BT Brands, Inc. — 2021 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
BT Brands operates nine Burger Time restaurants and one Dairy Queen restaurant across Minnesota, North Dakota, and South Dakota. The company also owns a Richmond, Indiana property held for sale. The filing covers the 13 weeks ended April 4, 2021, compared with the 13 weeks ended March 29, 2020. The financial statements are unaudited.
Key Financial Metrics
| Metric | 13 Weeks Ended April 4, 2021 | Comparable 2020 Period |
|---|---|---|
| Sales | $1,940,872 | $1,303,430 |
| Income from operations | $223,495 | $(79,777) |
| Interest expense | $38,571 | $36,467 |
| Income before taxes | $184,924 | $(116,244) |
| Income tax provision | $50,000 | None reported |
| Net income (loss) | $134,924 | $(116,244) |
| Basic and diluted earnings per share | $0.03 | $(0.03) |
| Net operating margin | 11.5% | (6.1)% |
| Net margin | 6.9% | (8.9)% |
| Restaurant-level EBITDA | $383,670 | $31,159 |
| Restaurant-level EBITDA margin | 19.8% | 2.4% |
Cash provided by operating activities was $242,292, compared with $81,438 in the prior-year period. Capital expenditures were $40,709, resulting in cash used in investing activities of $40,709. Financing activities used $62,729, primarily for debt principal payments. Cash increased by $138,854 to $1,460,098 at April 4, 2021.
At April 4, 2021, total assets were $3,513,570, total liabilities were $4,080,969, and shareholders’ deficit was $567,399. Gross long-term debt was $3,175,765, including $418,465 classified as current maturities and $2,704,560 of long-term debt net of unamortized issuance costs. The company reported working capital of $296,321; the filing contains inconsistent statements regarding the amount of the decrease from January 3, 2021.
Material Changes Versus the Prior Comparable Period
- Sales increased $637,442, or 48.9%, primarily due to strong drive-through demand during COVID-19-related restrictions and a 2020 menu price increase that management estimated contributed approximately 5% to 10% to sales.
- Average Burger Time unit sales increased to approximately $201,300 from approximately $141,000.
- Food and paper costs declined to 37.7% of sales from 41.4%, partly due to a favorable six-month ground-beef pricing arrangement.
- Labor costs increased in dollars to $565,492 but declined to 29.1% of sales from 37.1%, reflecting sales leverage and relatively stable restaurant management staffing.
- Occupancy and other operating costs declined to 13.4% of sales from 19.1%.
- General and administrative expense increased 59.1% to $105,338, primarily because of higher CEO compensation.
- The company shifted from an operating loss to operating income and from a net loss to net income.
- Debt declined from $3,238,494 at January 3, 2021 to $3,175,765 at April 4, 2021. A note of approximately $182,000 was repaid after quarter-end, on April 6, 2021.
- The company had 4,047,502 common shares outstanding at both balance-sheet dates and no potentially dilutive shares were included.
Guidance, Outlook, Risks, and Unusual Items
- Management intends to pursue acquisitions of individual restaurants and multi-unit foodservice concepts, as well as potential development or conversion of additional Burger Time locations. Expansion depends on available capital and suitable acquisition opportunities.
- Management expects sufficient cash to meet obligations for at least one year from issuance of the financial statements. Primary liquidity sources are operating cash flow and cash on hand.
- Contractual obligations were approximately $3.2 million, principally mortgage debt, with required monthly payments of approximately $32,000.
- COVID-19 continued to create uncertainty regarding customer traffic, staffing, supplier deliveries, menu availability, operating restrictions, and possible closures. Restaurants remained open for drive-through service, although some locations experienced reduced hours or temporary closures.
- Management expects inflationary pressure on food costs and identifies labor shortages, wage increases, commodity prices, competition, technology investment, delivery platforms, and discounting by larger quick-service restaurant chains as material risks.
- A 10% increase in beef costs would increase annual food costs by approximately $175,000, based on management’s estimate.
- The company received $460,400 of PPP loans that were forgiven in 2021 and had a separate $27,500 Minnesota small-business loan outstanding at quarter-end. The latter may be forgiven if specified employment levels are achieved.
- The company disclosed a material weakness related to lack of segregation of duties and ineffective risk assessment and monitoring of internal controls. Management concluded that disclosure controls and procedures were not effective as of April 4, 2021, although no significant changes in internal control occurred during the quarter.
- No significant legal proceedings, defaults, or off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Reconcile the filing’s inconsistent descriptions of the decrease in working capital from January 3, 2021.
- Assess the sustainability of the unusually strong COVID-era drive-through sales growth and the effect of easing restrictions.
- Monitor labor availability, wage inflation, food costs, and the company’s ability to pass cost increases through menu pricing.
- Review debt maturities, collateral, shareholder personal guarantees, and the impact of the April 6, 2021 debt repayment on liquidity.
- Evaluate the material weakness in internal controls and management’s remediation progress.
- Assess whether the company can fund planned acquisitions and restaurant expansion without materially increasing debt or issuing equity.
- Confirm the terms and potential forgiveness of the Minnesota small-business loan and the accounting treatment of previously forgiven PPP loans.