BT Brands, Inc.: Form 10-Q/A for the period ended Jun 30, 2024

The following discussion and analysis of our results of operations, financial condition, liquidity and capital resources should be read in conjunction with our financial statements and related notes for the thirteen weeks ended June 30, 2024 and July 2, 2023, as applicable. Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases, and in statements made by or with the approval of authorized personnel constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward-looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed on April 1, 2024 “Item 1A. Risk Factors” and elsewhere in this report, as well as other factors that may affect our business, results of operations, or financial condition. Forward-looking statements in this report speak only as of the date hereof, and forward-looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this report will, in fact, transpire.

Introduction

As of June 30, 2024, including our partially owned Bagger Dave’s business, we owned and operated eighteen restaurants comprising the following:

• Eight Burger Time fast-food restaurants (“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”).
• Schnitzel Haus in Hobe Sound, Florida (“Schnitzel”).
• Unconsolidated affiliate 40% owned Bagger Dave’s Burger Tavern, Inc., operates six Bagger Dave’s restaurants in Michigan, Ohio, and Indiana (“BD”).

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.

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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 approximately a 40% ownership interest in Bagger Dave’s, an operator of six casual restaurants. During the second quarter of 2024, we acquired assets and assumed the remaining lease obligation related to the Schnitzel Haus restaurant in Hobe Sound, Florida. 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 moderation of 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.

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.

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Results of Operations for the Thirteen Weeks Ended June 30, 2024, and the Thirteen Weeks Ended July 2, 2023

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 Sales:

Net sales for the second fiscal quarter of 2024 increased $110,674 to $4,110,639 from $3,999,965 in fiscal 2023. The increase in sales was principally the result of improved sales performance at Burger Time. The increase reflects strong sales performance at Pie in the Sky, which experienced a 16.5% sales increase over the prior year’s 13-week period. The increase also reflects sales increases at the majority of our Burger Time locations net of the impact of our Ham Lake, Minnesota location, which was closed for approximately four weeks during the period as the location was repurposed to a Burger Time store, which opened July 1, 2024. Sales also reflect the addition of the operations of Schnitzel Haus on May 13, 2024.

Restaurant unit sales for Burger Time for the 13 weeks ranged from a low of approximately $161,000 to a high of approximately $348,000. The average sales for each Burger Time unit were approximately $276,000 in 2024, approximately $34,000 above the same period in 2023. The average customer transaction at our Burger Time restaurants increased by approximately 10% in 2024. The results reflect a significant menu price increase, particularly in our “Deal of the Day” offering. The average check is currently about $18.00.

Our various restaurants all experience unique seasonal sales patterns.

Costs of Sales - food and paper:

The cost of sales—food and paper—for the fiscal 2024 period declined to 38.1% from 40.2% of restaurant sales in the second quarter of fiscal 2023. This percentage was the net result of moderating inflationary pressures, including the cost of key inputs from a year ago and the impact of menu price increases at all locations, particularly at Burger Time, where the menu price of the popular “Deal of the Day” was increased approximately 10%.

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 increased to 89.4% of sales in the fiscal quarter of 2024 from 84.2% in the similar period of fiscal 2023. This increase was the result of increases in labor costs, additional occupancy costs, and stabilizing commodity costs and the matters discussed in the "Cost of Sales, - food and paper," "Labor Costs," and "Occupancy and Other Operating Costs" sections below.

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Labor Costs

For the second quarter of fiscal 2024, labor and benefits costs increased as a percentage of restaurant sales to 37.7% from 35.3% in fiscal 2023. The increase in the percentage cost resulted from the continued tightness of labor markets, higher-than-historical costs to train new employees and continued upward competitive pressure on hourly wage costs. These costs were offset by leveraging existing staffing and labor costs associated with the Schnitzel Haus acquisition. Payroll costs are semi-variable, meaning they do not increase proportionally to increases in revenue.

Occupancy and Other Operating Expenses

For the second fiscal quarter of 2024, occupancy and other expenses increased to 13.6% of sales from 8.7% in 2023, partly reflecting a spike in maintenance expense, inflationary increases in utility costs and the lease expense related to the Schnitzel Haus acquisition. The increase in 2024 from occupancy expense in 2023 also reflects the 2023 second-quarter reversal of previously accrued property taxes related to a property in the St. Louis, Missouri, area. The St. Louis property was deeded to the taxing authority as settlement of the amount due.

Depreciation and Amortization Expense:

For the second fiscal quarter of 2024, depreciation and amortization expenses were $171,351 (4.2% of sales), a decrease from $192,520 (4.8% of sales) in the prior year as more of the Company’s assets reached the fully depreciated amount.

General and Administrative Costs

General and administrative costs in the second fiscal quarter of 2024 were $454,805, a decline of $64,272 from $519,077 in the second quarter of 2023. Due to increased sales, general and administrative expenses decreased slightly as a percentage of sales to 11.1% of sales from 13.0% in the same period of the previous year.

Income from Operations

The loss from operations for the second quarter of fiscal 2024 was $188,543, compared to a loss of $79,548 in the prior year fiscal quarter. This reflects higher hourly and increases in manager wages in virtually all of the company’s businesses, as well as 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.

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We define restaurant-level EBITDA as operating income before pre-opening costs, including 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.

Results of operations for the 26 weeks ending June 30, 2024, compared to the 26 weeks ending July 2, 2023

The following table sets forth our Consolidated Statements of Operations as a percentage of total revenues for the indicated periods. The percentages may not add up because of rounding.

Net Sales:

Net sales for the 26 weeks representing the first half of fiscal 2024 increased $230,023, or 3.2%, to $7,300,786 from $7,070,763 in fiscal 2023.

The increase in sales was principally the result of improved sales performance at Burger Time. The average customer transaction at our Burger Time restaurants increased by approximately 10% in 2024, including a significant percentage increase in our “Deal of the Day” offering. The average check is currently about $18.00. This recent increase is principally the result of menu price increases. Burger Time unit sales for the 26 weeks ranged from a low of approximately $286,000 to a high of approximately $616,000. Average sales for each Burger Time unit were approximately $471,000 in 2024, an increase from approximately $404,200 in the same 26-week period in 2023.

Sales at PIE for the six months also continued to be strong, increasing 16% over the prior year, well above an estimated 8% menu price increase. Keegan’s and the Village Bier Garten combined results were flat with 2023 first-half sales.

Costs of Sales - food and paper:

Cost of sales - food and paper for the first half of fiscal 2024 declined to 39.0% from 41.0% in the 2023 period due to menu price increases, particularly at Burger Time, where menu price increases contributed to improved margins.

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 94.2% in 2024 from 90.7% in fiscal 2023. This increase was due to the increase in sales activity from new locations and its impact, as further discussed in the "Cost of Sales," "Labor Costs," and "Occupancy and Other Operating Costs" sections below.

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Labor Costs:

For the first half of fiscal 2024, labor and benefits costs increased to 40.2% of restaurant sales from 37.0% in fiscal 2023. Shortages in staffing levels combined with higher hourly wage rates at all locations increased the overall labor percentage. Additional management labor at the Company’s PIE business. Overall hiring markets have continued to be challenging in terms of filling open positions. Payroll costs are semi-variable, with most locations requiring minimal staffing level, and generally, labor costs do not change directly with changes in revenue.

Occupancy and Other Operating Expenses:

For the first 26 weeks of fiscal 2024, occupancy and other expenses increased to 15.0% of sales from 12.8% in 2023, partly due to higher repair and maintenance costs. The increase in 2024 from occupancy expense in 2023 also reflects the 2023 second-quarter reversal of previously accrued property taxes related to a property in the St. Louis, Missouri, area. The St. Louis property was deeded to the taxing area as settlement of the amount due.

Depreciation and Amortization Expense:

Depreciation and amortization expenses in the first half of fiscal 2024 decreased to $331,893 (4.5% of sales) from $356,027 (5.0% of sales) in the first half of fiscal 2023 as a result of lower depredation expense.

General and Administrative Costs:

General and administrative costs decreased $35,572, or 3.8%, to $909,420 from $944,992 (13.4% of sales) in the first half of fiscal 2023. The year-over-year change was insignificant as many components are fixed costs.

Loss from Operations:

The operating loss was $819,372 in the first half of fiscal 2024, compared to a loss of $330,306 in the first half of fiscal 2023. The 2023 operating loss is net of a $313,688 gain on the sale of one of the Company’s properties. The change in loss from operations in the first half of fiscal 2024 compared to fiscal 2023 was due primarily to the increase in labor and occupancy costs, including the "Net Sales" and "Restaurant Operating Costs" sections above.

Restaurant-level EBITDA:

To supplement the consolidated financial statements, which are prepared and presented in accordance with GAAP, we use restaurant-level EBITDA (earnings before interest, taxes, depreciation, and amortization), which is not a measure defined by GAAP. This non-GAAP operating measure is useful to both management and investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. However, 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. Accordingly, restaurant-level EBITDA should not be considered a substitute for or superior to operating income, which is calculated in accordance with GAAP, and 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 gains on sales of assets. General and administrative expenses are excluded because they are generally unrelated to restaurant-specific costs, and depreciation and amortization are excluded because they are not ongoing controllable cash expenses and are unrelated to ongoing operations’ health.

Liquidity and Capital Resources

On June 30, 2024, we had $5.2 million in cash, cash equivalents and marketable securities and net working capital of $4.4 million, a decrease of $1.3 million from December 31, 2023.

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 26 weeks ending June 30, 2024, was negative $326,369. This was impacted by ongoing seasonal trading patterns in our business, which experienced increased labor costs and repair and maintenance expenses.

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 June 30, 2024, we had $4.3 million in contractual obligations relating to amounts due under mortgages on the real property where our stores are situated, including $1.9 million in lease obligations related to our recent acquisitions. Our monthly required payments on lease and mortgage obligations are approximately $47,000.

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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 June 30, 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 June 30, 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 June 30, 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.