BT Brands, Inc.: Form 10-Q for the period ended Mar 31, 2024

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 December 31, 2023.

Introduction

As of March 31, 2024, including our partially owned Bagger Dave’s business, we own and operate the following seventeen restaurants:

• Seven 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., 40% 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 8% in 2023, and the average check amount is currently about $15.00. This recent increase is principally the result of menu price increases. 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 an approximately 40% ownership interest in Bagger Dave’s, an operator of six casual restaurants. We continue to consider new acquisition opportunities.

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 2024. Beef and egg costs trended down slightly in 2023. Given the competitive nature of the restaurant industry, raising menu prices to fully cover cost increases may be challenging. 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 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 and retain quality employees.

Results of Operations for the Thirteen Weeks Ended March 31, 2024, and the Thirteen Weeks Ended April 2, 2023

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

Net Sales:

Net sales for the first fiscal quarter of 2024 increased $119,349 to $3,190,147 from $3,070,798 in the same period in fiscal 2023. Reflecting sales increases at most of our locations and the closing of the leased Sioux Falls location in February.

Restaurant unit sales for Burger Time for the first 13 weeks ranged from a low of approximately $125,000 to a high of approximately $290,000. The average sales for each Burger Time unit were approximately $209,000 in 2024, approximately $29,000 above the same period in 2023.

Our various restaurants all experience unique seasonal sales patterns. The first quarter was seasonally slower for BTND and PIE, which had sales of $446,000, an increase of 4% from the same quarter a year ago.

Costs of Sales - food and paper:

The cost of sales—food and paper—for the fiscal 2024 period decreased as a percentage of restaurant sales to 40.1% from 42.0% in the first quarter of fiscal 2023. This decrease was the net result of moderating inflationary pressures, including a decline in the cost of several key inputs 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, gain on sales of assets, and depreciation and amortization) as a percentage of restaurant sales increased slightly to 100.5% of sales in the first fiscal quarter of 2024 from 99.2% in the similar period of fiscal 2023. This increase was the result of higher labor costs and declining and stabilizing commodity costs, as well as 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 first quarter of fiscal 2024, labor and benefits costs increased as a percentage of restaurant sales to 43.5% from 39.2% in fiscal 2023. The increase in the percentage cost resulted from tighter labor markets, which resulted 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 change proportionally to changes in revenue.

Occupancy and Other Operating Expenses

For the first fiscal quarter of 2024, occupancy and other expenses decreased to 16.9% of sales from 18.0% in the same period in 2023, reflecting the impact of a sales increase on fixed costs.

Depreciation and Amortization Expense:

For the first fiscal quarter of 2024, depreciation and amortization expenses were $160,542 (5.0% of sales), approximately the same as in the prior year of $163,507 (5.3% of sales).

General and Administrative Costs

General and administrative costs in the first fiscal quarter of 2024 were $454,615, up $28,700 from the same period in previous year’s first quarter of $425,915. They were 14.3% of sales, an increase from 13.9% in the previous year.

Loss from Operations

The loss from operations for the first quarter of fiscal 2024 was $630,829 compared to a loss of $564,446 in the prior fiscal year calculated before the asset sale gain and reflects slightly improved sales and higher hourly wage rates in virtually all of the company’s businesses and the items discussed in the “Net Sales” 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.

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.

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Liquidity and Capital Resources

The public response to COVID-19 positively impacted sales and liquidity. Customer activities have returned to normal patterns, resulting in a decline in sales activity to historic levels. More recently, our Burger Time business sales have shown a slight upward trend. On March 31, 2024, we had $6.1 million in cash and marketable securities and net working capital of $5.3 million, a net working capital decrease of $.4 million from December 31, 2023.

Recent and unforeseen public health matters may impact the United States economy in the future. 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 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 thirteen weeks ending March 31, 2024, was a negative $408,875. Cash flow in the first quarter was impacted by seasonal patterns in our business.

Cash Flows Used in Investing Activities

We have continued to make improvements in our existing businesses and to seek acquisitions in the food service and related industries.

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 March 31, 2024, we had $4.2 million in contractual obligations relating to amounts due under mortgages on the real property where our stores are situated, including $1.8 million in capitalized lease obligations related to our recent acquisitions. Our monthly required payments on lease and mortgage obligations are approximately $49,000.

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, we have elected to comply with certain scaled disclosure reporting obligations and are not required to provide the information required by this item.

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 March 31, 2024, 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 December 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2024, 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

In addition to the matters discussed previously, the Company identified a consultant as an extension of management to assist in the accounting for acquisitions. Except for the items described above, there were no other changes in the Company’s internal control over financial reporting during our most recently completed fiscal quarter, which ended March 31, 2024, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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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.