Executive Summary / Key Takeaways

• Strategic Pivot: BT Brands is undergoing a profound transformation, shifting its core investment thesis from a multi-brand restaurant operator to a drone solutions and technology company through a definitive merger agreement with Aero Velocity Inc.
• Restaurant Optimization: The legacy restaurant business is actively being optimized through strategic closures of underperforming locations and disciplined cost management, leading to improved profitability metrics despite declining sales.
• New Growth Vector: The combined entity will focus on developing advanced drone technologies and AI-powered solutions for government and commercial applications, representing a high-potential, yet speculative, new growth avenue.
• Transitional Financials: While the restaurant segment shows improved operational efficiency (e.g., Q2 2025 restaurant-level EBITDA margin of 15.9% vs. 10.6% in 2024), current liquidity is being deployed to support the transition and new investments, including the NGI Corporation's Disney water bottle program.
• Investment Re-evaluation: Investors must now assess BTBD not on its historical restaurant performance but on the potential and risks associated with its new, high-tech drone and AI venture.

A Culinary Past, A Technological Future: BT Brands' Strategic Metamorphosis

BT Brands, Inc. (NASDAQ:BTBD) has historically carved a niche in the competitive quick-service and casual dining restaurant industry, with roots tracing back to the first Burger Time fast-food restaurant in Fargo, North Dakota, in 1987. Over the years, the company expanded its portfolio through strategic acquisitions, including Keegans Seafood Grille, Pie In The Sky Coffee and Bakery (PIE), and a 40.7% stake in Bagger Daves Burger Tavern. This diverse collection of eateries, from drive-thru burgers to fine dining and coffee shops, reflected a strategy of broad market appeal within regional confines.

The restaurant industry, however, presents a challenging environment marked by intense competition, difficulties in attracting and retaining food service workers, and rapid inflation in input costs. Major players have aggressively adopted digital ordering, mobile delivery applications, and loyalty programs, leveraging robust technology platforms to gain market share. BT Brands, as a smaller, regional operator, has faced an uphill battle against these well-resourced giants. Its Burger Time locations, for instance, emphasize value, a limited menu for speed, and fast drive-thru service, but these operational principles alone have not insulated it from broader industry pressures.

In response to these dynamics, BT Brands initiated a strategic review process last year, culminating in a definitive merger agreement with Aero Velocity Inc., a drone solutions and technology company, announced on September 3, 2025. This all-stock transaction signals a profound strategic pivot, fundamentally transforming BT Brands from a multi-brand restaurant operator into a player in the advanced drone and AI technology sector. The investment thesis for BTBD is no longer rooted in its culinary ventures but in the potential of this new, high-growth technological frontier.

Optimizing the Legacy: Restaurant Performance and Competitive Standing

Before delving into the future, understanding the performance of BT Brands' legacy restaurant business provides crucial context for the strategic pivot. The company has been actively optimizing its restaurant portfolio through disciplined expense management and the closure of underperforming locations. This included the Village Bier Garten in January 2025, the Ham Lake, Minnesota Burger Time in February 2025, and another Burger Time in Minot, North Dakota, in July 2025. These closures, while impacting top-line revenue, were instrumental in improving profitability.

For the thirteen weeks ended June 29, 2025, net sales were $3.78 million, an 8.1% decrease from the prior year, largely due to the aforementioned closures. However, net income significantly improved to $55,031 from a loss of $69,952 in the same period of 2024. Restaurant-level EBITDA for the quarter surged to $600,661, representing 15.9% of revenues, a notable improvement from 10.6% in 2024. This was driven by a reduction in food and paper costs to 33.1% of sales (from 38.1%) and labor costs to 36.4% of sales (from 37.7%), reflecting improved staffing efficiency, selective menu price increases, and cost-cutting measures. The recently acquired Schnitzel Haus contributed approximately $0.50 million in sales, while the Cape Cod-based PIE saw a 4.0% year-over-year sales increase to $1.04 million, benefiting from seasonal strength.

Over the twenty-six weeks ended June 29, 2025, net sales were $7.01 million, a 4.0% decline from 2024, but the net loss narrowed substantially to $274,818 from $515,652. Restaurant-level EBITDA for this period was $915,894, or 13.1% of revenues, a significant improvement from 5.8% in the prior year. These figures underscore management's focus on operational efficiencies and cost control in a challenging market.

In the restaurant sector, BT Brands' competitive standing has been that of a regional player, often competing with much larger, globally recognized brands like McDonald's (MCD), Restaurant Brands International (QSR) (Burger King's parent), and Wendy's (WEN). These larger competitors benefit from immense scale, extensive marketing budgets, and robust supply chains, allowing for superior operational efficiency and broader market reach. For instance, BTBD's TTM Gross Profit Margin of 30.88% lags significantly behind McDonald's 57%, QSR's 36%, and Wendy's 35%. While BTBD's regional focus and local brand recognition foster community ties and potentially lower marketing costs in specific locales, it has struggled to match the growth rates, profitability, and innovation speed of its larger rivals. The company's strategy of operating a diverse portfolio of restaurants, while offering variety, also meant a fragmented focus in a market increasingly dominated by streamlined, tech-enabled operations.

The Future: A Leap into Drone Technology and AI

The most compelling aspect of BT Brands' current investment narrative is its strategic pivot to advanced drone technologies and AI-powered solutions through the merger with Aero Velocity Inc. This move represents a complete reorientation of the company's business model and a bold bet on a high-growth, high-technology sector. The combined company will focus on developing and providing these solutions for government and commercial applications.

While specific technological differentiators and quantifiable benefits of Aero Velocity's offerings are not detailed, the stated goal of focusing on "advanced drone technologies and providing AI-powered solutions" implies a strategic intent to compete on innovation and specialized capabilities. This could involve superior data collection, enhanced operational efficiency for clients, or advanced autonomous functionalities in drone deployment. The "so what" for investors is a shift from a mature, low-margin industry to one with potentially higher growth rates, greater intellectual property value, and more attractive profitability profiles, albeit with higher inherent risks. This strategic move aims to create a new competitive moat based on technological leadership rather than regional restaurant operations.

Financial Health in Transition and Future Outlook

BT Brands' financial position reflects this transitional phase. As of June 29, 2025, the company held $3.50 million in cash, cash equivalents, and marketable securities, with net working capital increasing to $4.40 million. Operating cash flow for the 26 weeks ended June 29, 2025, turned positive at $77,623, a significant improvement from a negative cash flow in the prior year. This indicates that the legacy restaurant business, through its efficiency initiatives, is generating cash to support the company's strategic shift.

However, cash has also been deployed for new investments, notably $572,357 advanced to NGI Corporation and $292,372 for Disney-licensed water bottle inventory, which is expected to be sold in the second half of 2025. The sale of the Richmond property for $550,000, with an estimated gain of $250,000 to be recognized in Q3, further bolsters liquidity for the transition. The company's contractual obligations, including mortgages and operating leases, total $3.60 million, with manageable monthly payments.

The outlook for BT Brands is bifurcated. For the legacy restaurant segment, management expects continued cost management and leveraging seasonal strengths, particularly for PIE, and new third-party delivery initiatives for Burger Time to contribute to future sales growth. The Bagger Daves affiliate is also exploring potential sales of its store locations, indicating a broader divestment strategy for the restaurant assets. The primary forward-looking narrative, however, is dominated by the Aero Velocity merger. The combined entity's future performance will hinge on its ability to execute on the development and commercialization of drone and AI technologies, secure government and commercial contracts, and establish a strong competitive position in this nascent but rapidly evolving market.

Risks and the Road Ahead

The investment in BT Brands is now subject to a new set of risks inherent in its strategic pivot. While the legacy restaurant business still faces challenges such as labor shortages, inflationary pressures, and intense competition, the material weakness in internal control over financial reporting noted by management also requires attention. However, the dominant risks now revolve around the successful integration of Aero Velocity and the execution of its drone and AI strategy.

These new risks include the high capital requirements for R&D in advanced technology, the ability to attract and retain specialized talent in the drone and AI fields, intense competition from established and emerging players in the technology sector, and the complex regulatory landscape governing drone operations. Market adoption rates for new drone and AI solutions, as well as the ability to scale operations efficiently, will be critical. The success of this pivot is not guaranteed, and the transition period itself carries execution risk.

Conclusion

BT Brands stands at a pivotal juncture, having embarked on a transformative journey from a regional restaurant operator to a technology-focused entity in the drone and AI space. The company's recent operational improvements in its restaurant segment demonstrate a disciplined approach to managing its legacy assets, generating cash flow that can support this ambitious pivot. However, the core investment thesis has fundamentally shifted.

Investors are now presented with a unique opportunity to participate in a company that is shedding its traditional, lower-growth business for a potentially high-growth, high-margin technological future. The success of this re-imagining will depend entirely on the combined entity's ability to innovate, execute, and capture market share in the rapidly evolving drone and AI sectors. While the path ahead is fraught with the inherent risks of a technological venture, the strategic intent to leverage advanced drone technologies and AI for government and commercial applications offers a compelling, albeit speculative, long-term growth narrative for BTBD.