BTBD BT Brands Inc

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion of 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 3, 2021.

Overview

We own and operate ten fast food restaurants, including nine Burger Time restaurants and one Dairy Queen restaurant, all of which are in the North Central region of the United States. Our Burger Time restaurants feature a wide variety of burgers and other affordably priced 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 and other desserts, and a wide array of beverages. Our revenues are derived from the sale of food and beverages at our restaurants.

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, including maintaining inventory of $5,000 to $15,000 per store at any given time (which also has the advantage of allowing for frequent deliveries of fresh food)..

Our average customer transaction increased by 4% in the first nine months of fiscal 2021 compared to 2020 and currently is approximately $11.90. This recent increase is principally because of a menu price increase implemented in the middle of 2020. Our sales trends are influenced by many factors, including the COVID pandemic, which had been a positive for our sales, however, the environment is challenging for smaller restaurant chains as competition from the major fast-food hamburger-focused business is intense.

Material Trends and Uncertainties

There are industry trends which may have an impact on our business. These trends principally relate to the rapidly changing area of technology and food delivery. The major companies in the restaurant industry have rapidly adopted and developed applications for the smart phone and mobile delivery, have aggressively expanded drive-through operations and have developed loyalty programs and data base marketing supported by a robust technology platform. We expect these trends to continue as restaurants aggressively complete 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 2021. Beef costs were stable in 2020 and recently have increased by approximately 13.7% per pound following an increase of approximately 5% in 2019. 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 fourth quarter of 2021, however, it may be difficult to raise menu prices to fully cover future cost increases. During 2020 and continuing into 2021, a significant increase in business volume contributed to improved profit margins. Additional margin improvements may have to be achieved through operational improvements, equipment advances and increased 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 sre ordered to close, or we may be forced to implement temporary voluntary closures or impose restrictions on operations as a result of a shortage in 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 foodservice industry. Our principal strategy is to acquire multi-unit restaurant concepts and individual restaurant properties at attractive multiples of earnings. Though we do not currently plan to do so, under certain circumstances, we may develop additional Burger Time locations through the acquisition and conversion of existing properties. Other key elements of our growth strategy encompass increasing same store sales and boosting 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 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. 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 that seek 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 distinct opportunity:

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 both expand the number of locations and to 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 in close proximity to each other, we believe the concentration of operations will provide economic synergies with respect to 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 location. Conditions which 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 a highly attractive price in a location that fits naturally 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 development of these restaurants will, based on our experience, require a minimum six to nine months after opening to achieve the targeted restaurant-level sales and operating margins. In a case where 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 and building brand awareness takes time in a new an untested market. How quickly new restaurants achieve their targeted sales and operating margin depends on many factors, including the level of consumer familiarity with our brand, as well as the availability of experienced managers and other staff. However, every restaurant has a unique opening sales pattern, and this pattern 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 at our acquired properties and to 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 utilizing public relations and experiential marketing to engage customers. We expect that 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 important to the growth of our Company. We will develop and implement forward-looking branding strategies both for our Burger Time concept and for any businesses that we acquire. 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 internet advertising to match specific menu items targeted to specific demographic groups. We will deploy cross-over ads with radio and social media interacting with each other. We expect that our branding initiatives will 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.

Results of Operations for the Thirteen Weeks Ended October 3, 2021, and the Thirteen Weeks Ended September 27, 2020

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

Net Revenues:

Net sales for fiscal third quarter of 2021 decreased $93,455 to $2,280,999 from $2,374,454 in fiscal 2020. Sales in 2021 have continued to be strong relative to the 2019 the pre-pandemic level. We have maintained the majority of the gains realized during the period of significant dining restrictions at the height of the pandemic which contributed to a continuing favorable impact on drive-through locations. This trend has led to an increase in consumers choosing Burger Time as a meal alternative.

Restaurant gross unit sales at the Company’s nine Burger Time locations for the 13-week period ranged from a low of approximately $147,000 to a high of approximately $298,000 and average sales for each Burger Time unit during the period was approximately $227,000 in 2021 a decline of approximately $10,000 from the same period in 2020.

Costs of Sales - food and paper:

Cost of sales - food and paper for third quarter of fiscal 2021 increased as a percentage of sales to 41.4% of restaurant sales from 36.4% of restaurant sales in the third quarter of fiscal 2020. This increase was the net result of inflationary pressures of certain items, a favorable six-month verbal fixed price arrangement on the price of ground beef patties at $2.51 per pound which, more recently, has increased to $2.95 per pound, increases in cost have been mitigated by the impact of a price increase taken at the end of second quarter in 2020 fully realized in 2021 we are planning to implement a menu price increase in the fourth quarter of 2021 to, in part, offset increasing costs.

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 costs, impairment charges and depreciation and amortization) as a percent of restaurant sales decreased to 36.9% of sales in the third fiscal quarter of 2021 from 38.6% in similar period of fiscal 2020. This was due to the net effect of improved utilization of store labor, offset by by higher cost incurred for personal protection equipment, a tighter labor markets and the matters discussed in the “Cost of Sales,” “Labor Costs,” “Occupancy and Other Operating Cost” sections below all of which were offset by the midyear 2020 price increase.

Labor Costs:

For the third quarter of fiscal 2021, labor and benefits costs increased slightly as a percentage of sales to 26.6% of restaurant sales from 26.3% of restaurant sales in fiscal 2020. The increase in the percentage was the result of tighter labor markets leading to higher hourly wage costs offset by the leveraging of existing staffing. Payroll costs are semi-variable in nature, meaning that they do not decrease proportionally to decreases in revenue, thus they increase as a percentage of restaurant sales when there is a decrease in restaurant sales.

Occupancy and Other Operating Expenses

For the third fiscal quarter of 2021, occupancy and other expenses decreased slightly to $235,485 (10.3% of sales) from $291,936 (12.3% of sales) in 2020. The decrease is the result of a reduction in one time maintenance charges incurred in 2020.

Depreciation and Amortization Expense:

For third fiscal quarter of 2021, depreciation and amortization increased $10,737 to $60,405 (2.6% of sales) from $49,668 (2.1% of sales) in the third quarter of fiscal 2020.

General and Administrative Costs

General and administrative costs decreased $113,887 from $188,292 (7.9% of sales) to $74,415 (3.3% of sales) in the third fiscal quarter of 2021. The decline is, in part, the result of a decrease in corporate staff during the 2021 period. The Company expects to fill a vacant position during the fourth quarter.

Income from Operations

The income from operations for the 13-week period was $358,743 in fiscal 2021 compared to an income from operations of $355,865 in the similar period in 2020. The increase in the percentage of income from operations to 15.8% in fiscal 2021 from 15.0% in fiscal 2020 was the result of higher input costs resulting from inflationary pressures in the marketplace offset by a significant decline in General and Administrative costs.

Restaurant-level EBITDA:

To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with Generally Accepted Accounting Principles, (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, to investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. This measure is not, however, 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, if any, general and administrative costs, depreciation and amortization and impairment charges. General and administrative costs are excluded as they are generally not specifically identifiable to restaurant specific costs. Depreciation and amortization and impairment charges are excluded because they are not ongoing controllable cash expenses, and they are not related to the health of ongoing operations.

Results of Operations for the Thirty-Nine Weeks Ended October 3, 2021, and the Thirty-Nine Weeks Ended September 27, 2020

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

Net Revenues:

Net sales for the 39-week period representing the first three quarters of fiscal 2021 increased $530,332 or 8.7% to $6,604,554 from $6,074,222 in fiscal 2020. The increase in sales was principally the result of moderating but still favorable impact in the first half of the 39-week period of the consumer response to the pandemic resulting in consumers choosing Burger Time as a meal alternative combined with generally favorable weather conditions during the period.

Gross restaurant sales for the 39-week period for our nine Burger Time locations ranged from a low of approximately $418,000 to high of approximately $886,000 and average sales for each Burger Time unit during the period was approximately $617,000 in 2021 an increase from approximately $556,000 in same 39-week period in 2020.

Costs of Sales - food and paper:

Cost of sales - food and paper for the 39-week period representing the first three quarters of fiscal 2021 increased as a percentage of sales to 39.1% from 37.9% of restaurant sales in the similar period in 2020. This increase was mainly due to inflationary pressures in the general economy increasing product cost . Average beef prices paid by the Company were approximately of $2.51 per pound in 2021 which was unchanged from 2020. Although, near the end of the period beef prices increased 13.7% per pound which we expect will impact fourth quarter results to some degree.

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 costs, impairment charge, depreciation, and amortization) as a percent of restaurant sales declined to 39.2% of sales in the 2021 period from 41.8% in the fiscal 2020 period. This was due primarily to the increase in sales activity and its impact as further discussed in the “Cost of Sales,” “Labor Costs,” “Occupancy and Other Operating Cost” sections below.

Labor Costs

For the 39-week period representing the first three quarters of fiscal 2021, labor and benefits costs decreased to 27.2% of restaurant sales from 28.3% of restaurant sales in the fiscal 2020 period. The Company was able to favorably leverage staffing levels against the significant increase in volume during the second half of the period. While the hiring markets have become more challenging in terms of filling open positions, the Company continued to benefit from limited turnover in its unit restaurant management which tends to cause unfavorable variations in labor costs. Payroll costs are semi-variable in nature, meaning that they do not decrease proportionally to decreases in revenue, thus they may increase as a percentage of restaurant sales when there is a decrease in restaurant sales conversely in tight labor markets occasionally the labor percentage cost decreases significantly as managers help fill spot shortages in staff.

Occupancy and Other Operating Expenses

For the first 39 weeks of fiscal 2021, occupancy and other expenses increased $28,225 to $791,220 (12.0% of sales) from $817,243 (13.5% of restaurant sales) in the similar period in 2020. Many of these costs are fixed and the lower percentage reflect the increase in restaurant sales, this was offset by an increased focus on maintenance projects resulting from high volume at our stores impacting our major systems such as HVAC and refrigeration.

Depreciation and Amortization Expense:

Depreciation and amortization expense in the first three quarters of fiscal 2021 increased by $33,211 to $173,799 (2.6% of sales) from $140,588 (2.3% of sales) in the fiscal 2020 period and is the result of capital additions at several of our locations.

General and Administrative Costs

General and administrative costs decreased 25.7%, or $76,058, from $371,455 (6.1% of sales) in the first three quarters of fiscal 2020 to $295,397 (4.5% of sales) for the fiscal 2021 period. In part from the result of lower management headcount

Income from Operations

Income from operations was $969,415 in the 39-week period of fiscal 2021 compared to $626,244 in the fiscal 2020 period. The change in income from operations in the fiscal 2021 period compared to fiscal 2020 was due primarily to the impact of the 2020 impairment charge, continued robust sales activity 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, to investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. This measure is not, however, 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, if any, general and administrative costs, depreciation and amortization and impairment charges. General and administrative costs are excluded as they are generally not specifically identifiable to restaurant specific costs. Depreciation and amortization and impairment charges are excluded because they are not ongoing controllable cash expenses, and they are not related to the health of ongoing operations.

Liquidity and Capital Resources

Since March of 2020, the Covid-19 pandemic has had a positive impact of the Company’s sales and liquidity. For the 39 weeks ended October 3, 2021, the Company earned an after-tax profit of $583,268. On October 3, 2021, the Company had $2,078,812 in cash and working capital of $1,1760,68 an increase of $765,794 from January 3, 2021. The increase is partially the result of Company completing a refinancing of the mortgages covering all its Burger Time properties including approximately $185,000 of current maturities of long-term debt which was included in the long-term refinancing. In the 39-week period ending October 3, 2021, the Company continued to benefit from excellent results and positive operating cash flow even as government restrictions on inside dining were eased.

Covid-19, and its variants, the various variants, likely will to continue to have a significant impact on the United States economy. It is difficult to predict either the ultimate impact of the COVID-19 pandemic or the impact of governmental responses on the United States economy in general, and specifically the impact on the quick service drive-through segment of the food service industry and on Company’s operating results and financial condition as the situation is evolving.

In May 2020, the Company received pandemic-related loans totaling $487,900. Included in that amount was $460,400 borrowed under the Small Business Administration’s Paycheck Protection Program (“PPP”). Under the terms of the program, the loans were forgiven in 2021. The SBA’s forgiveness of the PPP is accounted for as a “grant” and $466,400 was reflected as “Other Income” in the second quarter of 2020. Also, in May 2020, the Company borrowed $27,500 at no interest under the Minnesota Small Business Emergency Loan Program which under certain circumstance, may become a grant.

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 or complimentary to our business. Our operations do not require significant working capital, and, like many restaurant companies, we able operate with negative working capital. We anticipate that working capital deficits may be incurred in the future. Our primary sources of liquidity and cash flows are operating cash flows and cash on hand. We use this to service debt and to maintain our stores to operate in an efficient manner, and to 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 sale, or within a few days from our credit card processor, and in general, payments to our vendors are not due for thirty days.

Summary of Cash Flows

Cash Flows Provided by Operating Activities

Operating cash flow in 2020 included $466,758 of Paycheck Protection loan forgiveness “other income” in operating cash flow which did not reoccur in 2021 contributing to a decline in cash flow from operations in the first six months of 2021 compared to 2020. As a result continued strong sales over the prior year, we generated $931,322 in pre-tax cash flow from operations in the 39-week period ending October 3, 2021. The winter months have historically been seasonally the slowest part of the Company’s business generating a lower level of cash flow in comparison to the balance of the year.

Cash Flows Used in Investing Activities

In 2020 through the third quarter of 2021 the Company has focused on its primary business and building its working capital reserves.

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 October 3, 2021, we had approximately $3,210,000 in contractual obligations relating principally to amounts due under mortgages on the real property on which are stores are situated. Our monthly required payment is approximately $24,000. At the end the second quarter of fiscal 2021, the Company refinanced most of its outstanding mortgage debt with a new lender lowering its nominal interest cost from 4.75% to 3.45% fixed for the next ten years.