 2022. The filing describes the restaurant base inconsistently as 17 restaurants in the notes and 18 restaurants in the MD&A when including the 41.2%-owned Bagger Dave’s affiliate.
The company’s wholly owned operations include Burger Time, Dairy Queen, Keegan’s Seafood Grille, Pie In The Sky Coffee and Bakery, and Village Bier Garten. Bagger Dave’s operates six restaurants and is accounted for under the equity method.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $3.071 million | $2.073 million | Up 48.1% |
| Income (loss) from operations | $(251) thousand | $89 thousand | Declined |
| Net income (loss) | $(142) thousand | $43 thousand | Declined |
| Net margin | (4.6%) | 2.0% | Down 6.6 percentage points |
| Restaurant-level EBITDA | $339 thousand | $449 thousand | Down 24.7% |
| Restaurant-level EBITDA margin | 11.0% | 21.7% | Down 10.7 percentage points |
| Net cash from operating activities | $(474) thousand | $337 thousand | Declined |
Sales growth primarily reflected the full-quarter contribution from three restaurants acquired during 2022, which contributed approximately $1.307 million of revenue. BTND sales declined approximately $195,000 because of harsh winter weather and the closure of the West St. Paul location. Average sales per BTND unit open at quarter-end declined approximately 13.2% to $157,000.
Restaurant operating costs increased to 99.2% of restaurant sales from 78.3%. Food and paper costs were 42.0% of sales versus 34.8%, labor costs were 39.2% versus 29.3%, and occupancy and other operating costs were 18.0% versus 14.2%. General and administrative expenses increased 46.3% to $426,000 but declined slightly as a percentage of sales to 13.9% from 14.0%.
Operating results included a $314,000 gain on the sale of the West St. Paul property, $70,000 of unrealized gains on marketable securities, $89,000 of interest and dividend income, and a $54,000 equity-method loss from Bagger Dave’s. Without these non-operating and unusual items, reported profitability would have been weaker.
Cash was $5.494 million at April 2, 2023, compared with $2.151 million at January 1, 2023. Marketable securities were $1.378 million, total current assets were $7.384 million, and reported working capital was $6.213 million. The increase in cash primarily resulted from $5.742 million of marketable-securities proceeds, including the maturity of Treasury bills, and $496,000 of proceeds from the West St. Paul sale.
Total debt was $2.624 million, including $166,000 of current maturities and $2.417 million of long-term debt net of issuance costs. The company also reported $1.965 million of noncurrent operating lease obligations and approximately $2.413 million of future minimum operating lease payments. Financing cash outflows included $244,000 of debt principal payments and $250,000 for treasury-share purchases.
Material changes versus the prior comparable period
- Revenue increased 48.1%, primarily because acquisitions made during 2022 contributed a full quarter of sales.
- The company shifted from $43,000 of net income to a $142,000 net loss and from $89,000 of operating income to a $251,000 operating loss.
- Restaurant-level EBITDA declined despite higher revenue, reflecting weaker BTND sales, seasonal weakness, poor Keegan’s margins, inflation, labor costs, and higher occupancy costs at leased locations.
- Operating cash flow shifted from $337,000 provided to $474,000 used.
- Cash increased substantially because of investment maturities and asset-sale proceeds rather than operating performance.
- The company repurchased 150,000 shares for approximately $250,000, increasing treasury stock to $357,000.
- Bagger Dave’s reported sales of $2.014 million and a net loss of $136,000 for the 13 weeks ended March 26, 2023; BT Brands recognized its 41.2% share of the loss.
- At April 2, 2023, outstanding common shares were 6,246,118, compared with 6,396,118 at January 1, 2023.
Guidance, outlook, risks, contingencies, and unusual items
The company did not provide specific revenue, earnings, or margin guidance. Management expects continued inflationary pressure during 2023, particularly for beef and eggs, and stated that competitive conditions may limit its ability to fully offset cost increases through menu pricing.
Management identified labor shortages, higher wages, food and energy inflation, intense competition, changing consumer preferences, delivery and technology requirements, adverse weather, food-safety risks, supply interruptions, dependence on a limited number of suppliers and one distribution company, acquisition execution, access to capital, and the ability to manage growth as important risks.
Following quarter-end, the company disposed of its St. Louis-area property in lieu of unpaid property taxes. Management expects the second quarter to include an approximately $180,000 gain from reversing previously accrued property taxes. The Richmond, Indiana property remained held for sale, and management expected to sell it at or above carrying value.
The company reported no pending legal proceedings or significant known claims. Management stated that its disclosure controls and procedures were not effective as of April 2, 2023 because of inadequate accounting resources and insufficient segregation of duties. Management was developing accounting-system and internal-control improvements.
A contingent incentive award could result in an aggregate issuance of 250,000 common shares if the company’s share price reaches $8.50 for 20 consecutive trading days and the recipients remain employed. The filing recognized $9,500 of related stock-based compensation in the quarter and estimated total fair value at $250,000.
Important facts for investors to verify
- Whether the acquired restaurants can reach sustainable positive margins after food, labor, occupancy, and other inflationary pressures.
- How much of the cash balance represents recurring liquidity versus proceeds from securities maturities and asset sales.
- The company’s ability to generate positive operating cash flow during the remainder of fiscal 2023.
- Debt-service requirements, mortgage collateral, lease obligations, and the effect of future interest-rate changes.
- Operating performance and funding needs of the 41.2%-owned Bagger Dave’s affiliate.
- The timing and economics of the Richmond and St. Louis-area property dispositions.
- Progress in remediating ineffective disclosure controls and segregation-of-duties deficiencies.
- Potential dilution from warrants, options, and the 250,000-share contingent incentive award.
- The filing’s inconsistent restaurant count and the precise distinction between wholly owned and affiliate locations.