BTBD BT Brands Inc

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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, "BT Brands" or 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 October 2, 2022, including our partially owned Bagger Dave's business, we owned and operated eighteen restaurants comprising the following:

The first Burger Time restaurant opened in Fargo, North Dakota, in 1987. BTND, LLC purchased the assets of Burger Time in May 2007. Burger Time restaurants feature a traditional grilled hamburger and other affordable foods such as chicken sandwiches, pulled pork sandwiches, sides, and soft drinks. Burger Time's 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 and 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 strive for efficiency at our Burger Time restaurants, including maintaining an inventory of approximately $15,000 per store, with frequent fresh food deliveries. Historically, our Burger Time investment model targeted an average cash investment of between $325,000 and $535,000.

The average customer transaction at our Burger Time restaurants increased by approximately 4% in the first nine months of fiscal 2022 compared to 2021 and currently is about $12.60. This recent increase is principally because of a menu price increase implemented in 2021 and a 2022 price increase of approximately 10% on our popular "Deal of the Day" offering. We most recently increased menu prices in September of 2022. Many factors influence our sales trends. The business environment is challenging for smaller restaurant chains as competition is intense.

BT Brands operates Burger Time restaurants and newly acquired businesses through a central management organization which we believe provides continuity across our restaurant base and allows for efficiencies of a central management team.

Recent Events

During the 39 weeks ending October 2, 2022, we acquired three operating restaurants and a 41.2% ownership interest in an operator of six restaurants with the net proceeds from our November 2021 initial public offering. We expect to continue to consider acquisition opportunities. Our recent acquisitions have allowed us to diversify our operations into new restaurant segments and new geographic regions, which will reduce our dependency on the financial performance of our Burger Time restaurants.

Keegan's Seafood Grille, acquired in March 2022, has served customers in the Clearwater and St. Petersburg, Florida markets for over 35 years. The operation is primarily a dine-in restaurant offering a variety of traditional fresh seafood items for lunch and dinner and a selection of beer and wine.

In May 2022, we acquired the assets and business operations of the iconic Pie In The Sky Coffee Shop and Bakery "PIE." The store is adjacent to the ferry dock in Woods Hole, Massachusetts. The business has operated in the same location for over thirty years, offering a range of breakfast and lunch options, freshly roasted coffee, and branded merchandise serving locals and tourists.

In August 2022, we purchased the assets and business operating as Van Stephan Village Bier Garten, a full-service bar and restaurant in Cocoa, Florida. The restaurant features a German-themed menu, specialty imported European beers, and regular entertainment.

In June 2022, we acquired shares representing 41.2% ownership of Bagger Dave's Burger Tavern, Inc., which owns and operates six Bagger Dave's restaurants, a casual restaurant and bar concept. Bagger Dave's provides a warm, inviting, and entertaining atmosphere specializing in locally sourced, never-frozen prime rib recipe burgers, all-natural turkey burgers, hand-cut fries, locally crafted draft beers, milkshakes, salads, black bean turkey chili, pizza, and other items. Bagger Dave's opened its first restaurant in Berkley, Michigan, in January 2008 and operates four restaurants in Michigan, one restaurant in Ft. Wayne, Indiana, and one location in Centerville, Ohio.

Material Trends and Uncertainties

Industry trends have a direct impact on our business. Current trends include difficulties attracting food service workers and rapid inflation in the cost of input items. Recent trends also include the rapidly changing area of technology and food delivery. The major companies in the restaurant industry have rapidly adopted and developed smartphone and mobile delivery applications, 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 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 rose in 2021, continued to increase in 2021, and have recently risen by approximately 7% 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, as the pandemic peaked, our Burger Time business experienced a significant increase in volume, contributing to improved profit margins. Future margin improvements may be difficult to achieve and will be achieved through operational enhancements, equipment advances, and increased volumes offsetting food cost increases.

Labor is a critical factor in operating our stores. Securing staff to run our locations at full capacity has become more challenging in most areas where we operate our restaurants. The current labor market has resulted in higher wages as the competition for employees intensifies, not only in the restaurant industry but in practically all retail and service industries. We must develop and retain quality employees.

Although moderating recently, since March 2020, COVID and its variants have adversely affected workforces, customers, economies, and financial markets globally and disrupted the US economy's normal flow. Our stores have, with some exceptions, generally remained open for drive-through business. However, many businesses have experienced a disruption of operations. More recently, food service businesses, including ours, have faced challenges in attracting and hiring workers. Labor shortages have resulted in some store curtailment of operating hours which may become more acute as market participants compete to attract employees.

We can't predict the effects of public health matters and their impact on our business. 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. We continue to monitor public health issues and their impact. It is difficult to predict the future considering the many factors, including the spread of new variants of the original coronavirus disease.

Our strategy to acquire additional restaurant properties presents numerous risks and uncertainties to our operations, including our management's ability to:

Our failure to manage any 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 critical 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:

Assuming we 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 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, 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 October 2, 2022, and the Thirteen Weeks Ended October 3, 2021

The following table sets forth our consolidated condensed statements of income and percentages of total revenues for the thirteen-week fiscal periods. The percentages below may not reconcile because of rounding.

Net Revenues:

Net sales for the third fiscal quarter of 2022 increased $1,742,921 to $4,023,920 from $2,280,999 in fiscal 2021. The increase during the period resulted from sales from the recently acquired businesses contributing $1,938,508 in revenue. Sales at the Burger Time locations declined approximately 14% as customer purchasing patterns returned to pre-pandemic levels. Staffing challenges also adversely impacted Burger Time, resulting in limited hours and isolated daily store closures during the quarter. 

Restaurant unit sales for Burger Time for the 13 weeks ranged from a low of approximately $115,000 to a high of approximately $311,000. The average sales for each Burger Time unit were approximately $208,000 in 2022, approximately $24,500 below the same period in 2021.

Costs of Sales - food and paper:

Cost of sales - food and paper decreased for the fiscal 2022 period as a percentage of sales to 39.9% of sales from 41.4% of restaurant sales in the third quarter of fiscal 2021. This decrease was the net result of generally a higher cost of sales for Keegan's, inflationary pressures offset by menu price increases and the acquisition of PIE which operates at a significantly lower food 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 88.4% of sales in the third fiscal quarter of 2022 from 78.4% in the similar period of fiscal 2021. This increase was because of higher labor and occupancy cost, including lease costs associated with our recently acquired locations and the matters discussed in the "Cost of Sales," "Labor Costs," and "Occupancy and Other Operating Costs" sections below.

Labor Costs

For the third quarter of fiscal 2022, labor and benefits cost increased as a percentage of sales to 33.2% of restaurant sales from 26.6% in fiscal 2021. The increase in the percentage cost resulted from tighter labor markets leading to higher hourly wage costs offset by leveraging existing staffing and higher labor costs associated with the PIE acquisition. Payroll costs are semi-variable, meaning they do not change proportionally to changes in revenue.

Occupancy and Other Operating Expenses

For the third fiscal quarter of 2022, occupancy and other expenses increased to 15.3% of sales from 10.3% in 2021. This increase results from higher occupancy costs, including lease costs associated with our three new locations.

Depreciation and Amortization Expense:

For the third fiscal quarter of 2022, depreciation and amortization increased to $168,855 (4.2% of sales) from $60,405 (2.6% of sales) in the third quarter of fiscal 2021. The increase results from depreciation and amortization associated with our recent acquisitions.

General and Administrative Costs

General and administrative costs increased by $214,506 from $74,415 to $288,921; the increase is associated with expenses related to the Company's transition to a public company in November 2021, including the costs related to long-term management agreements, incentive stock options and legal and accounting relating to our status as a public company. For these reasons, third-quarter general and administrative expenses were 7.2% of sales, a significant increase from 3.3% in the earlier year.

Income from Operations

The income from operations for the third quarter of fiscal 2022 was $8,991 compared to income from operations of $358,743 in the same period in 2021; the percentage of income from operations as a percentage of sales declined to .2% from 15.7%, reflecting a decline in profit margin is the result of costs associated with transitioning the acquired businesses, higher general and administrative expenses 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, investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. This measure is not indicative of our overall results, nor does restaurant-level profit accrue directly to the benefit of stockholders, primarily due to the exclusion of corporate-level expenses. Restaurant-level EBITDA should not be considered a substitute or superior to operating income calculated under GAAP. The reconciliations to operating income set forth below should be carefully evaluated.

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 unrelated to ongoing operations' health.  

Our Results of Operations for the Thirty-nine Weeks Ended October 2, 2022, and the Thirty-nine Weeks Ended October 3, 2021

The following table sets forth our consolidated condensed statements of income and percentages of total revenues for the thirty-nine-week fiscal period. The percentages below may not reconcile because of rounding.

 Net Revenues:

Net sales for the 39 weeks representing the first three-quarters of fiscal 2022 increased $3,017,442 or 45.7% to $9,621,996 from $6,604,554 in fiscal 2021. The increase in sales was principally the result of a favorable impact in the 39 weeks of acquired restaurants which contributed approximately $3.8 million in sales, offsetting a decline of approximately $700,000 or 11% in BTND revenues.

Burger Time unit sales for the 39 weeks ranged from a low of approximately $345,000 to a high of approximately $861,000. Average sales for each Burger Time unit were approximately $599,000 in 2022, a decline from approximately $671,400 in the same 39-week period in 2021. The sales decline in the 2022 period is the combined result of a return to pre-covid customer purchasing patterns as competitive dining options returned to normal, labor challenges resulting in some contraction of hours, and poorer weather conditions relative to the year-earlier period.

Costs of Sales - food and paper:

Cost of sales - food and paper for the 39-week period of fiscal 2022 decreased as a percentage of sales to 37.8% from 39.1% of restaurant sales in the same period in 2021. This decrease resulted from the seasonally strong performance at PIE which operates at lower food and paper costs than our traditional business and Keegan's.

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 84.6% of sales in the first 39 weeks of 2022 from 78.2% in the same period in fiscal 2021. This increase was due to the rise in sales activity from new locations and its impact, as further discussed in the "Cost of Sales," "Labor Costs," and "Occupancy and Other Operating Costs" sections below.

Labor Costs:

For the 39-week period in fiscal 2022, labor and benefits cost increased to 32.5% of restaurant sales from 27.2% 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 change proportionally to changes in revenue.

Occupancy and Other Operating Expenses:

For the first 39 weeks of fiscal 2022, occupancy and other expenses increased to 14.4% of sales from 12.0% 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 for the 39 weeks of fiscal 2022 ending October 2, 2022, increased by $173,757 to $351,084 (3.6% of sales) from $177,285 (2.6% of sales) in the similar period of 2021 and are the result of the purchase of three restaurants and capital improvements, including significant parking lot repairs, at several of our locations.

General and Administrative Costs:

General and administrative costs increased 250.6%, or $740,242, to $1,035,639, from $295,397 (11.4% of sales) in the 39 weeks of fiscal 2022. The increase results from the transition to a public reporting company, stock-based compensation costs, and the expense associated with long-term management employment agreements.

Income from Operations:

Operating income was $93,765 in the 39 weeks of fiscal 2022 compared to $969,415 in the same period in fiscal 2021. The change in income from operations in the fiscal 2022 period compared to fiscal 2021 was due primarily to the increase in general and administrative expenses, including stock-based compensation, which included higher costs associated with the transition to a public company near the end of 2021, including the items noted in "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, we use restaurant-level EBITDA, which is not a measure defined by GAAP. This non-GAAP operating measure is helpful to both management and, we believe, investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. This measure is not indicative of our overall results, nor does restaurant-level profit accrue directly to the benefit of stockholders, primarily due to the exclusion of corporate-level expenses. Restaurant-level EBITDA should not be considered a substitute or superior to operating income calculated under GAAP. The reconciliations to operating income set forth below should be carefully evaluated.

We define restaurant-level EBITDA as operating income before 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 related to the continuing health of the business.