BTBD BT Brands Inc

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of BT Brands, Inc., and its subsidiaries (the “Company,” “we,” “our,” “us,” or “BT Brands”) and have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. All intercompany accounts and transactions have been eliminated in consolidation and have been prepared on a basis consistent in all material respects with the accounting policies for the fiscal year ending January 1, 2023. In our opinion, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of our financial position and results of operation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.

The accompanying Condensed Consolidated Balance Sheet as of April 2, 2023, does not include all of the disclosures required by GAAP. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of January 1, 2023, and the related notes thereto included in the Company’s Form 10-K for the fiscal year ended January 1, 2023.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and the differences could be material.

The Company

BT Brands, Inc. (the “Company”) was incorporated as Hartmax of NY Inc. on January 19, 2016. Effective July 30, 2018, the Company acquired 100% of BTND, LLC.

We operate restaurants in the eastern two-thirds of the United States. As of April 1, 2023, including our 41.2% owned Bagger Dave’s business, we operated seventeen restaurants comprising the following:

Our Dairy Queen store is operated under a franchise agreement with International Dairy Queen. We pay royalty and advertising payments to the franchisor as required by the franchise agreement.

Fiscal Year Period

Our fiscal year is a 52/53-week year, ending on Sunday, closest to December 31. Most years consist of four 13-week accounting periods comprising the 52-week year. All references to years in this report refer to the 13-week periods in the respective fiscal year periods. The fiscal year 2023 is 52 weeks ending December 31, 2023.

Cash

For purposes of reporting cash and cash flows, cash includes money market funds and is net of outstanding checks and includes, amounts on deposit at banks and deposits in transit and excludes transfers out in transit and includes brokerage account money market funds which are not insured deposits.

Fair Value of Financial Instruments

The Company’s accounting for fair value measurements of assets and liabilities, including available-for-sale securities, is that they are recognized or disclosed at fair value in the statements on a recurring or nonrecurring basis, adhere to the Financial Accounting Standards Board (FASB) fair value hierarchy that prioritizes the input to valuation techniques used to measure fair value.

The hierarchy prioritizes unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy are as follows:

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to fair value measurement in its entirety.

The carrying values of cash, receivables, accounts payable and other financial working capital items approximate fair value due to the short maturity nature of these instruments.  

On April 2, 2023, the cost of marketable securities include a bond fund at a cost of $416,570 and common stocks at a cost of $978,333 was a total cost of $1,394,903 prior to a mark-to-market reduction of $16,566. These investments are reflected in the accompanying financial statements at April 2, 2023, at the level-one quoted market price in an active market of $1,378,337. At January 1, 2023, the fair value of Level 1 investments included common stocks of $713,900 and a corporate bond exchange-traded fund (ETF) of $316,000, a total carrying value of $1,029,900, net of an unrealized mark-to-market loss of $86,422, as determined by quoted market prices in an active market.

Investments  

Noncurrent investments at April 2, 2023, include our net equity method investment of $1,010,787 in Bagger Dave’s and our $304,000 total investment in Next Gen Ice, Inc. (NGI). In 2020, the Company received equity ownership in NGI as consideration for a loan to NGI. Upon repayment of the note, $75,000 was attributed by us to the value of the equity received, and this amount was reflected as additional interest income in 2020. The fair value determined in 2020 continues to be reflected as the value of the investment. On February 12, 2022, we invested $229,000 in Series A1 8% Cumulative Convertible Preferred Stock of NGI, including a five-year warrant to purchase 34,697 common shares of NGI at $1.65 per share. See also Note 8.

Bagger Dave’s common stock is traded on the OTC Pink market and files quarterly and annual financial reports with OTCMarkets, Inc. under the Alternative Reporting Standard. The listing with OTC Markets does not require the information to be audited. For the thirteen weeks ended March 26, 2023, Bagger Dave’s had sales of $2,014,158 and a net loss of $136,153. Our 41.2% equity share in the loss was approximately $54,399 and is included in the accompanying statement of operations.

Short-Term Investments

Marketable Securities at January 1, 2023, include $5,000,000 face value of a United States Treasury Bills maturing March 16, 2023, purchased for $4,907,378 in August 2023. At January 1, 2023, the Treasury Bills were planned to be held until maturity and had an amortized cost value of $4,964,395. The amortized cost value approximates fair value.

Receivables

Receivables consist mainly of estimated rebates due from a primary vendor.

Inventory

Inventory consists of food, beverages and supplies and is stated at lower of cost (first-in, first-out method) or net realizable value.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives, ranging from three to thirty years.

The Company reviews long-lived assets to determine if the carrying value of these assets is recoverable based on estimated cash flows. Assets are evaluated at the lowest level for which cash flows can be identified at the restaurant level. In determining future cash flows, estimates are made by the Company for future operating results of each restaurant. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets.

Land, building and equipment, operating right of use assets and certain other assets, including definite-lived intangible assets are reviewed regularly for impairment and whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount of the assets to the future undiscounted net cash flow expected to be generated and is determined at the restaurant level. If an asset is determined to be impaired, the recognized impairment is measured by the amount by which the carrying amount of the asset exceeds the fair value.

Impairment and Disposal of Long-Lived Assets

We closed the Burger Time store in West St. Paul in 2022 and the Richmond, Indiana, store in 2018. The West St. Paul location sale was completed in February of 2023 for a gain of $313,688. The Richmond location is currently offered for sale. We believe the Richmond property will be sold at or above its current carrying value. Following the end first quarter of 2023, we completed the disposition of the St. Louis area property in lieu of unpaid property taxes. The second quarter of 2023 will reflect a gain of approximately $180,000 for the reversal of previously accrued property taxes.

Income Taxes

We provide for income taxes under (Accounting Standards Codification (ASC) 740), Accounting for Income Taxes. ASC 740 uses an asset and liability approach in accounting for income taxes. Deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities. They are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. The deferred tax assets are reviewed periodically for recoverability, and valuation allowances are adjusted as necessary. As of April 2, 2023, the Company estimates a current tax provision at the statutory rate of approximately 27.5%

The Company has no accrued interest or penalties relating to income tax obligations. The Company has no federal or state examinations in progress, nor has it had any federal or state tax examinations since its inception. All periods since inception remain open for inspection.

Per Common Share Amounts

Net income per common share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period. Common stock equivalents are excluded from the computation of diluted per-share amounts if their effect is anti-dilutive. There were no dilutive shares for the periods ending in 2023 and 2022.

Goodwill, Other Intangible Assets and Other Assets

Goodwill is not amortized. Goodwill is tested for impairment at least annually.  The cost of other intangible assets is amortized over the expected useful life. Other assets  include the allocated fair value of the acquired Dairy Queen franchise agreement related to our location in Ham Lake, Minnesota, and is amortized over an estimated useful life of 14 years

On January 1, 2023, intangible assets comprise4 the following: 

Tradename assets are being amortized over 15 years at $26,000 in amortization expense per year. The total amortization of intangible assets, including the covenants not to compete, will approximate $58,900 in 2023 and  2024 and $40,500 in 2025 and $26,200 per year thereafter for the following six years and approximately $7,500 in 2037.

Total amortization expense for the 2023 13-week period was $14,718.

Depreciation expense for the 13-week periods in 2023 and 2022 was $148,364 and $68,902, respectively.

NOTE 6 - STOCK-BASED COMPENSATION

In 2019, we adopted the BT Brands, Inc 2019 Incentive Plan (the “Plan”), under which the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance stock units, and other stock and cash awards to eligible participants. As of April 2, 2023, there were 529,750 shares available for grant under the  Plan.

Compensation expense equal to the fair value of the options at the grant date is recognized in general and administrative expense over the applicable service period. Compensation expense for the first quarter of 2023 was $26,400 in 2023,  and $9,500 related to the Contingent Share Award described below and $33,500 in 2022. Based on current estimates, we project that for current grants, approximately $180,000 in stock-based compensation expense will be recognized over the next three years at approximately $60,000 per year.

As outlined in each agreement, stock options granted to employees and directors vest over four years in annual installments. Options expire ten years from the date of the grant. Compensation expense equal to the fair value of the options at the grant date is recognized in general and administrative expense over the applicable service period.

We utilize the Black-Scholes option pricing model when determining the compensation cost associated with stock options issued using the following significant assumptions:

Information regarding our stock options is summarized below:

On February 27, 2023, the Company finalized a Contingent Incentive Share Award with senior executives. The Contingent Share Awards provides that so long as the Company’s publicly traded warrants are outstanding, senior management of the Company will be deemed to earn an aggregate award of 250,000 shares of common stock as an award upon the Company’s share price reaching $8.50 per share for 20 consecutive trading days, provided, however, participants must be employed by the Company at the time the Incentive Shares are earned.  The estimated fair value of the plan is $1.00 per share, and $250,000 of compensation expense will be recognized over the remaining 2.1 years available under the Plan and $9,500 of stock-based compensation was recognized for this Agreement in the first quarter of 2023. We utilized a lattice model when determining the fair value of the Contingent Incentive Share Awards. Assumption utilized in the model include a risk-free rate of 4.4% and volatility of 63%.

NOTE 7 – LEASES

With the acquisition of Keegan’s net assets, we entered into a lease for approximately 2,800 square feet of restaurant space. The 131-month Keegan’s lease provides for an initial rent of $5,000 per month with an annual escalation equal to the greater of 3% or the Consumer Price Index. The lease is being accounted for as an operating lease. At the inception of the lease, we recorded an operating lease obligation and a right-of-use asset of $624,000. The present value discounted at 3.75% of the remaining lease obligation of $563,546 is reflected as a liability in the accompanying financial statements.

Keegan’s lease does not provide an implicit interest rate; we used our incremental borrowing rate of 4% to determine the present value. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the lease term. Variable lease costs consist primarily of property taxes, insurance, certain utility expenses, and sales tax.

Upon acquiring PIE assets, we leased approximately 3,500 square feet of restaurant and bakery production space. The terms of the 60-month lease provide for an initial rent of $10,000 per month with an annual escalation of after 24 months of 5%. The PIE lease includes three five-year renewal option periods. The PIE lease is accounted for as an operating lease. At the inception of the lease, we recorded an operating lease obligation and a right-of-use asset of $1,055,000. The present value discounted at 5% of the remaining lease obligation of $1,029,806 is reflected as a liability in the accompanying financial statements.

The PIE lease did not provide an implicit interest rate; we used our estimated incremental borrowing rate of 5% to determine the present value of future lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the lease term. Variable lease costs consist primarily of property taxes, insurance, certain utility expenses, and sales tax.

With the acquisition of assets of Village Bier Garten, we entered into a five-year lease with the seller for approximately 3,000 square feet of restaurant space and access to an additional 3,000 square feet of shared entertainment and seating area. The terms of the triple-net 60-month provide for an initial rent of $8,200 per month with an annual escalation of 3%. The VBG lease includes three five-year renewal option periods. The VBG lease does not provide an implicit interest rate; we used our estimated incremental borrowing rate of 5% to determine the present value of future lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the lease term. Variable lease costs consist primarily of property taxes, insurance, certain utility expenses, and sales tax.

The VBG lease is accounted for as an operating lease. At the inception of the lease, we recorded an operating lease obligation and a right-of-use asset of $469,949. The present value discounted at 4.5% of the remaining lease obligation of $371,592 is reflected as a liability in the accompanying financial statements.

Following is a schedule of the approximate minimum future lease payments on the operating leases as of April 2, 2023:

The Company is a party to a month-to-month land lease agreement for one of its Burger Time locations. The net book value of the building on this land is approximately $18,500. The monthly lease payment is $1,800 plus the cost of property taxes.

The weighted average remaining lease term is approximately 5.9 years.

The Company also pays a monthly rent, under month-to-month arrangements, for corporate and administrative office spaces in West Fargo, North Dakota, and Minnetonka, Minnesota, for a combined monthly rent of approximately $2,200.

The total operating lease expense for the 13-week period in 2023 was $93,151. Cash paid for leases during the 13-week period in 2023 totaled $97,887 and variable expenses for leased properties were $14,196.

NOTE 8 - RELATED PARTY TRANSACTION

Next Gen Ice

Our CEO and CFO also serve as Chairman and CFO of Next Gen Ice, Inc. (NGI). BT Brands owns 179,000 common shares, and 138,788 NGI Series A1 Preferred Shares and also holds warrants to purchase 358,000 common shares at $1.00 expiring March 31, 2028, and 34,697 warrants to purchase additional shares at $1.65  of NGI as part of a Note modification, BT Brands We received 179,000 shares of common stock in NGI as consideration for modification of a note that subsequently was paid. The common stock and warrants received in the note modification transaction were recorded at a value determined by BT Brands of $75,000. The investment in NGI does not have a readily determinable market value. Therefore, it is carried at a cost determined by BT Brands.

NOTE 9 – CONTINGENCIES

In the course of its business, the Company may be a party to claims and legal or regulatory actions arising from its business. However, we are unaware of any significant asserted or potential claims that could impact our financial position.