BT Brands, Inc. 10-K/A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion of our financial condition and results of operation should be read in conjunction with the financial statements and related notes that appear elsewhere in this Annual Report. This discussion contains forward-looking statements and information relating to our business that reflect our current views and assumptions with respect to future events and are subject to risks and uncertainties that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Fiscal Year The Company’s fiscal year is a 52/53-week year, ending on the Sunday closest to December 31. Fiscal 2019 ended on December 29, 2019 and fiscal 2018 ended on December 30, 2018, both of which were 52-week years. Introduction 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 bigger burgers and more value for the money; (ii) offering a limited menu to permit attention to quality and speed of preparation; (iii) providing fast service by way of single and double drive-thru designs and a point-of-sale system that expedites the ordering and preparation process; and (iv) great tasting 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 no more than approximately $5,000 per store at any given time (which also has the advantage of allowing for frequent deliveries of fresh food). Our Burger Time investment model targets an average total cash investment of between $325,000 and $525,000, or an average of $425,000. Real estate and finance costs may vary materially by location but, assuming the average investment figure applies, the amount allocated to the purchase of real estate would be approximately $225,000. We would typically contribute 25% of the purchase price, or $56,250, in cash and the 75% balance, or $168,750, would be financed through third parties. These costs can fluctuate significantly, based on the number and timing of restaurant openings and the specific expenses incurred for each restaurant. 17 Table of Contents Historically, we acquired sites for restaurants that previously had been operated as a restaurant location, however, discontinued operations for any number of reasons. Purchasing properties such as these allows us to utilize the existing structure and remodel or renovate it to our specifications. We believe that we can convert these locations into Burger Time restaurants a meaningful cost savings relative to new restaurant construction. We believe that we can make these locations successful because we have developed a successful business model based on low capital requirements to construct and operate our restaurants. These low costs allow us to operate profitably where other fast food restaurants may not be able to because, for example, franchise fees may reduce the owner’s profits below what might be acceptable. Our ability to execute this property acquisition strategy is dependent upon favorable real estate prices. This strategy comprises many risks, including that the possibility that the previous operations failed to generate income prior to closing and we cannot assure you that we will be successful operating our restaurants at such locations at a profit. Our average customer transaction increased by approximately 2--%[WR1] [KB2] in the fiscal 2019 compared to 2018. Our sales trends are influenced by many factors and the macroeconomic environment remains challenging for smaller restaurant chains as competition from the major fast-food hamburger-focused business has continues to intensify. The average customer transaction increased in fiscal 2019 as a result of a less aggressive promotional pricing including modifying, our “Deal of the Day” promotion which provided customers a discount of 10 to 20% from basic menu pricing. This discounting program was discontinued in 2018 and was reintroduced in the fall of 2019. Material Trends and Uncertainties There are industry trends which may have a significant adverse effect 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 QSR’s have been increasingly willing to strategically discount prices through promotions such as a “dollar menu”. In the early years of its development Burger Time maintained a significant price advantage in comparison to the major competitors. As competition for customers has intensified in recent years price promotions by the competitors have eliminated Burger Time’s price advantage. We expect these significant trends will continue. The cost of food has increased over the last two years; however, we expect prices to remain stable or decrease in 2020. Beef costs decreased by approximately 5% in 2019 and decreased by 2% in 2018. The Company did not implement a menu price increase in fiscal 2018. Given the competitive nature of the fast food burger restaurant industry, it may be difficult to raise menu prices to fully cover future cost increases. Additional margin improvements may have to be made through operational improvements, equipment advances and increased volumes to help offset these cost increases, due to the competitive state of the restaurant industry. Labor will continue to be a critical factor in the foreseeable future. In most areas where we operate our restaurants, there historically has been a shortage of suitable labor. This 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. It is crucial for the Company to develop and maintain programs to attract and retain quality employees. Increases in the federally and state mandated minimum wage may also impact our operations. Over the last several years, there has been a movement in Washington, D.C. and various states to increase the minimum wage to $15 per hour. In North Dakota, the minimum wage is set at the federally mandated minimum wage of $7.25 per hour and the rates are annually adjusted to reflect any increase in cost of living. South Dakota has established a minimum wage of $9.10 per hour which is annually adjusted to increase with the cost of living. Minnesota's minimum-wage rate for small employers, such as us, is $8.04 per hour. In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. A health pandemic is a disease outbreak that spreads rapidly and widely by infection and affects many individuals in an area or population at the same time. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, potentially leading to an economic downturn. While our stores have remained open for drive-through business. The response to COVID-19 has disrupted the normal operations of many businesses, including ours. 18 Table of Contents Several states including Minnesota, have ordered residents to “shelter-in-place” or “stay-at-home,” and limit or ban public gatherings to halt or delay the spread of disease. Under these emergency orders, essential services remain open, including, but not limited to gas stations, pharmacies, grocery stores, food banks, convenience stores, take-out and delivery restaurants, banks, hospitals, and laundromats. Under the shelter-in-place directions, regulators have generally allowed drive-through restaurant services to remain open. To-date our restaurants, including those in Minnesota, remain open although we have curtailed some hours. Local, regional or national governments may, at any time, implement directives that further limit or order our business to close or take other measures intended to mitigate the spread of disease. Further, customers may choose to remain in self-imposed isolation and avoid public gathering places. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business or results of operations at this time. The conditions may impact our 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 in which we have restaurants 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 As disclosed elsewhere in this Annual Report, we are focused on growing our business and building value for our shareholders. We are seeking to increase value for our shareholders in the foodservice industry. We expect to pursue the acquisition of multi-unit restaurant concepts and individual restaurant properties at attractive multiples of earnings. Once acquired, we will operate the business or businesses with a shared central management organization. Assuming we are successful in acquiring an operating business, following the acquisition, we expect to pursue growth strategies to both expand the number of locations and to increase comparable store sales and profits. Our business plan is to grow through acquisitions in the foodservice industry. In addition, we may develop additional Burger Time locations through the acquisition and conversion of existing properties. We also expect to identify and complete acquisitions of existing restaurant units and multi-unit chains which could be operated and expanded through the addition of new locations. Our growth strategy is predicated upon (i) building or acquiring new restaurants, (ii) growing comparable restaurant sales and profits, and (iii) quickly and cost-effectively scaling our growth while leveraging our corporate services. We believe that we will have opportunities to acquire new restaurant businesses. We intend to follow a disciplined strategy of evaluating acquisition opportunities to determine the operations are in markets meeting our demographic, real estate and investment criteria. Our ability to successfully evaluate an acquisition opportunity and to understand the competitive landscape of a new market will be critical in making a successful acquisition. Additionally, our ability to identify, recruit and hire both salaried and hourly staff will impact our ability to expand as will changes in the legal environment, including increases to the minimum wage, which could impact our ability to expand into certain areas. Further, we believe that there has been an oversaturation of restaurants in certain areas which could decrease the number of markets that we believe will be attractive to expand into. Even if we can acquire restaurants, the new restaurants, and our Company, will be subject to various risks, some of which, including factors impacting our customers, such as declining economic conditions, are entirely out of our control. We will seek to quickly and cost-effectively scale our growth by leveraging our general and administrative costs. 19 Table of Contents Results of Operations The following table sets forth, for the fiscal years indicated, our Consolidated Statements of Operations expressed as percentage of total revenues. Percentages below may not reconcile because of rounding. Fiscal Year 2019 2018 Sales 100.0 % 100.0 % Costs and expenses Restaurant operating expenses Food and paper costs 39.7 40.2 Labor costs 33.0 31.7 Occupancy costs 11.1 12.0 Other operating expenses 5.5 4.7 Depreciation and amortization 3.3 3.2 Impairment of asset held for sale 1.4 - Gain on sale of property and equipment - (2.2 ) General and adminiastrative 9.4 7.9 Total costs and expenses 103.4 97.5 Income (loss) from operations (3.4 ) 2.5 Interest expense 3.2 (2.5 ) Income before taxes (6.4 ) - Income tax (provision) benefit 0.7 - Net income (loss) (5.4 )% 0.3 % 52 Week Period Ended December 29, 2019 (Fiscal 2019) compared to the 52 Week Period Ended December 30, 2018 (Fiscal 2018) Net Revenues: Net sales for Fiscal 2019 decreased $570,903 or 8.1% to $6,480,564 from $7,051,467 in Fiscal 2018. The decrease in sales was principally the result of closing the Richmond, Indiana location at the end of 2018. Restaurant sales for Fiscal 2019 ranged from a low of $497,000 to a high of $818,000 and average sales for each Burger Time unit during the period was approximately $669,000 in 2019 declining from $698,000 in 2018. Costs of Sales - food and paper: Cost of sales - food and paper for Fiscal 2019 decreased slightly to $2,574,388 (39.72% of restaurant sales) from $2,835,757 (40.2% of restaurant sales) in Fiscal 2018. This decrease was mainly due to an increase in average beef prices of approximately 5.6% to an average of $2.36 per pound in 2019 offset by the favorable cost-saving results from the elimination of costs associated with the Richmond, Indiana location which we closed at the end of 2018. 20 Table of Contents 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 and depreciation and amortization) as a percent of restaurant sales increased slightly to 89.2% in 2019 from 88.6% in Fiscal 2018. This was due primarily to matters discussed in the “Cost of Sales,” “Labor Costs,” “Occupancy and Other Operating Cost” sections below. The changes in restaurant-level costs from Fiscal 2018 to Fiscal 2019 are principally the result of closing of the Richmond location at the end of 2018 and may be detailed as follows: Restaurant operating costs for the period ended December 30, 2018 $ 6,249,118 Decrease in food and paper costs (261,369 ) Decrease in labor cost (97,221 ) Decrease in occupancy and operating (103,576 ) Restaurant operating costs for the periods ended December 29, 2019 $ 5,786,952 Labor Costs For Fiscal 2019, labor and benefits costs decreased $97,221 to $2,140,157 (33.0% of restaurant sales) from $2,237,378 (31.7% of restaurant sales) in Fiscal 2018. The decrease was the result the closing of the Richmond location offset by cost increases resulting from tight labor markets and higher starting wages in most of the locations in which the Company operates. The Company benefited from virtually no 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 increase as a percentage of restaurant sales when there is a decrease in restaurant sales. Occupancy and Other Operating Costs For Fiscal 2019, occupancy and other costs declined to 16.5% of sales or $1,072,407 compared to $1,175,983 (16.7% of restaurant sales in Fiscal 2018). Depreciation and Amortization Costs: For Fiscal 2019, depreciation and amortization costs decreased 16.3% or $14,727 to $212,787 (2.9% of sales) from $227,514 (3.2 % of sales) in Fiscal 2018. Depreciation costs primarily decreased due the transfer of the Richmond, Indiana restaurant to the asset held for sale classification following the closing of the store. General and Administrative Costs General and administrative costs increased 22.4% or $115,207 from $492,378 (6.9% of sales) in Fiscal 2018 to $607,585 (9.4% of sales) in Fiscal 2019. The increase in general and administrative costs is primarily attributable to approximately a $40,000 write-off in deferred offering costs and an impairment of $48,500 in Goodwill. Income (loss) from Operations The loss from operations was $220,048 in Fiscal 2019 compared to income from operations of $240,158 in Fiscal 2018. The change in income from operations in Fiscal 2019 compared to Fiscal 2018 was due primarily to the gain on sale of property and equipment of $158,358 and the matters discussed in the “Net Revenues” and “Restaurant Operating Costs” sections above. Interest expense For Fiscal 2019, our interest expense increased $30,806 to $207,841 (3.0% of restaurant sales) from $176,955 (2.5% restaurant sales) in Fiscal 2018. 21 Table of Contents Gain on Sale of Property and Equipment In Fiscal 2018, we concluded not to develop a property located in St. Louis, Missouri and the property was sold in 2018 for a gain of $158,358. Net Income (loss) The net income was a loss of $368,577 for Fiscal 2019, compared to a profit of $20,803 in Fiscal 2018. The change from Fiscal 2019 from Fiscal 2018 was primarily attributable to the matters discussed in the “Net Revenues,” “Restaurant Operating Costs,” “General and Administrative Costs,” and “Gain on Sale of Property and Equipment” sections above due to the matters discussed above. Restaurant-level EBITDA : To supplement the 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. Fiscal Year 2019 2018 Revenues $ 6,480,564 $ 7,051,467 Reconciliation: Income (loss) from operations (220,248 ) 82,457 Depreciation and amortization 212,787 227,514 Impairment charges 93,488 0 General and administrative, corporate level expenses 607,585 492,378 Restaurant-level EBITDA $ 693,612 $ 802,358 Restaurant-level EBITDA margin 10.7 % 11.3 % Liquidity and Capital Resources The consolidated financial statements have been prepared on a going concern basis. For the year December 29, 2019, the Company incurred a net loss of $368,577. Cash flow provided by operating activities increased slightly to $50,489 in 2019 from $49,116 for fiscal 2018. At December 29, 2019, the Company had $258,101 in cash and working capital deficit of $468,326. On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“Covid-19”) a global pandemic. At this time, all of our units continue to operate, however, it is impossible to predict either the near-term effects or the ultimate impact of the Covid-19 pandemic on the Company’s operating results and financial condition as the situation is rapidly evolving. A cash flow forecast for the next 12 months prepared by management has been adjusted to reflect recent offers by banks, in the wake of the COVID-19 Pandemic, including the Company’s principal lenders, Northview Bank and Bremer Bank, to abate all loan payments for the next three months. As a result, the Company expects to have sufficient cash assets to meet its obligations for a year from the issuance of these consolidated financial statements. No adjustments have been made relating to recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company not continue as a going concern. 22 Table of Contents 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 companies that are synergistic with or complimentary to our business. 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 restaurant sales are primarily received in cash or by credit card and our restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverages and supplies, reducing the need for incremental working capital to support growth. Based on current information, we believe that we will have enough capital to meet our long-term debt obligations, working capital and recurring capital expenditure needs in fiscal 2020; however, our projections of future cash needs and cash flows may differ from actual results, and the difference could be material. If cash that may be generated from our business operations is insufficient to continue to operate our business, we may be required to obtain more working capital. We may seek to obtain additional working capital through sales of our equity securities or through bank credit facilities or public or private debt from various financial institutions where possible. We cannot be certain that additional funding will be available on acceptable terms, or at all. The working capital deficit and debt outstanding could cause substantial doubt about the Company’s ability to continue as going concern, but our plans indicate that the Company can meet its working capital needs through 2020. If we do identify sources for additional funding, the sale of additional equity securities or convertible debt could result in dilution to our shareholders. Additionally, the sale of equity securities or issuance of debt securities may be subject to certain security holder approvals or may result in the downward adjustment of the exercise or conversion price of our outstanding securities. We can give no assurance that we will generate sufficient cash flows in the future to satisfy our liquidity requirements or sustain future operations, or that other sources of funding, such as sales of equity or debt, would be available or would be approved by our security holders, if needed, on favorable terms or at all. If we fail to obtain additional working capital as and when needed, such failure could have a material adverse impact on our business, results of operations and financial condition. Furthermore, such lack of funds may inhibit our ability to respond to competitive pressures or unanticipated capital needs, or may force us to reduce operating expenses, which would significantly harm the business and development of operations. Qualitative and Quantitative Disclosure about Market Risk Commodity Price Risk We are subject to volatility in food costs as a result of market risk associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We do not enter into pricing agreements with any of our suppliers to manage these risks. Beef is our largest single food purchase and the price we pay for beef fluctuates weekly based on beef commodity prices. We do not currently manage this risk with commodity future and option contracts. A ten percent increase in the cost of beef would result in approximately $98,000 of additional food costs for the Company annually. 23 Table of Contents Seasonality and Inflation Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically slightly lower in the first and fourth quarters due to holiday closures and the impact of cold weather at all our locations. Adverse weather conditions may also affect customer traffic, especially in the first and fourth quarters, when customers do not use our outdoor seating areas, which impacts the use of these areas and may adversely affect our revenue. Management does not believe that inflation has had a material effect on income during the 2019 or 2018 fiscal years. Increases in food, labor or other operating costs could adversely affect the Company’s operations. In the past, however, the Company generally has been able to increase menu prices or modify its operating procedures to substantially offset increases in its operating costs. The cost of construction has also increased in recent history. We expect that costs to construct new restaurants in our existing and contiguous markets will be more expensive than several years ago, but we expect to achieve higher restaurant sales volumes and/or margin improvements to offset these or addition construction cost increases. Construction cost increases could have an adverse effect on our business and operations, particularly for new restaurant development. Our business is subject to a wide range of federal, state and local regulations, which are subject to change in ways we cannot now anticipate. We are uncertain as to the effect, if any, that changes in the regulatory environment may have on our Company. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission. Recently Issued and Adopted Accounting Pronouncements A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 1 to our consolidated financial statements appearing at the end of this Annual Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item. 24 Table of Contents