BT Brands, Inc.: Form 10-K for the period ended Jan 3, 2021

In this Annual Report on Form 10-K, or Annual Report, and unless otherwise indicated, the terms “BT Brands,” the “Company,” “we,” “us,” “our,” “our Company,” and “our business” refer to BT Brands, Inc. together with its consolidated subsidiaries. Effective December 18, 2020 we reincorporated BT Brands from the State of Delaware to the State of Wyoming.

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report. Due to rounding, figures in tables may not sum exactly.

Overview of Our Company

We own and operate nine Burger Time restaurants and a Dairy Queen franchise. Our “Burger Time” restaurants feature a variety of burgers and other affordably priced foods such as chicken sandwiches, pulled pork sandwiches, side dishes and soft drinks. Our DQ restaurant serves the menu developed by DQ and sold across the country. We believe that our restaurants appeal to a broad range of consumers. We serve customers by way of a single or double drive-thru format and walk-up windows. We generally do not offer interior seating but provide outdoor seating areas and parking areas for customer use. Our Burger Time restaurants are located in the upper Midwest, including four restaurants in North Dakota, two in South Dakota and three in Minnesota. Our Dairy Queen franchise is located in Minnesota.

Our Burger Time operating principles include: (i) offering bigger burgers and more value for the money; (ii) offering a limited menu to permit the maximum attention to quality and speed of preparation; (iii) providing fast service by way of the single or double drive-thru design 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.

We operate in the fast-food drive-through category of the QSR of the restaurant industry. The QSR segment comprises fast food restaurants characterized by limited menus, limited or no table service and fast service. In the United States, the QSR segment is the largest segment of the restaurant industry and has demonstrated growth over a long period of time. According to recent estimates, this segment represents approximately 80 percent of total commercial foodservice visits in the United States and every day about 50 million Americans eat fast food. In 2019, this segment generated $273 billion in revenue in the U.S., making it the largest segment of the restaurant industry.

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, subject to our ability to obtain the capital required for any such acquisition. 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 expansion in the number of locations and to increase comparable store sales and profits. One possible growth strategy comprises the acquisition of operating assets and a subsequent franchise rollout of the acquired business, which management may conclude is an appropriate growth plan. Management of a franchise business will expose the Company to additional risks that we do not currently face.

Our principal business plan is to grow in the foodservice industry. We may develop additional Burger Time locations through the acquisition and conversion of existing properties. However, we expect our focus will be 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 Corporate History

The Company was originally incorporated in the state of Delaware as Hartmax of NY, Inc. in January 2016 with no assets or operations, and, until the Share Exchange described below, was majority-owned by affiliates of the placement agent in the 2018 Private Placement described below. Upon the closing of the 2018 Private Placement, the Company and BTND, LLC, a Colorado limited liability company, which we refer to as BTND, entered into a Share Exchange Agreement whereby the members of BTND exchanged all of their membership interests in BTND for shares of our common stock comprising 85.9% of the outstanding shares of our Company, without giving effect to the sale of any securities sold in the 2018 Private Placement (the “Share Exchange”). Two affiliates of the placement agent together held 11.7% of our common stock as of the closing of the Share Exchange, without giving effect to the sale of any securities sold in the 2018 Private Placement. After giving effect to the Share Exchange, the Company became the sole member of BTND and BTND’s managing member, Gary Copperud, became the chief executive officer of the Company. Following the Share Exchange, the Company changed its name to BT Brands, which is the parent company of BTND, which in turn became a wholly owned operating subsidiary of the Company.

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In July 2018, we completed a private placement of our securities in which we issued and sold an aggregate of 205,002 shares of our common stock at a purchase price of $3.00 per share and warrants to purchase up to 102,503 shares of our common stock with an initial exercise price equal to $4.00 per share, for which Maxim Group, LLC acted as the placement agent (the “2018 Private Placement”). We received approximately $615,000 in gross proceeds from the sale of the securities in the 2018 Private Placement. After deducting placement agent fees and other expenses payable by us in connection with the 2018 Private Offering, we received net proceeds of approximately $492,266.

On June 13, 2019, the Company amended and restated its certificate of incorporation to change its corporate name to “BT Brands, Inc.” to better reflect its multi-faceted growth plan, and to adopt certain provisions in line with its status as a public company. On June 13, 2019, the Company adopted amended and restated bylaws also to reflect the Company’s status as a public company.

On June 12, 2020, the holders of 100% of our outstanding shares of common stock adopted resolutions approving the change of corporate domicile from Delaware to Wyoming. The Company affected the reincorporation by the filing of the appropriate documents with Delaware and Wyoming and as of December 18, 2020, the Company is domiciled in Wyoming.

The Burger Time brand originated in August 1987 with the opening of the first restaurant in Fargo, North Dakota. Over the next five years, several additional Burger Time restaurants were opened in Minnesota, North Dakota and South Dakota. In 2005, the restaurant assets were sold to STEN Corporation, a public company of which Kenneth Brimmer, our Chief Operating Officer, Chairman and member of board of directors, and Gary Copperud, our Chief Executive Officer and a member of our board of directors, were officers and directors. In May 2007, BTND purchased the Burger Time assets from STEN Corporation. Gary Copperud was the managing member of BTND from the acquisition in 2007 until the closing of the Share Exchange and 2018 Private Placement.

Since 2007, BTND from time to time sold restaurant assets, including the underlying real property resulting in the closing of the stores located on the respective properties, and BTND has closed two other stores upon the expiration of the leaseholds on which they were located. In December 2018, we closed a store located in Richmond Indiana which was open for only 18 months.

Burger Time Restaurants

Menu

At our Burger Time restaurants, we seek to give our customers “more good food for their money” and to deliver it “hot ‘n fresh.”

Our Burger Time restaurants feature a wide variety of juicy, flame broiled burgers that we refer to as “Bigger Burgers” because they are made with approximately 25% more meat and are larger in diameter than the typical quarter pound burger offerings served by our competitors. Our burgers are custom made to our specifications by our supplier, with no fillers, only beef and salt. Each burger is prepared to a customer’s individual order and is served hot and fresh. Burger favorites include a mushroom Swiss burger, a jalapeno burger, and a full pound burger to satisfy the heartiest appetite. Other entrees items include chicken sandwiches, pulled pork sandwiches and chicken chunks. Our burgers and sandwiches are served on fresh buns and are topped with generous helpings of top-tier condiments. We offer an array of traditional and signature sides, many of which have evolved into regional favorites, such as large cut battered onion rings, cheese curds, fried pickle spears and chicken fries. We also offer soft drinks and other reasonably priced food and beverage items. From time to time, we offer specialty sandwiches and wraps at similar price points. Our limited menu is designed to deliver quality across all products, a high taste profile and speedy delivery.

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Our objective is to serve customers within 60 seconds of their arrival during the peak day parts of lunch and dinner and within 3 minutes at other times. We can achieve this based on our single and double drive-thru format and on our integrated restaurant design and equipment lay-out that allows us to deliver exceptional food with fast service times. Our restaurants have a computerized point-of-sale system which displays each item ordered on a monitor viewed by food and drink preparers. This enables the preparers to begin filling an order before the order is completed and totaled, thereby increasing the speed of service to the customer and the number of sales per hour.

One of our key operating strategies is to minimize inventory and storage requirements, mandating frequent deliveries, which ensures that our food is always fresh.

Our restaurants are generally open from 10 am to 10 pm seven days a week, for lunch, dinner and late-night snacks and meals. We also have recently introduced on-line ordering through our website with curbside delivery.

We believe that our restaurants appeal to a broad spectrum of consumers, but we cater to consumers who appreciate the size and variety of our burgers, the value for the money proposition offered by our bigger burgers and the speed and efficiency offered by our single and double drive-thru windows.

Locations

The table below provides basic information about each of our restaurants.

(1) Property is leased from a third party.

(2) Dairy Queen franchise.

(3) Restaurant operations are 99% owned by BTND, LLC and 1% owned by current restaurant manager.

(4) Restaurant operations closed in December 2018.

(5) Property for sale.

We own the real estate on which all, but one of our ten operating restaurants are situated. We lease the property on which one of our Sioux Falls, South Dakota restaurants is situated. The Sioux Falls location is leased on a month-to-month basis, for which we pay monthly rent of $1,600 to a third party.

All our owned properties are subject to mortgages secured by our real and personal property. At the end of fiscal 2020, we had approximately $3.2 million in outstanding mortgage notes payable on our owned locations. Interest on most of the notes is fixed at 4.75%, two of our notes have a fixed rate of 5.50%. One of the notes has an adjustable rate based on the five-year Treasury Note rate in 2021, with a floor of 4.00%. In addition to being secured by the restaurants and other property at the sites, each note is also personally guaranteed by Gary Copperud, our Chief Executive Officer.

Our restaurants are in commercial and mixed-use zoning districts, where our target customers work, which positions the restaurants for lunch and dinner visits.

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Burger Time Restaurant Design

Our Burger Time units are free-standing facilities with single or double drive-thru capability and walk-up service windows. The menu, store layout and equipment are designed to work together to allow us to offer exceptional food with fast service times. This integrated design allows for maximum food output with minimal labor.

Burger Time stores have a highly visible, distinctive look that is intended to appeal to customers of all ages. Historically, Burger Time stores have ranged from 600 to 1000 sq. ft. Regardless of its size, each restaurant is designed for maximum financial and operational efficiency, with only four employees required to effectively staff a store. As a result of their small size, our restaurants can be constructed on as little as 15,000 square feet of land. Because of the small size of the structure, our restaurants generally require a smaller capital investment and have lower occupancy and operating costs per restaurant than traditional quick-service competitors. The size of the facility also permits somewhat greater flexibility with respect to the selection of prospective sites for restaurants.

Our Burger Time design encompasses a red and white structure and features a single or double drive thru. The roof overhangs to protect the drive thru windows from the weather. A walk-up service window is situated at the front of each restaurant. Our design and color scheme are intended to convey a message of “clean and fast” to the passing motorist. Most of our restaurants do not provide an interior dining area but offer parking and a patio for outdoor eating.

Staffing

Each restaurant employs twelve to sixteen employees, including a manager, and an assistant manager. Work shifts are staggered and vary in length of time to ensure superior customer service during our busiest times. We are focused on customer service and we seek to staff our stores with personnel who are friendly, and customer focused.

We have enjoyed a long relationship with many of the managers of our restaurants, several of whom have been with Burger Time more than seven years. We will seek to establish similar relationships with the managers joining us in the future.

Our highly experienced managers train new assistant managers in all facets of a restaurant’s operations. Other personnel can be trained in a matter of days.

Our manager training stresses food quality; fast, friendly customer service; restaurant cleanliness; and proper management operations of a quick service restaurant. We also focus on food safety and sanitation, employment laws and regulations, and systems to control food and labor costs. All managers and assistants are required to obtain the required food safety (HACCP) training and obtain the Certification applicable to their location.

Our managers and assistant managers are full time employees. We support our managers by offering competitive wages, including incentive bonuses tied to unit performance. Most other staff members are part time employees.

Our future growth and success are highly dependent upon our ability to attract, develop and retain qualified restaurant management and hourly staff members, which may be challenging.

Restaurant Reporting

Each restaurant has a computerized point-of-sale system monitored by the management of the restaurant. With this system, managers can monitor sales, labor, customer counts and other pertinent information. This information allows a manager to better control labor utilization, inventories and operating costs. Information is reported up to our corporate staff where it is analyzed to maximize cost efficiencies in food and labor costs and inventories and customer counts on a weekly basis and profit and loss statements and balance sheets on a monthly basis.

The general manager of each restaurant reports directly to a Director of Operations who in turn reports to our Chief Operating Officer, who oversees all aspects of restaurant operations including kitchen operations, restaurant facility management, new restaurant openings and the roll-out of key operational initiatives. All our restaurants prepare detailed monthly operating budgets and compare their actual results to their budgets.

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Purchasing and Distribution

We purchase most of our food, paper, packaging and related supplies from Sysco Corporation, the nation’s largest distributor of food products. Sysco distributes these supplies to our restaurants on a frequent and routine basis. Typically, our inventory of supplies is never more than $5,000 at any restaurant. This ensures that our food is consistently fresh and frees cash flow for other purposes. Our agreement with Sysco expires on May 30, 2021. We have customarily entered into a new agreement with Sysco every two years. Either party may terminate the agreement after the initial year with 180 days’ notice or in the event of a material breach that is not cured within 60 days. The agreement may be terminated by Sysco in the event that we fail to pay any amounts owed, or if, in Sysco’s sole judgment, either our financial position deteriorates materially, or Sysco becomes aware of circumstances that would materially impact our ability to meet our financial obligations.

We are party to a five-year exclusive beverage service agreement under which we have agreed for most locations to purchase our beverages, other than coffee, tea or milk, from Pepsi-Cola Bottling of Fargo., through December 21, 2025. Under this agreement, Pepsi provides to us economic incentives for being an exclusive supplier and provides beverage-dispensing equipment free of charge. Either party may terminate the agreement in the event of a material breach that is not cured within 30 days.

Beef is our largest product cost item and is expected to remain such for the foreseeable future. Fluctuations in supply and prices can significantly impact our financial results.

Marketing and Advertising

Our marketing efforts for Burger Time are intended to convey the principles that we believe attract our core customers – we provide our patrons with more good food for their money by offering them “a bigger burger” and we give it to them “hot ‘n fresh.”

To date, our marketing and advertising spend has been allocated to advertisements in newspapers and radio in the geographic areas in which our restaurants are located. In addition, we have employed product discount coupons, live remote broadcasts, customer contests and direct mailings. We also utilize marketing incentives from our suppliers whenever possible. We recently introduced an on-line ordering capability and curbside delivery program through our website, and we expect to develop an increased emphasis on direct data base marketing supplemented by social media tools, such as Facebook, to promote our brand and local stores. Collectively, however, our marketing-related expenditures have historically comprised less than 1% of our net revenues.

We believe our restaurant sales have traditionally, and generally, been derived from drive-by traffic and dedicated return visits from loyal customers. However, we recognize that as we expand our restaurant base, our marketing and advertising expenditures may need to increase. We further expect that as we open new restaurants in existing geographic areas, we will be able to take advantage of operating and marketing efficiencies resulting from the “clustering” of our restaurants.

We expect to develop and deploy a more sophisticated marketing campaign, including an expanded social media presence, intended to build consumer brand awareness of our restaurants.

Dairy Queen Franchise

In October 2015, we acquired a 99% ownership interest in a Dairy Queen franchise in Ham Lake, Minnesota. The remaining 1% ownership interest in the franchise is owned by the General Manager of the location who possesses certain Dairy Queen qualifications and whose ownership is required under the operating agreement with the franchisor.

Because we are a franchisee, we are party to a franchise agreement with Dairy Queen that, among other things, restricts our menu offerings at this location to the established Dairy Queen menu and severely limits our flexibility in the operating model we may employ at this location. Specifically, we are prohibited from selling any Burger Time items at this franchise and we may not market this restaurant as a part of our Burger Time family.

We have no plans at this time to enter into any other franchise agreements with Dairy Queen or any other national chain of restaurants, as we believe our profitable future can best be realized by expanding the Burger Time brand or by acquiring either restaurant business assets or another restaurant chain. However, should we become aware of another attractive opportunity to assume control of a franchise, we may consider it.

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Burger Time Restaurant Economic Model

Our restaurant economic model is based on three principles: a low capital investment, low conversion and incremental expenses and lean and disciplined operating efficiencies. For example, in the case of our Burger Time locations, because we do not offer interior seating, our restaurant footprint is small, generally around 650 sq. ft., which can be situated on a parcel of real estate as small as 15,000 sq. ft (approximately 0.344 acres), which includes sufficient space for parking and outdoor seating. While some of our newer restaurants have been larger, enabling us to offer some limited in-store seating, our basic model remains the same and our real estate costs, whether we purchase or lease, remain relatively low.

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 restaurant investment model targets a total cash investment of between $325,000 and $535,000, or an average of $430,000. Real estate and finance costs 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.

Costs to develop a new Burger Time location can fluctuate significantly, based on the number and timing of restaurant openings and the specific expenses incurred for each restaurant.

Based on our experience, we believe that our new restaurants may require six to nine months after opening, or more, to achieve their targeted restaurant-level sales and operating margin due to cost of sales and labor inefficiencies, especially with respect to restaurants that we open in new geographic areas. We have limited experience opening new restaurants; however, based upon our experience the initial 2-3 months shows a strong “honeymoon” effect as patrons try a new location. As is common in the restaurant industry, following the initial honeymoon period, we see sales stabilize at a lower level as we attract regular repeat customers with the goal of growing the base of customers reaching targeted sales levels in six to nine months and continue to grow in the future periods. If we open restaurants in new and untested markets, achieving targeted sales may take longer since the local population will not be familiar with our brand and it will take time to build brand awareness. 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. As a result, any number of restaurant openings in any single fiscal quarter, along with their associated opening expenses, could have a significant impact on our consolidated results of operations for that period. We believe that by a restaurant’s second full year of operations, we can achieve an annualized cash-on-cash return of approximately 30% of our investment, although there is no assurance that this target will be met. We determine the annualized cash-on-cash return based upon the free cash flow generated by the unit after all expenses including required capital improvement, compared to the net cash invested after deducting and mortgage financing secured before or after the unit is opened. This is the targeted return calculated based upon our new unit investment analysis and is based upon limited experience in opening new stores and there is no assurance the targeted returns will be achieved. “Cash-on-cash return” is calculated based on the restaurant-level earnings before interest, taxes, and depreciation and amortization (EBITDA), and is based upon the net equity investment by the Company in relation to EBITDA on an annualized basis. Our acquisition criteria seek to achieve a return in excess of the 30% target; however, as a result of the many risks and uncertainties surrounding an acquisition, there is no assurance this return will be achieved.

Growth Strategy

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 a growth plan to both expand the number of locations and to increase comparable store sales and profits. One possible growth strategy comprises the acquisition of operating assets and a subsequent franchise rollout of the acquired business, which management may conclude is an appropriate growth plan. Management of a franchise business will expose the Company to additional risks that we do not currently face.

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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.

The financing we received from the 2018 Private Placement did not provide sufficient capital to undertake the development of new Burger Time locations or complete a significant restaurant acquisition. Recently, we have been reviewing potential acquisitions that will allow us to leverage our existing infrastructure with established profitable locations as we seek a high return on our invested capital; however, we do not have any specific acquisitions planned. Any such acquisition likely will require raising additional capital to complete the purchase and to grow the business.

We will seek to acquire one or more existing restaurants and/or restaurant chains, including concepts that feature menu options that differ from the menu items we offer at Burger Time. Restaurant businesses become available for acquisition frequently and we believe that we may be able to purchase either individual properties or multi-unit businesses at prices providing an attractive return on our investment. Successful execution of our acquisition strategy will allow us to diversify our operations both into other dining concepts and geographic locations. This strategy may include one or more restaurants that lease locations from a third party as opposed to owning the real property on which the stores are located. This approach would result in a change to our historical core business model which was to own the real estate on which our restaurants operate. This approach may prove to be riskier to our business and less appealing to investors and potential sources of funding.

In all cases, implementation of our growth strategy is contingent upon the availability of adequate financing to fund both the acquisition and our expansion, of which we cannot be assured.

Expand Our Restaurant Base Through Acquisitions

The acquisition of an existing restaurant chain or individual restaurants combined with new restaurant development is expected to be the key driver of our growth strategy. We believe that there are numerous opportunities to acquire and open new restaurants in existing and new geographic areas. Initially, we plan to develop new restaurants in some of our existing markets to take advantage of operational and financial efficiencies. This approach can provide specific economic benefits including lower supply and distribution costs, improved marketing efficiencies and increased brand awareness.

From time to time, we may close restaurants based on operating metrics or other factors. We have closed only one restaurant since 2011 (Richmond, Indiana opened in 2017 and closed in 2018) and do not anticipate closing any restaurants in 2020 or in the foreseeable future thereafter. There is no guarantee that we will be able to increase the overall number of our restaurants. We may be unsuccessful in expanding within our existing markets or into new markets for a variety of reasons, including competition for customers, sites, employees, licenses and financing.

Increase Comparable Restaurant Sales

We believe that acquisitions of restaurants relative to our comparable restaurant base will be our primary driver of growth and increased revenue. However, we are considering ways to improve sales and restaurant performance. We expect to develop a more aggressive on-line presence including a mobile app which could be downloaded by customers and used to drive immediate customer visits to our locations. In addition, we will continue to create and offer seasonal and limited-time specialties to keep our menu fresh and our customers interested. We may require additional capital for such purposes, and we cannot be certain that such capital will be available on terms acceptable to us or at all.

Increase Brand Awareness

Our loyal customer base and following is now entering a third generation of Burger Time devotees. In order to develop and enhance brand awareness, we intend to update and expand our web presence. We expect to create a complete web-based program designed around mobile usage, including introducing a web- based loyalty program. 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 intend to develop social media campaigns in other markets. We may require additional capital for such purposes, and we cannot be certain that such capital will be available on terms acceptable to us or at all.

Trademarks and Service Marks

We have registered our trademarks “It’s Burger Time” and “Hot ‘n Now” with the United States Patent and Trademark Office. We believe that our trademarks and service marks have value to us and are important to our marketing efforts. We may develop additional marks in the future. Our policy is to pursue registration of our marks whenever possible and to oppose vigorously any infringement of its marks.

Competition

The restaurant industry is highly competitive and is dominated by major chains that possess substantially greater financial and other resources than we have. The industry is affected by changes in geographic competition, changes in the public’s eating habits and preferences, local and national economic conditions affecting consumer spending habits, population trends and local traffic patterns. Key elements of competition in our industry are the price, quality and value of food products offered; quality and speed of service; advertising effectiveness; brand name awareness; restaurant convenience; and attractiveness of facilities. We compete primarily based on value of food (portion size), price, food quality and speed of service. A significant change in pricing or other marketing strategies by one or more of our competitors could have an adverse impact on our sales, earnings and growth. Our competition includes a variety of national and regional fast-food chains and locally owned restaurants that offer carry-out, dine-in, delivery and catering services, many of which have achieved significant brand and product recognition and engage in extensive advertising and promotional programs. Our competition in the geographic areas in which operate includes McDonalds, Burger King, Carl’s Jr. and Wendy’s.

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Seasonality

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 the impact of cold weather at our upper Midwest 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.

Employees

As of January 3, 2021, the Company had three members of its senior corporate personnel. Each of the Burger Time restaurants and the Dairy Queen franchise has both a manager, who is a full-time, salaried employee, and an assistant manager or supervisor and a varying number of restaurant staff, all of whom are hourly employees. As of January 3, 2021, we had approximately 107 employees, of which 17 were full time and 90 were part time. None of our employees are unionized or covered by collective bargaining agreements, and we consider our current employee relations to be good.

Marketable Securities

We have, from time to time, purchased publicly traded marketable securities. Historically, these securities consisted of investments in exchange-listed common stocks with published prices per share readily available.

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore is not required to provide the information required by this item.

A description of our restaurant properties appears above under the heading “BUSINESS—Locations.” We lease our executive offices, consisting of approximately 1,000 square feet located at 405 West Main Street, West Fargo, North Dakota, on a month-to-month basis at a cost of $500 per month. We believe our current office space is suitable and adequate for its intended purposes and our near-term expansion plans.

Mortgages

We currently have mortgages on each of our restaurant locations except two. As of January 3, 2021, the total amount of the loans we owe on those properties is approximately $3,200,000. Our monthly payments on these mortgages total $31,128. During 2020, two of the Company’s mortgage lenders suspended and deferred current payments for a period of three months. A total of $93,602 in payments were deferred under these arrangements and the deferred amount was added to the final payments due under the mortgages.

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Rental Properties

We currently lease the land one of our Sioux Falls, South Dakota locations on a month-to-month basis and the monthly rent we pay is $1,600.

Regulation and Compliance

Our operations are subject to a wide range of federal, state and local government regulations, including those relating to, among others, public health and safety, zoning and fire codes, labor and franchising. Our failure to obtain or retain food or other licenses and registrations or exemptions would adversely affect the operations of our restaurants. We operate each of our restaurants in accordance with standards and procedures designed to comply with applicable laws, codes and regulations. To date, we have not experienced and do not anticipate any significant problems in obtaining required licenses, permits or approvals, however, any difficulties, delays or failures in obtaining such licenses, permits, registrations, exemptions, or approvals in the future could delay or prevent the opening of, or adversely impact the viability of, a restaurant.

The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. We believe federal and state environmental regulations have not had a material effect on operations, but more stringent and varied requirements of local government bodies with respect to zoning, land use and environmental factors could delay construction and increase development costs for new restaurants.

We are also subject to the Fair Labor Standards Act, the Immigration Reform and Control Act of 1986 and various federal and state laws governing such matters as minimum wages, overtime, unemployment tax rates, workers’ compensation rates, citizenship requirements and other working conditions. A significant portion of the hourly staff is paid at rates consistent with the applicable federal or state minimum wage and, accordingly, increases in the minimum wage will increase labor costs. We are also subject to various laws and regulations relating to any future franchise operations. We are also subject to the Americans with Disabilities Act, which prohibits discrimination based on disability in public accommodations and employment, which may require us to design or modify our restaurants to make reasonable accommodations for disabled persons.

Many states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose to consumers certain nutritional information or have enacted legislation restricting the use of certain types of ingredients in restaurants. Many of these requirements are inconsistent or interpreted differently from one jurisdiction to another. These requirements may be different or inconsistent with requirements that we are subject to under the ACA, which establishes a uniform, federal requirement for certain restaurants to post nutritional information on their menus. Specifically, the ACA requires chain restaurants with 20 or more locations in the United States operating under the same name and offering substantially the same menus to publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake. The ACA also requires covered restaurants to provide to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards about the availability of this information upon request. While our ability to adapt to consumer preferences is a strength of our concepts, the effect of such labeling requirements on consumer choices, if any, is unclear at this time.

Currently, the Company is not engaged in the business as a “franchisor” and operates a Dairy Queen unit as a “franchisee of Dairy Queen. Franchise operations will be governed by state laws that regulate the offer and sale of franchises and the franchisor – franchisee relationship. Such laws generally require registration of the franchise offering with state authorities and regulate the franchise relationship by, for example, requiring the franchisor to deal with its franchisees in good faith, prohibiting interference with the right of free association among franchisees, limiting the imposition of standards of performance on a franchisee and regulating discrimination against franchisees in charges, royalties or fees. In addition, such laws may restrict a franchisor in the termination of a franchise agreement by, for example, requiring “good cause” to exist as a basis for the termination, advance notice to the franchisee of the termination, an opportunity to cure a default and a repurchase of inventory or other compensation.

Environmental Matters

Our operations are subject to extensive federal, state and local laws and regulations relating to environmental protection, including regulation of discharges into the air and water, storage and disposal of waste and clean-up of contaminated soil and groundwater. Under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of hazardous or toxic substances on, in or emanating from such property. Such liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances.

We have not conducted a comprehensive environmental review of our properties or operations. No assurance can be given that we have identified potential environmental liabilities at our properties or that such liabilities will not have a material adverse effect on our financial condition.

We are not presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us that may materially affect us.

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. The 53-week fiscal 2020 ended on January 3, 2021 and the 52-week fiscal 2019 year ended on December 29, 2019.

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 $535,000. 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. These costs can fluctuate significantly, based on the number and timing of restaurant openings and the specific expenses incurred for each restaurant.

Our average customer transaction increased by approximately 4% in the fiscal 2020 compared to 2019 principally the result of price increase implemented in the middle of 2020. Our sales trends are influenced by many factors and the environment remains challenging for smaller restaurant chains as competition from the major fast-food hamburger-focused business is intense.

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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”. 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 2021. Beef costs were stable in 2020 following an increase of approximately 5% in 2019. 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. During 2020, a significant increase in business volume contributed to improved profit margins. Additional margin improvements may have to be made through operational improvements, equipment advances and increased volumes to help offset any food 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. While details have not been determined the initial proposal by the Biden Administration includes a proposal 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. Our hourly employees earn a wage of on average of approximately $12 per hour. An increase in the minimum wage to $15 per hour would adversely impact our profit margins.

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 increases and decreases in intensity 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.

Most states, including Minnesota and North Dakota, have limited or banned public gatherings to halt or delay the spread of disease. Under these emergency orders, essential services have remained 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 directions limiting public gatherings, regulators have generally allowed drive-through restaurant services to remain open. To date, our restaurants have remained open although we have curtailed some hours and have experiences temporary restaurant closures while locations have been cleaned and employees tested. Thus far, we have been able to reopen after two or three days. 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.

While a program to vaccinate a majority of Americans is currently in progress, it is not possible for us to predict the duration or magnitude of the effects of the outbreak and its impact on our business or results of operations at this time. The 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 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.

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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.

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.

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Results of Operations.

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

53 Week Period Ended January 3, 2021 (Fiscal 2020) compared to the 52 Week Period Ended December 29, 2019 (Fiscal 2019)

Net Revenues:

Net sales for Fiscal 2020 increased $1,679,232 or 25.9% to $8,159,796 from $6,480,564 in Fiscal 2019. The significant increase, which occurred beginning in March of 2020, was principally the result of the COVID-19 pandemic and the temporary shutdown of many restaurant alternatives. The result of limiting indoor seating at restaurants was customers choosing drive-through alternatives including Burger Time.

Restaurant sales for Fiscal 2020 ranged from a low of $536,000 to a high of $1,043,500 and average sales for each Burger Time unit during the period was approximately $839,000 in 2020 an increase of approximately 25% from $669,000 in 2019.

Costs of Sales - food and paper:

Cost of sales - food and paper for Fiscal 2020 decreased to 37.9% of restaurant sales from 39.7% of restaurant sales in Fiscal 2019. This decrease was mainly due to a price increase taken in the middle of 2020 during a relatively stable cost environment.

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Restaurant Operating Costs:

Despite increases in general restaurant operating costs during Fiscal 2020, restaurant operating costs (which refer to all the costs associated with the operation of our restaurants, but do not include general and administrative costs, depreciation and amortization and impairment charges including the write-down of goodwill) as a percent of restaurant sales decreased to 80.4% in 2020 from 89.2% in Fiscal 2019. 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 2019 to Fiscal 2020 are principally the result of a significant increase in restaurant sales volume in 2020 and may be detailed as follows:

Labor Costs:

For Fiscal 2020, labor and benefits costs decreased to 28.6% of restaurant sale from 33.0% of restaurant sales in Fiscal 2019. The decrease was the result of the significant increase in business activity and the latter three quarters of 2020 which resulted in a favorable utilization of the fixed portion of labor costs. The Company continues to benefit from minimal turnover in its unit restaurant management. Payroll costs are semi-variable in nature, meaning that they do not decrease proportionally to decreases in revenue, thus they decrease as a percentage of restaurant sales when there is a increase in restaurant sales volume.

Occupancy and Other Operating Costs:

For Fiscal 2020, occupancy and other costs declined to 13.9% of sales, or $1,136,257, compared to 16.5% of restaurant sales, or $1,072,407, in Fiscal 2019 principally as a result of the significant increase in restaurant volume.

Depreciation and Amortization Costs:

For Fiscal 2020, depreciation and amortization costs decreased 11.0%, or $23,398, to $189,389 (2.3% of sales) from $212,787 (3.3 % of sales) in Fiscal 2019. Depreciation costs have been declining as the Company’s equipment reaches a fully depreciated status and in 2020 decreased as percentage of sales because of the significant sales increase during 2020.

General and Administrative Costs

General and administrative costs increased 22.6%, or $126,639, from $560,885 (6.9% of sales) in Fiscal 2019 to $687,524 (9.4% of sales) in Fiscal 2020. The increase was principally the result of increased executive bonus compensation based on the strong financial performance in 2020.

Impairment of Assets Held for Sale and Goodwill

In 2019, the Company recorded a $93,488 charge to provide for a loss resulting from the closing of its Richmond, Indiana location and the planned sale of the property. In 2020, an additional $100,000 impairment charge was recognized for related to the Richmond property and a $90,493 charge was recorded to recognize impairment of the majority of costs associated with property in St. Louis, Missouri which the company had originally acquired for development. Additionally, in 2019, there was a $248,500 charge to write-off goodwill arising from the 2018 Share Exchange.

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Income (loss) from Operations:

The income from operations was $529,368 in Fiscal 2020 compared to a loss from operations of $373,548 in Fiscal 2019. The change in income from operations in Fiscal 2020 compared to Fiscal 2019 was due to the matters discussed in the “Net Revenues”, “Restaurant Operating Costs” and “Impairment and Goodwill Write-down Charges” sections above.

Interest expense:

In Fiscal 2020, our interest expense decreased $30,084 to $177,757 (2.2% of restaurant sales) from $207,841 (3.2% restaurant sales) in Fiscal 2019.

Interest Income:

The $103,623 increase in interest income in 2020 was the result of interest earned on the Company’s advances to Next Gen Ice, Inc. (NGI), a related company, and includes $75,000 of interest income related to the value of equity received by the Company as part of a modification of the notes receivable.

Other Income:

The $466,758 of other income in Fiscal 2020 is the result of the Company having borrowed $460,400 under the Paycheck Protection Program (PPP). The Company was informed by its lender in 2021 that the entire amount of PPP advances been forgiven and therefore the anticipated loan forgiveness is reflected as “Other Income”. In accordance with recent Federal stimulus legislation, the PPP loan has been treated as an SBA Grant during 2020 and the funds advanced under the program have been treated as non-taxable for federal income tax purposes in determining the provision for income taxes.

Net Income (loss):

The net income $791,992 for Fiscal 2020, compared to a loss of $466,577 in Fiscal 2019. The change from Fiscal 2020 from Fiscal 2019 was primarily attributable to the matters discussed in the “Net Revenues,” “Restaurant Operating Costs,” “General and Administrative Costs,” and “Other Income” 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.

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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 Resource

Since March of 2020, the COVID-19 pandemic has had a positive impact of the Company’s sales and liquidity. For the 53 weeks ended January 3, 2021, the Company earned an after-tax profit of $791,992. On January 3, 2021, the Company had $1,321,244 in cash and working capital of $371,693, an increase of $843,688 from the prior year-end deficit of $471,995.

COVID-19 has had, and likely will to continue to have a significant adverse 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 under the terms of the program, the Company applied for forgiveness of the loans in 2020, anticipating its application qualified the loans for forgiveness. Following application by the Company, the loans were forgiven in full 2021. As a result of forgiveness of the PPP advances, the loan forgiveness is reflected as “Other Income” in 2020. In accordance with federal stimulus legislation, the PPP loans have been treated as SBA Grants and the funds advanced under the program have been treated as non-taxable for federal income tax purposes in determining the provision for income taxes. Also, in May 2020, the Company also borrowed $27,500 at no interest under the Minnesota Small Business Emergency Loan Program, and in addition, two of the Company’s mortgage lenders suspended and deferred current payments for a period of three months during the first half of 2020. A total of $93,602 in payments were deferred under these programs. The Company expects to have sufficient cash assets to meet its obligations for more than a year from the date of this Annual Report.

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.

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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 2021; 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. Our plans indicate that the Company can meet its working capital needs through 2022. If we 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.

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 2020 or 2019 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.

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.

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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.

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.

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(1) Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As of January 3, 2020, our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation and the material weakness in our internal control over financial reporting discussed below, our Chief Executive Officer and Chief Financial Officer concluded that, as of January 3, 2021, our disclosure controls and procedures were not effective at a reasonable assurance level in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules, regulations and forms of the SEC, including ensuring that such material information is accumulated by and communicated to our management, including our Chief Executive Officer, Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(2) Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of January 3, 2021. As of January 3. 2021, management has not completed an effective assessment of the Company’s internal controls over financial reporting based on the 2013 Committee of Sponsoring Organizations (COSO) framework. Management has concluded that, during the period covered by this report, our internal controls and procedures were not effective to detect the inappropriate application of U.S. GAAP. Management identified the following material weaknesses set forth below in our internal control over financial reporting.

1. We lack the necessary corporate accounting resources to maintain adequate segregation of duties.

2. We did not perform an effective risk assessment or monitor internal controls over financial reporting.

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This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only the management’s report in this annual report.

A material weakness, as defined in Exchange Act Rule 12b-2, is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As a result of this assessment, management concluded that we did not design and maintain effective controls over the completeness and accuracy of the accounting for, and disclosure of, the income tax effects of acquired assets. Specifically, we did not design appropriate controls to identify and reconcile deferred income taxes associated with the accounting for acquired assets and the related tax provision. This material weakness resulted in material errors in connection with the accounting for our Share Exchange in 2018 and the calculation of Goodwill that were corrected through a revision of the consolidated financial statements as of and for the years ended December 29, 2019. We evaluated the revision in accordance with Accounting Standards Codification (ASC) 250, Accounting Changes and Error Corrections and evaluated the materiality of the revision on prior periods’ financial statements in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality. We concluded that the revision was not material to any prior annual or interim period and therefore, amendments of previously filed reports are not required. In accordance with ASC 250, we have corrected the error in all prior periods presented by revising the consolidated financial statements appearing herein.

As a result of the material weakness in internal control over financial reporting described above, management has concluded that we did not maintain effective internal control over financial reporting as of January 3, 2021. Management is in the process of developing and implementing a series of accounting systems and procedure changes and internal controls intended to provide adequate controls over financial reporting.

(3) Changes in Internal Control over Financial Reporting

Except as described above, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934 that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.