BT Brands, Inc.: Form 10-Q for the period ended Oct 1, 2023

The following discussion of the financial condition, results of operations, liquidity, and capital resources of BT Brands, Inc. and its wholly-owned subsidiaries (together, "BT Brands" or the "Company") should be read in conjunction with the Company's condensed consolidated financial statements and accompanying notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as with the audited consolidated financial statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended January 2, 2023.

Introduction

As of October 1, 2023, including our partially owned Bagger Dave’s business, we owned and operated eighteen restaurants comprising the following:

• Eight Burger Time fast-food restaurants and one Dairy Queen franchise (“BTND”);
• Village Bier Garten is a German-themed restaurant, bar, and entertainment venue in Cocoa, Florida. (“VBG”):
• Keegan’s Seafood Grille in Indian Rocks Beach, Florida (“Keegan’s”);
• Pie In The Sky Coffee and Bakery in Woods Hole, Massachusetts (“PIE”).
• Unconsolidated affiliate Bagger Dave’s Burger Tavern, Inc., 41.2% owned, operates six Bagger Dave’s restaurants in Michigan, Ohio, and Indiana (“BD”).

Burger Time opened its first restaurant in Fargo, North Dakota, in 1987. Burger Time restaurants feature grilled hamburgers and other affordable foods such as chicken sandwiches, pulled pork sandwiches, sides, and soft drinks. Burger Time’s operating principles include (i) offering bigger burgers and more value for the money; (ii) offering a limited menu to permit attention to quality and speed of preparation; (iii) providing fast service by way of single and double drive-thru designs and a point-of-sale system that expedites the ordering and preparation process, and (iv) great tasting and quality food made fresh to order at a fair price. Our primary strategy is to serve the drive-thru and take-out segment of the quick-service restaurant industry.

The average customer transaction at our Burger Time restaurants increased by approximately 20% in fiscal 2023 compared to 2022 and currently is approximately $15.60. This recent increase is principally the result of menu price increases implemented in 2022. Many factors influence our sales trends. Our business environment is challenging as competition is intense.

We operate through a central management organization that provides continuity across our restaurant base by utilizing the efficiencies of a central management team.

Notable Recent Events

Our recent acquisitions have allowed us to diversify our operations into new restaurant segments and new geographic regions, reducing our dependency on the financial performance of our Burger Time restaurants. During 2022, we acquired three operating restaurants and a 41.2% ownership interest in BD, an operator of six casual restaurants. We expect to consider new acquisition opportunities in the future.

Material Trends and Uncertainties

Industry trends have a direct impact on our business. Current trends include difficulties attracting food service workers and rapid inflation in the cost of input items. Recent trends also include the rapidly changing area of technology and food delivery. The major companies in the restaurant industry have rapidly adopted and developed smartphone and mobile delivery applications, aggressively expanded drive-through operations, and developed loyalty programs and database marketing supported by a robust technology platform. We expect these trends to continue as restaurants aggressively compete for customers. Competitors will continue to discount prices through aggressive promotions.

Food costs have increased over the last two years, and we expect to see some moderating inflationary pressure during the remainder of 2023. Beef and egg costs have trended down slightly in 2023. Given the competitive nature of the restaurant industry, it may be challenging to raise menu prices to cover cost increases fully. As a result, future margin improvements may be difficult to achieve. Margin improvement will be achieved through operational enhancements, equipment advances, and increased volumes offsetting food cost increases.

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Labor is a critical factor in operating our stores. Securing staff to run our locations at full capacity has become more challenging in most areas where we operate our restaurants. The current labor market has resulted in higher wages as the competition for employees intensifies, not only in the restaurant industry but in practically all retail and service industries. To succeed, we must identify, develop and retain quality employees.

Results of Operations for the Thirteen Weeks Ended October 1, 2023, and the Thirteen Weeks Ended October 2, 2022

The following table sets forth our Condensed Statements of Operations and percentages of total revenues for the thirteen-week fiscal periods. The percentages below may not reconcile because of rounding.

Net Revenues:

Net sales for the third fiscal quarter of 2023 decreased $16,264 to $4,007,656 from $4,023,920 in fiscal 2022. Reflecting the closing of the West St. Paul location at the end of 2022. Including West St. Paul in the prior year, sales at the Burger Time locations declined approximately 4.6% as customer purchasing patterns continued a return to pre-pandemic levels. Staffing challenges adversely impacted Burger Time, which resulted in limited hours and daily store closures during the quarter.

Restaurant unit sales for Burger Time for the 13 weeks ranged from a low of approximately $140,000 to a high of approximately $337,000. The average sales for each Burger Time unit were approximately $228,000 in 2023, approximately $20,000 above the same period in 2022.

Our various restaurants all experience unique seasonal sales patterns. The third quarter, which includes the summer months, is particularly strong at PIE; for the quarter, PIE had sales of $1,292,740, an increase of 2.9% from the same quarter a year ago, particularly at PIE where eggs, butter and pork were all at lower costs than one year ago.

Costs of Sales - food and paper:

Cost of sales - food and paper for the fiscal 2023 period decreased as a percentage of sales declined to 36.2% of restaurant sales from 39.9% of restaurant sales in the third quarter of fiscal 2022. This decrease was the net result of moderating inflationary pressures where several key inputs declined in price from a year ago.

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Restaurant Operating Costs:

Restaurant operating costs (which refer to all the costs associated with the operation of our restaurants but do not include general and administrative expenses and depreciation and amortization) as a percentage of restaurant sales decreased to 88.6% of sales in the third fiscal quarter of 2023 from 88.4% in the similar period of fiscal 2022. This decrease was the result of declining and stabilizing commodity costs, particularly at PIE and the matters discussed in the "Cost of Sales, - food and paper," "Labor Costs," and "Occupancy and Other Operating Costs" sections below.

Labor Costs

For the third quarter of fiscal 2023, labor and benefits cost increased as a percentage of sales to 37.7% of restaurant sales from 33.2% in fiscal 2022. The increase in the percentage cost resulted from tighter labor markets, resulting in higher hourly wage costs offset by leveraging existing staffing and higher labor costs associated with the PIE acquisition. Payroll costs are semi-variable, meaning they do not decrease proportionally to decreases in revenue.

Occupancy and Other Operating Expenses

For the third fiscal quarter of 2023, occupancy and other expenses decreased to 8.5% of sales from 9.1% in 2022; the impact of the closure of the West St. Paul at the end of 2022 was offset by rent and utility cost increases.

Depreciation and Amortization Expense:

For the third fiscal quarter of 2023, depreciation and amortization expense decreased to $114,774 (2.9% of sales) from $168,855 (4.2% of sales) in the third quarter of fiscal 2022. The decrease results from reduced depreciation and amortization associated with our recent acquisitions.

General and Administrative Costs

General and administrative costs increased by $54,105 in the third fiscal quarter of 2023 from $288,922 to $343,027; the increase is associated with expenses related to the Company's transition to a public company in November 2021, including the costs related to long-term management agreements, incentive stock options and legal and accounting relating to our status as a public company and approximately $100,000 in legal expenses for a proxy solicitation contest related to one of the Company’s investments. For these reasons, third-quarter general and administrative expenses were 8.6% of sales, an increase from 7.2% in the earlier year.

Income from Operations

The income from operations for the third quarter of fiscal 2023 was $40,615 compared to an income from operations of $8,991 in the same period in 2022. The percentage of income from operations as a percentage of sales improved by 1.0% from .2%, reflecting an improved profit margin due to moderating inflation, higher general and administrative expenses and the matters discussed in the "Net Revenues" and "Restaurant Operating Costs" sections above.

Restaurant-level EBITDA

To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with GAAP. The Company uses restaurant-level EBITDA, which is not a measure defined by GAAP. This non-GAAP operating measure is useful to both management and, we believe, investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. This measure is not indicative of our overall results, nor does restaurant-level profit accrue directly to the benefit of stockholders, primarily due to the exclusion of corporate-level expenses. Restaurant-level EBITDA should not be considered a substitute or superior to operating income calculated under GAAP. The reconciliations to operating income set forth below should be carefully evaluated.

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We define restaurant-level EBITDA as operating income before pre-opening costs, if any, general and administrative costs, depreciation and amortization, and impairment charges. General and administrative expenses are excluded as they are generally not specifically identifiable as restaurant-specific costs. Depreciation, amortization, and impairment charges are excluded because they are not ongoing controllable cash expenses and are not related to the health of ongoing operations.

Our Results of Operations for the Thirty-nine Weeks Ended October 1, 2023, and the Thirty-nine Weeks Ended October 2, 2022

The following table sets forth our Condensed Statements of Income and percentages of total revenues for the 39-week fiscal periods. The percentages below may not reconcile because of rounding.

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Net Revenues:

Net sales for the 39 weeks of fiscal 2023 increased $1,456,423 or 15.1% to $11,078,419 from $9,621,996 in fiscal 2022. The increase in sales was principally the result of a favorable impact in the 39 weeks of acquired restaurants, which contributed approximately $1.9 million in incremental sales in 2023, offsetting a 4.5% decline in BTND revenue.

Burger Time unit sales for the 39 weeks ranged from a low of approximately $347,000 to a high of approximately $925,000. Average sales for each Burger Time unit were approximately $625,000 in 2023, a decline from approximately $626,000 in the same 39-week period in 2022. The sales decline in the first half of 2023 resulted from a return to pre-COVID customer purchasing patterns as competitive dining options returned to normal, labor challenges resulting in some contraction of hours, and poorer weather conditions relative to the year-earlier period.

Costs of Sales - food and paper:

Cost of sales - food and paper for the 2023 period increased as a percentage of sales to 39.3% from 37.8% of restaurant sales in the same period in 2022. This increase resulted from inflation early in the year, especially for Keegan's fresh seafood and the cost of meat which resulted in higher costs at Burger Time.

Restaurant Operating Costs:

Restaurant operating costs, which are associated with operations, not including general and administrative expenses, and depreciation and amortization, increased as a percentage of restaurant sales to 89.6% in 2023 from 84.6% in fiscal 2022. This increase was due to the rise in both hourly wages and commodity food costs, as further discussed in the "Cost of Sales," "Labor Costs," and "Occupancy and Other Operating Costs" sections below.

Labor Costs:

For the 39-week period of fiscal 2023, labor and benefits costs increased to 37.2% of restaurant sales from 32.5% in fiscal 2022. Significantly higher hourly wage rates at all locations increased the overall labor percentage. The hiring markets have become more challenging in terms of filling open positions. Payroll costs are semi-variable, meaning they do not decrease proportionally to decreases in revenue. Thus, they increase as a percentage of restaurant sales when there is a decrease.

Occupancy and Other Operating Expenses:

For the first 39 weeks of fiscal 2023, occupancy and other expenses fell to 7.6% of sales from 8.4% in 2022, principally as a result of reversing previously accrued property taxes. Aside from the real state tax matter, many of these costs are fixed, and the percentage reflects lower maintenance costs offset by higher lease occupancy costs at our new locations.

Depreciation and Amortization Expense:

Depreciation and amortization expenses in the third quarter of fiscal 2023 increased by $119,717 to $470,801 (4.2% of sales) from $351,084 (3.6% of sales) in 2022 and are the result of the purchase of three new restaurants and capital improvements, including significant parking lot repairs, at several of our locations.

General and Administrative Costs:

General and administrative costs during the first three quarters of fiscal 2023 increased $252,380 to $1,2,88,019 from $1,035,639 (10.8% of sales) during the fiscal 2022 period. The increase results from approximately $100,000 in legal and other costs associated with the Noble Roman’s Inc. proxy solicitation effort and other expenses generally associated with public reporting, stock-based compensation costs, and the expenses associated with long-term management employment agreements.

Income from Operations:

Operating loss was $289,691 in the 39 weeks of fiscal 2023 compared to a profit of $93,765 in the same period in fiscal 2022. The change in income from operations in 2023 compared to 2022 was due primarily to the increase in general and administrative expenses, which included higher costs associated with public company expenses, including the reasons described in the "Net Revenues" and "Restaurant Operating Costs" sections above.

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Restaurant-level EBITDA:

To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we use restaurant-level EBITDA, which is not a measure defined by GAAP. This non-GAAP operating measure is helpful to both management and, we believe, investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. This measure is not indicative of our overall results, nor does restaurant-level profit accrue directly to the benefit of stockholders, primarily due to the exclusion of corporate-level expenses. Restaurant-level EBITDA should not be considered a substitute or superior to operating income calculated under GAAP. The reconciliations to operating income set forth below should be carefully evaluated.

We define restaurant-level EBITDA as operating income before general and administrative costs, depreciation and amortization, and impairment charges. General and administrative expenses are excluded as they are generally not specifically identifiable as restaurant-specific costs. Depreciation, amortization, and impairment charges are excluded because they are not ongoing controllable cash expenses and are not related to the health of ongoing operations.

Liquidity and Capital Resources

In its peak period, the public response to COVID-19 positively impacted our sales and liquidity. More recently, as customer activities have returned to normal patterns, our Burger Time business has experienced a decline from the peak level at the height of COVID restrictions. On October 1, 2023, we had $6.9 million in cash and cash equivalents and marketable securities and net working capital of $6.2 million, a decrease of $.6 million from January 1, 2023.

In the future, COVID and its variants may continue to impact the United States economy. It is difficult to predict the ultimate impact on the United States economy in general, the impact on the quick service drive-through segment of the food service industry, and our operating results and financial condition.

Our primary requirements for liquidity are to fund our working capital needs, capital expenditures, and general corporate needs, as well as to invest in or acquire businesses. Our operations do not require significant working capital, and, like many restaurant companies, we generally operate with negative working capital. We anticipate that working capital deficits may be incurred in the future and possibly increase. Our primary liquidity and cash flow sources are operating cash flows and cash on hand. We use this to service debt, maintain our stores to operate efficiently and increase our working capital. Our working capital position benefits from the fact that we collect cash from sales from our customers at the point of purchase or within a few days from our credit card processor; generally, payments to our vendors are not due for thirty days.

Summary of Cash Flows

Cash Flows Provided by Operating Activities

Operating cash flow for the 39 weeks ending October 1, 2023, was a negative $74,732. The cash flow from operations was impacted negatively by the ongoing costs related to our public company expenses, including stock-based compensation programs and costs associated with contested proxy solicitation for our Noble Roman investment. We expect operating cash flow in future periods to be significantly affected by our recent acquisitions.

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Cash Flows Used in Investing Activities

During fiscal 2023, we have continued to seek acquisitions in the food service and related industries, purchasing two operating restaurants and purchasing a 41.2% interest in a publicly traded casual dining business.

Cash Flows Used in Financing Activities

A significant portion of our cash flow used in financing activities is allocated to service our debt.

Contractual Obligations

As of October 1, 2023, we had $4.4 million in contractual obligations relating to amounts due under mortgages on the real property where our stores are situated, including $1.9 million in capitalized lease obligations related to our recent acquisitions. Our monthly required payments on lease and mortgage obligations are approximately $47,000.

Disclosure Controls and Procedures

(1) Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports we filed under the Exchange Act is recorded, processed, summarized, and reported within the periods specified by the SEC's rules and forms. Disclosure controls are also designed to ensure that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As of October 1, 2023, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation and the material weakness in our internal control over financial reporting as disclosed in the Company's Form 10-K for the fiscal year ended January 1, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 1, 2023, our disclosure controls and procedures were not effective at a reasonable assurance level in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules, regulations, and forms of the SEC, including ensuring that such material information is accumulated by and communicated to our management, including our Chief Executive Officer, Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(2) Changes in Internal Control over Financial Reporting

The Company disclosed a material weakness for lack of segregation of duties and not performing an adequate risk assessment on monitoring of internal controls over financial reporting in its Form 10-K for the fiscal year ended January 1, 2023. While we are addressing these deficiencies, there has been no significant change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting. As a result of recent restaurant acquisitions, we are integrating our controls and procedures into the acquired businesses. Other than the recent acquisitions, during the period covered by this report, there were no changes in the Company's internal controls over financial reporting, which materially affected or are reasonably expected to impact our internal financial reporting controls.

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We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.