BT BRANDS, INC. The following discussion of the financial condition, results of operations,
liquidity and capital resources of
Introduction
As of
· Nine Burger Time fast-food restaurants and one Dairy Queen franchise, all
of which are in the North Central region of the United States ;
· Bagger Dave's Burger Tavern, Inc, a 41.2% owned affiliate, operates six
Bagger Dave's restaurants in Michigan , Ohio , and Indiana ;
· Keegan's Seafood Grille in Indian Rocks Beach, Florida ;
· Pie in the Sky Coffee Shop and Bakery in Woods Hole, Massachusetts .
The first Burger Time restaurant opened in
Operationally, we strive for efficiency at our Burger Time restaurants,
including maintaining an inventory of approximately
The average customer transaction at our Burger Time restaurants increased by
approximately 4% in the first six months of fiscal 2022 compared to 2021 and
currently is approximately
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Highlights
During the first two quarters of 2022, we acquired two restaurants and a 41.2%
interest in an operator of six restaurants with the net proceeds from our
Keegan's
In
In
Material Trends and Uncertainties
There are industry trends that currently have an impact on our business. Current trends include difficulties attracting food service workers and rapid inflation in the cost of many 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, have 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 likely will continue to discount prices through aggressive promotions.
The cost of food has increased over the last two years, and we expect to see continued inflationary pressure in the remainder of 2022. Beef costs were stable in 2020, continued to rise in 2021, and have recently increased by approximately 4% per pound. Given the competitive nature of the fast-food burger restaurant industry, it may be difficult to raise menu prices to cover future cost increases fully. During 2020 and early 2021, our Burger Time business experienced a significant increase in business volume contributing to improved profit margins. Additional margin improvements may have to be made through operational enhancements, equipment advances, and increased volumes to help offset food cost increases due to the competitive state of the restaurant industry.
Labor is a critical factor in operating our stores. In most areas where we operate our restaurants, there historically has been a shortage of suitable labor, and recently, securing staff has become more challenging. 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. We must develop and retain quality employees.
Since
We can't predict the duration or magnitude of the effects of COVID and the impact on our business or the results of operations. The response to public health matters may influence restaurant customer traffic and our ability to staff our restaurants, receive deliveries on a timely basis or perform functions at the corporate level. Further, such conditions could impact the availability of the menu items we offer and the ability of suppliers to deliver such products. We also may be adversely affected by mandatory closures, seek voluntary closures, or impose restrictions on operations. Even if such measures are not implemented, the perceived risk of infection or significant health risk may adversely affect our business.
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We continue to monitor public health issues and their impact on our customer
base and throughout the country. It is difficult to predict the future in light
of many factors, including the spread of new variants of the original
coronavirus disease among the
Our strategy to acquire additional restaurant properties presents numerous risks and uncertainties to our operations, including our management's ability to:
· identify suitable targets;
· complete comprehensive due diligence as to targets,
· integrate a target's operations with our existing operations,
· retain management and key employees of the target;
· operate new restaurant concepts in new geographic areas outside of our
traditional Burger Time platform;
· develop and implement appropriate and effective sales and marketing
strategies for our new restaurants individually and our restaurant group
as a whole;
· maintain and grow revenue at our new properties;
· identify and retain experienced managerial personnel to effectively
administer our operations;
· improve existing, and implement new operational, financial, and management
controls;
· install enhanced management information systems; and
· create a corporate brand identifying our restaurants as BT Brands'
properties.
Our failure to manage any of these aspects of our growth could adversely impact our business and our results of operations.
Future conditions may influence restaurant customer traffic and our ability to adequately staff our restaurants, receive deliveries on a timely basis or perform functions at the corporate level. Further, such conditions could impact the availability of the menu items we offer and the ability of suppliers to deliver such products. We also may be adversely affected if jurisdictions impose mandatory closures, seek voluntary closures, or impose restrictions on operations. Even if such measures are not implemented, the perceived risk of infection or significant health risk may adversely affect our business.
Growth Strategy and Outlook
We are seeking to increase value for our shareholders in the food service industry. Our principal strategy comprises acquiring individual and multi-unit restaurant properties at attractive earnings multiples. Though we do not plan to do so, we may develop additional Burger Time locations by acquiring and converting existing properties under certain circumstances. Other key elements of our growth strategy include increasing same-store sales and introducing a campaign to boost brand awareness.
Expansion Through Acquisitions
We intend to continue to make strategic and opportunistic acquisitions that provide an entrance into targeted restaurant segments and geographic areas. Restaurant businesses become available for acquisition frequently, and we believe that we may be able to purchase either individual restaurant properties or multi-unit businesses at prices providing an attractive return on our investment. We may acquire operating assets where a franchise program of the acquired foodservice business is the most appropriate growth plan. We intend to follow a disciplined strategy of evaluating acquisition opportunities to ensure and enable the accretive and efficient acquisition and integration of additional restaurant concepts. Successful execution of our acquisition strategy will allow us to diversify our operations into other dining concepts and geographic locations.
In evaluating potential acquisitions, we may consider the following characteristics, among others, that management considers relevant to each opportunity:
· the value proposition offered by acquisition targets when comparing the
purchase price to the potential return on our investment;
· established, recognized brands within their geographic footprint;
· steady cash flow;
· track records of long-term operating performance;
· sustainable operating results;
· geographic diversification; and
· growth potential.
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Assuming we are successful in acquiring new businesses, we will operate the business or businesses with a shared central management organization. Following the acquisition, we expect to pursue a growth plan to expand the number of locations and increase comparable store sales and profits, as described below. We anticipate that by leveraging our management services platform, we will achieve post-acquisition cost benefits by reducing the corporate overhead of the acquired business. If we acquire one or more restaurant chains or individual units near each other, we believe the concentration of operations will provide economic synergies for management functions, marketing, and advertising, supply chain assistance, staff training, and operational oversight.
Increase Same-Store Sales
Same-store sales growth reflects the change in year-over-year sales for the comparable store base and is a benchmark for the performance of our restaurants. We use a multi-faceted same-store sales growth strategy to optimize restaurant performance. We use techniques proven in the restaurant industry to increase same-store sales. We utilize customer feedback and analyze sales data to test and improve existing and new menu items. In addition, we may use social media and public relations, and experiential marketing to engage customers. Our strategies to increase same-store sales will evolve as we acquire new restaurant concepts in new markets.
Increase Brand Awareness
Increasing brand awareness is essential to the growth of our Company. We intend to develop and implement forward-looking branding strategies. We will seek to leverage social media and employ targeted digital advertising to expand the reach of our brands and drive traffic to our stores. In addition, we intend to develop mobile applications that will allow consumers to find restaurants, order online and earn rewards. We expect to deploy internet advertising to match specific menu items targeted to demographic groups. We will deploy cross-over ads with radio and social media. Our branding initiatives will evolve as we acquire restaurant concepts that appeal to distinct consumer markets in differing geographic areas.
Results of Operations for the Thirteen Weeks Ended
The following table sets forth our Condensed Statements of Income and percentages of total revenues for the thirteen-week-fiscal periods. Percentages below may not reconcile because of rounding.
13 weeks ended, 13 weeks ended,
July 3, 2022 July 4, 2021
Amount % Amount %
SALES $ 3,524,881 100.0 % $ 2,382,683 100.0 %
COSTS AND EXPENSES
Restaurant operating expenses
Food and paper costs 1,311,373 37.2 908,760 38.1
Labor costs 1,179,118 33.5 621,227 26.1
Occupancy costs 261.282 7.4 167,106 7.0
Other operating expenses 212,314 6.0 128.872 5.4
Depreciation and amortization 109,286 3.1 58.558 2.5
General and administrative 455,656 12.9 110,983 4.7
Total costs and expenses 3,529,029 100.1 1,995,506 83.8
Income (loss) from operations (4,148 ) (.1 ) 387,177 16.2
INTEREST EXPENSE (26,190 ) (.7 ) (89,661 ) (3.8 )
INTEREST AND OTHER INCOME 9,473 .3 - -
UNREALIZED LOSS AND LOSS FROM - -
AFFILIATE (94,410 ) (2.7 )
INCOME TAX BENEFIT (EXPENSE) 23,000 .6 (85,000 ) (3.5 )
NET INCOME (LOSS) $ (92,275 ) (2.6 )% $ 212,516 8.9 %
Net Revenues:
Net sales for the second fiscal quarter of 2022 increased
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Restaurant unit sales for Burger Time for the 13 weeks ranged from a low of
approximately
Costs of Sales - food and paper:
Cost of sales - food and paper for the fiscal 2022 period decreased as a percentage of sales declined to 37.2% of restaurant sales from 38.1% of restaurant sales in the second quarter of fiscal 2021. This decrease was the net result of inflationary pressures of certain items, offset by the inclusion of results of PIE which operates at a significantly lower food and labor cost than our Burger Time business.
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 percent of restaurant sales increased to 78.2% of sales in the second fiscal quarter of 2022 from 76.6% in the similar period of fiscal 2021. This increase was because of higher labor and occupancy cost, including lease costs associated with our two recently acquired locations and the matters discussed in the "Cost of Sales," "Labor Costs," and "Occupancy and Other Operating Cost" sections below.
Labor Costs
For the second quarter of fiscal 2022, labor and benefits cost increased as a percentage of sales to 33.5% of restaurant sales from 26.1% in fiscal 2021. The increase in the percentage resulted from tighter labor markets leading to higher hourly wage costs offset by leveraging existing staffing. Payroll costs are semi-variable, meaning they do not decrease proportionally to decreases in revenue.
Occupancy and Other Operating Expenses
For the second fiscal quarter of 2022, occupancy and other expenses increased to 13.4% of sales from 12.4% in 2021. This increase results from higher occupancy costs, including lease costs associated with our two new locations.
Depreciation and Amortization Expense:
For the second fiscal quarter of 2022, depreciation and amortization increased
to
General and Administrative Costs
General and administrative costs increased by
Income (Loss) from Operations
The loss from operations for the second quarter of fiscal 2022 was
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 for 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.
13 weeks ended,
July 3, 2022 July 4, 2021
Revenues $ 3,524,881 $ 2,382,683
Reconciliation:
Income (loss) from operations (4,148 ) 387,177
Depreciation and amortization 109,286 58,558
General and administrative, corporate level
expenses 455,656 110,983
Restaurant-level EBITDA $ 560,795 $ 556,716
Restaurant-level EBITDA margin 15.9 % 23.4 %
Our Results of Operations for the Twenty-Six Weeks Ended
The following table sets forth our Condensed Statements of Income and percentages of total revenues for the twenty-six-week fiscal periods. Percentages below may not reconcile because of rounding.
26 weeks ended, 26 weeks ended,
July 3, 2022 July 4, 2021
Amount % Amount %
SALES $ 5,598,076 100.0 % $ 4,323,555 100.0 %
COSTS AND EXPENSES
Restaurant operating expenses
Food and paper costs 2,032,956 36.3 1,636,053 37.8
Labor costs 1,786,828 31.9 1,186,719 27.4
Occupancy costs 435,920 7.8 261,282 6.0
Other operating expenses 332,181 5.9 303,654 7.0
Depreciation and amortization 178,701 3.2 113,394 2.6
General and administrative 746,717 13.3 220,982 5.1
Total costs and expenses 5,513,303 98.5 3,712,883 85.9
Income from operations 84,773 1.5 610,672 14.1
INTEREST EXPENSE (54,461 ) (1.0 ) (128,232 ) (3.0 )
INTEREST AND OTHER INCOME 9,473 .2 - -
UNREALIZED LOSS AND LOSS FROM - -
AFFILIATE (94,410 ) (1.7 )
INCOME TAX BENEFIT (EXPENSE) 5,000 .1 (135,000 ) (3.1 )
NET INCOME (LOSS) $ (49,625 ) (.9 )% $ 347,440 8.0 %
Net Revenues:
Net sales for 26-week period representing the first half of fiscal 2022
increased
Burger Time unit sales for the 26 weeks ranged from a low of approximately
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Costs of Sales - food and paper:
Cost of sales - food and paper for the first half of fiscal 2022 decreased as a percentage of sales to 36.3% from 37.8% of restaurant sales in the same period in 2021. This decrease resulted from a strong performance at our PIE business which operates at lower food and paper costs than our traditional business and Keegan's location.
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 81.9% of sales in 2021 from 77.0% in fiscal 2021. 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 Cost" sections below.
Labor Costs:
For the first half of fiscal 2022, labor and benefits cost increased to 31.9% of restaurant sales from 27.4% in the fiscal 2021 period. Shortages in staffing levels combined with 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 26 weeks of fiscal 2022, occupancy and other expenses increased to 13.7% of sales from 13.0% in 2021. 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 first half of fiscal 2022
increased by
General and Administrative Costs:
General and administrative costs increased 238.4%, or
Income from Operations:
Operating income was
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 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 for 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.
26 weeks ended,
July 3, 2022 July 3, 2021
Revenues $ 5,598,076 $ 4,323,555
Reconciliation:
Income from operations 84,773 653,044
Depreciation and amortization 178,701 113,394
General and administrative, corporate level
expenses 746,717 220,982
Restaurant-level EBITDA $ 1,010,191 $ 987,420
Restaurant-level EBITDA margin 18.0 % 22.8 %
Liquidity and Capital Resources
Initially, the public response to COVID 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
we experienced during the height of COVID restrictions. For the 26 weeks ended
In the future, COVID and its variants may continue to impact
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 in the first half of 2022 was
Cash Flows Used in Investing Activities
During fiscal 2022, we have focused on identifying 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
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