BTBD BT Brands Inc

NOTE 10 – SUBSEQUENT EVENT

On May 11, 2022, the Company acquired the assets of an operating bakery and coffee shop located in Woods Hole, Massachusetts. The acquired assets have operated as Pie In The Sky Coffee and Bakery (“Pie Coffee”) for more than 20 years, near the Ferry Terminal in Woods Hole. Pie Coffee serves the local Woods Hole market and a significant seasonal market of visitors to Cape Cod and the Ferry Terminal. The Pie Coffee assets were acquired for $1,173,500 of cash. The Company has not yet finalized the allocation of the purchase price. At the time of purchase, we entered into a five-year triple-net lease for the property occupied by Pie Coffee with three 5-year renewal options. The initial rent of $10,000 per month for 24 months increases annually at 3% during the lease term and option periods.

RESULTS OF OPERATION

The following discussion of the financial condition, results of operations, liquidity and capital resources of BT Brands, Inc. and its wholly-owned subsidiaries (together, 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, 2022.

Introduction

As of April 2, 2022, we owned and operated eleven restaurants, including nine Burger Time fast-food restaurants, one Dairy Queen fast-food restaurant, and Keegan's Seafood Grille, a dine-in restaurant located in Florida. Our fast-food restaurants are all located in the North Central region of the United States. Our Burger Time restaurants feature a wide variety of burgers and other affordable foods such as chicken sandwiches, pulled pork sandwiches, sides, and soft drinks. Our Dairy Queen restaurant offers the established Dairy Queen menu consisting of burgers, chicken, sides, ice cream, other desserts, and various beverages. Keegan's Seafood Grille has operated in Indian Rocks Beach, Florida, for more than thirty-five years and offers a variety of traditional fresh seafood items for lunch and dinner. The menu at Keegan's includes beer and wine. Our revenues are derived principally from the sale of food and beverages at our restaurants and branded retail merchandise, which accounts for an insignificant portion of our income.

                Our Burger Time operating principles include: (i) offering a "Bigger Burger" to deliver our customers "more good food for your 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 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.

Operationally, we take several steps to maintain efficiency at our restaurants, including maintaining an inventory of typically less than $20,000 per store at any given time (which also allows for frequent deliveries of fresh food).

Our average customer transaction at Burger Time increased by 4% in the first three months of fiscal 2022 compared to 2021 and currently is approximately $12.10. This recent increase is principally the result of a menu price increase in 2021. Our sales trends are influenced by many factors, including the COVID pandemic, which was a positive for our sales. The environment remains challenging for smaller restaurant chains as competition from the major fast-food hamburger-focused business is intense.

In the fourth quarter of 2021, we completed an initial public offering of units of our securities at a public offering price of $5.00 per unit, each unit comprising one share of common stock and one warrant to purchase one share of common stock at an exercise price of $5.50 per share. The net proceeds to the Company from the offering, including the exercise of the underwriter's option to purchase additional warrants, were approximately $10.7 million, after deducting underwriting discounts and commissions and payment of estimated offering expenses totaling approximately $1.3 million.

Material Trends and Uncertainties

There are industry trends that may have an impact on our business. These trends principally relate to the rapidly changing technology and food delivery area. The major companies in the restaurant industry have rapidly adopted and developed applications for the smartphone and mobile delivery, have aggressively expanded drive-through operations and have developed loyalty programs and database marketing supported by a robust technology platform. We expect these trends to continue as restaurants aggressively compete for customers. Further, the major industry participants have continued to strategically discount prices through promotions such as a "dollar menu." We expect these significant trends will continue.

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 and since 2020 have increased by approximately 13.7% per pound. Given the competitive nature of the fast-food burger restaurant industry, in response to recent commodity price increases, we are planning to implement a price increase in the second quarter of 2022. It may be difficult to raise menu prices to cover future cost increases. In 2020 and 2021, a significant increase in business volume contributed to improved profit margins. Additional margin improvements may have to be achieved through operational enhancements, equipment advances and increased sales volumes to help offset any food cost increases due to the competitive state of the restaurant industry.

The general state of the economy influences restaurant customer traffic, 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 if jurisdictions in which we have restaurants are ordered to close, or we may be forced to implement temporary voluntary closures or impose restrictions on operations due to a shortage of available workers. 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 is to acquire multi-unit restaurant concepts and individual properties at attractive earnings multiples. Though we do not have plans to do so, we may, under certain circumstances, develop additional Burger Time locations. Other critical elements of our growth strategy encompass increasing same-store sales and introducing a campaign to boost brand awareness.

Expansion Through Acquisitions

We intend to make strategic and opportunistic acquisitions that provide an entrance into targeted restaurant segments and geographic areas. Restaurant businesses become available for acquisition frequently. We believe that we may be able to purchase either individual restaurant properties or multi-unit businesses at prices that provide an attractive return on our investment. Alternatively, we may acquire operating assets where a franchise program of the acquired foodservice business is concluded by management to be 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 both 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:

Assuming we successfully acquire 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 be able to 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.

Future Development of Additional Burger Time Restaurants

We may consider developing additional Burger Time locations. Conditions that might give rise to developing additional Burger Time locations include the opportunity to acquire and convert a property that previously had operated as a fast-food establishment at an attractive price in a location that fits within Burger Time's geographic footprint so that we may share service expenses, including advertising costs.

If we elect to open additional Burger Time restaurants, we expect that the development of these restaurants will, based on our experience, require a minimum of six to nine months after opening to achieve the targeted restaurant-level sales and operating margins. When we open a restaurant in new and untested markets, achieving targeted sales may take longer since the local population will not be familiar with our brand. Building brand awareness takes time in a new and untested market. How quickly new restaurants achieve their targeted sales and operating margin depends on many factors, including consumer familiarity with our brand and the availability of experienced managers and other staff. However, every restaurant has a unique opening sales pattern, which is difficult to predict.

Increase Same-Store Sales

Same-store sales growth reflects the change in year-over-year sales for the comparable store base. We intend to deploy a multi-faceted same-store sales growth strategy to optimize restaurant performance. We will apply techniques proven in the restaurant industry to increase same-store sales at our Burger Time restaurants and our acquired properties and develop new approaches that reflect our corporate character and restaurant composition. We expect to utilize customer feedback and analyze sales data to introduce, test and hone existing and new menu items. In addition, we will investigate using public relations and experiential marketing to engage customers. We expect our strategies to increase same-store sales will evolve as we acquire new restaurant concepts in new markets.

Increase Brand Awareness

We appreciate that increasing brand awareness is essential to the growth of our Company. We will develop and implement forward-looking branding strategies for Burger Time and any acquired businesses. 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 will deploy cross-over ads with radio and social media interaction. We expect our branding initiatives to evolve as we consummate acquisitions of restaurant concepts that appeal to distinct consumer markets in differing geographic areas.

Our ability to acquire or open new restaurants is predicated on the availability of capital for such purposes. We cannot be certain that capital will be available to us on acceptable terms, if at all.

First Quarter Highlights

On March 2, 2022, we consummated the acquisition of substantially all of the assets of Keegan's Seafood Grille, Inc., an operating restaurant located in Indian Rocks Beach, Florida. We acquired the assets for a purchase price of $1,150,000. The acquired assets have operated as Keegan's Seafood Grille for more than 35 years, primarily serving the Clearwater and St. Petersburg, Florida markets. As part of the purchase, we acquired the "Keegan's Seafood Grille" tradename, and we plan to continue to operate the property under the Keegan's Seafood Grille name.

Key Performance Indicators

We use comparable store sales metrics as indicators of sales growth to evaluate how our established stores have performed over time. We use comparable guest traffic to determine how established stores have performed over time, excluding growth achieved through menu price and sales mix change. Finally, we use average checks per guest to identify trends in guest preferences and the effectiveness of menu changes. We believe these performance indicators are useful for investors by providing a consistent comparison of sales results and trends across comparable periods within our core, established store base, unaffected by results of store openings, closings, and other transitional changes.

Results of Operations for the Thirteen Weeks Ended April 3, 2022, and the Thirteen Weeks Ended April 4, 2021

The following table sets forth our Condensed Statements of Operations for the fiscal periods indicated as a percentage of total revenues. Percentages below may not reconcile because of rounding.

Net Revenues:

 Net sales for the fiscal first quarter of 2022 increased $132,323 or 6.8% to $2,073,195 from $1,940,872 in the first quarter of fiscal 2021. A decline in sales at Burger Time locations was attributable principally to the labor issues resulting in some curtailment of restaurant operating hours and poorer weather conditions than in the year-earlier period. These negative effects were offset by the contribution to sales of approximately one-month for Keegan's Seafood Grille, which was acquired on March 2, 2022, and contributed approximately $345,000 in sales during the quarter.

Costs of Sales - food and paper:

Cost of sales - food and paper for the first quarter of fiscal 2022 decreased as a percentage of sales to 34.8% of restaurant sales from 37.7% of restaurant sales in the first quarter of fiscal 2021. This decrease resulted from a menu price increase in the second half of 2021 and relatively favorable pricing negotiated with the Company's ground beef supplier.

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 were relatively stable at 79.7% of sales in the first fiscal quarter of 2022 compared to 80.2% in the same period of fiscal 2021. This was due primarily to an increase in sales which favorably impacted both fixed and semi-fixed costs and the matters discussed in the "Cost of Sales,” "Labor Costs,” "Occupancy,” and “Other Operating Cost" sections below.

Labor Costs:

For the first quarter of fiscal 2022, labor and benefits cost increased by $42,218 to $607,710, and labor costs as a percentage of sales increased to 29.3% of restaurant sales from 29.1% of restaurant sales the in fiscal 2021 first quarter. The increase in the rate resulted from an increase in new-hire wage rates offset by leveraging existing staffing levels as sales increased significantly from the previous year. The Company continued to benefit from minimal turnover in its unit restaurant management, which tends to cause unfavorable variations in labor costs. Payroll costs are semi-variable, meaning that they do not change proportionally to changes in revenue.

Occupancy and Other Operating Expenses

For the first fiscal quarter of 2022, occupancy and other expenses increased by $34,748. As a percentage of sales, these costs increased to 14.2% of restaurant sales compared with 13.3% in a similar period in 2021. This increase is primarily the result of winter conditions increasing heating costs and snow removal expenses compared to the milder weather a year ago.

Depreciation and Amortization Expense:

For the first fiscal quarter of 2022, depreciation and amortization increased by $14,579 to $69,415 (3.3% of sales) from $54,836 (2.8% of sales) in the same period in fiscal of 2021. The company continues to reinvest in its properties to maintain and upgrade items such as point-of-sale equipment and HVAC equipment.

General and Administrative Costs

General and administrative costs increased 176.3% or $185,724 from $105,338 (5.4% of sales) in the first fiscal quarter of 2022 to $291,062 (14.0% of sales) in the first quarter of 2021. The increase in general and administrative costs is primarily the result of the transition to a public company following the Company's IPO in November 2021. Following the recent stock offering, the Company increased officer compensation over the year-earlier level and increased staff.

Income from Operations

Income from operations for the first fiscal quarter of 2022 was $88,921 compared to income from operations of $223,495 in the 2021 period. The change in income from operations in fiscal 2022 compared to fiscal 2021 was due to the significant increase in General and Administrative Expenses following the Company's initial public offering and the matters discussed in the "Net Revenues" and "Restaurant Operating Costs" sections above.

Restaurant-level EBITDA:

To supplement the condensed consolidated financial statements, prepared and presented according to 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. 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. 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.

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

Liquidity and Capital Resources

For the 13 weeks ended April 3, 2022, the Company earned an after-tax profit of $42,650. Principally, as a result of the Company's public offering of common stock and warrants in November 2021, on April 3, 2022, the Company had $11,073,645 in cash and working capital of $9,905,672.

In May 2020, the Company received pandemic-related loans totaling $487,900; $460,400 was borrowed under the Small Business Administration's Paycheck Protection Program ("PPP"). The Company accounted for the loan's proceeds as a government grant under International Accounting Standard 20 ("IAS 20"), Accounting for Government Grants, and Disclosure of Government Assistance. Under IAS 20, the loan is initially recorded as deferred income on the balance sheet. Forgiveness income is recognized systematically over the qualifying expenses incurred when the Company determines that the forgiveness is reasonably assured. The loans were forgiven in 2021. As a result of the forgiveness of the PPP advances, the loan forgiveness was reflected as "Other Income" in 2020. Also, in May 2020, the Company borrowed $27,500 at no interest under the Minnesota Small Business Emergency Loan Program. Under the loan terms, the Company will seek loan forgiveness in 2022.

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 that are synergistic with our business. Our operations do not require significant working capital, and, like many restaurant companies, we may operate with negative working capital. Our primary sources of liquidity and cash flows 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

Primarily as a result of a positive one-month contribution from the operations Keegan's in March 2022, we generated positive cash flow in the 13 weeks ending April 3, 2022. The winter months have historically been seasonally the slowest part of the Company's business.

Cash Flows Used in Investing Activities

In 2022 the Company has focused on identifying potential acquisition opportunities, including its purchase of Keegans on March 2, 2022.

Cash Flows Used in Financing Activities

A significant portion of the Company's cash flow is allocated to service the Company's debt.

Contractual Obligations

As of April 3, 2022, we had $3 million in contractual obligations relating principally to amounts due under mortgages on the real property on which stores are situated. Our monthly required payment is approximately $32,000.