BT Brands, Inc.: Form 10-K for the period ended Jan 2, 2022

In this 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.

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 fast-food restaurants in the north-central United States and are seeking to expand into other regions and other foodservice businesses. We currently own and operate nine Burger Time restaurants in Minnesota, North Dakota, and South Dakota and a Dairy Queen franchise in Ham Lake, Minnesota. Our plan is to purchase one or more existing restaurant businesses.

Our operating principles for Burger Time include: (i) offering a “Bigger Burger” to deliver our customers “more good food for your 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 at our restaurants that expedites the ordering and preparation process; and (iv) great tasting quality food made fresh to order at a fair price. We currently serve the drive-thru and take-out segment of the restaurant industry.

We operate in the fast-food hamburger category of the quick service restaurant, or QSR, a restaurant industry segment. Fast-food restaurants are characterized by limited menus, limited or no table service, and fast service. According to IBISWorld, there are nearly 200,000 fast-food restaurants in the United States, and fast food generated an estimated $278.6 billion in revenue in 2021, with an estimated $126.9 billion, or approximately 45% of the U.S. fast-food market, deriving from the hamburger segment. Therefore, the hamburger segment is the largest segment of the U.S. QSR market.

Our objective is to increase value for our shareholders in the foodservice industry. Our principal strategy is to acquire multi-unit restaurant concepts and individual restaurant properties at attractive earnings multiples. Though we do not currently plan to do so, we may develop additional Burger Time locations under certain circumstances. Once acquired, we will operate the acquired business(es) with a shared central management organization. Assuming we are successful in acquiring an operating business, following the acquisition, we may pursue expansion in the number of locations and will implement programs to increase comparable-store sales and profits and to boost brand awareness

Our Corporate History

The Company was incorporated in Delaware as Hartmax of NY, Inc. in January 2016. Prior to the Share Exchange, the Company 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, “BTND,” entered into a Share Exchange Agreement whereby the membership interests in BTND were exchanged 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”). Following the Share Exchange, the Company became the sole member of BTND and changed its name to BT Brands, Inc. Concurrent with the Share Exchange, Maxim Group, LLC acted as the placement agent for 205,002 shares of our common stock at $3.00 per share and warrants to purchase up to 102,503 shares of our common stock with an initial exercise price of $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 and $492,266 in net proceeds from the 2018 Private Placement.

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 growth plans and adopt specific provisions in line with its 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. As of December 18, 2020, the Company became domiciled in Wyoming.

On November 12, 2021, we completed a public offering of 2,400,000 units of our securities at a public offering price of $5.00 per unit, each unit comprising one share of common stock and one warrant to purchase one share of common stock at an initial exercise price of $5.50 per share. On November 12, 2021, the underwriters of the offering exercised their option to purchase 360,000 Warrants for $3,600 under the over-allotment option, and on November 16, 2021, the public offering closed. The net proceeds to the Company from the offering, including the exercise of the underwriter’s option to purchase additional warrants, were approximately $10.7 million, excluding any proceeds from the exercise of warrants, after deducting underwriting discounts and commissions and payment of estimated offering expenses of approximately $1.3 million.

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The Burger Time brand originated in August 1987 with its 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 the 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.

Burger Time Restaurants

Menu

At our Burger Time restaurants, we seek to give our customers more good food for their money and 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 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 include chicken sandwiches, pulled pork sandwiches, and chicken chunks. Our burgers and sandwiches are served on fresh buns and are topped generously with 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. In addition, we offer specialty sandwiches and wraps at similar price points from time to time. Our limited menu is designed to deliver quality across all products, a high taste profile, and speedy delivery.

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 our integrated restaurant design and equipment layout 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 manage inventory and storage requirements with frequent deliveries, ensuring that our food is always fresh.

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

We believe that our restaurants appeal to a broad spectrum of consumers., 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.

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Locations

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

(1) Land is leased from a third party.

(2) Dairy Queen franchise.

(3) Restaurant operations are 99% owned by BTND, LLC, and 1% owned by the 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 located. The Sioux Falls location is leased on a month-to-month basis, for which we pay a monthly rent of $1,600 to a third party.

All of our owned properties are subject to mortgages secured by our real and personal property. On June 27, 2021, we refinanced most of our existing mortgage debt, which bore interest at 4.75%. As of January 2, 2022, we had $3,027,971 in contractual obligations relating to amounts due under mortgages on the real property on which our stores are situated. Our monthly required payment is approximately $22,700. Under the terms of the refinanced mortgage debt, our nominal interest cost is 3.45% fixed for the next ten years. In addition to being secured by the restaurants and other property at the sites, each mortgage note is also personally guaranteed by Gary Copperud, our Chief Executive Officer.

Our restaurants are in commercial and mixed-use zoning districts near where our target customers work and live positioning the restaurants for lunch and dinner visits.

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 offer exceptional food with rapid service times. This integrated design seeks to maximize food output with minimal labor.

Burger Time stores have a visible, distinctive look 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 staff a store effectively. As a result of their small size, our restaurants can be constructed on as little as 15,000 square feet of land. 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 greater flexibility for selecting 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. Our restaurants do not provide an interior dining area but offer parking and a patio for outdoor eating.

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Staffing

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

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

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

Our manager training stresses food quality, fast, friendly customer service; restaurant cleanliness; and proper quick-service restaurant management operations. We also focus on food safety and sanitation, employment laws and regulations, and systems to control food and labor costs. All managers and assistant managers are required to obtain 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 depend on 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 restaurant’s management. 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. It is analyzed to maximize cost efficiencies in food and labor costs, inventories and customer counts weekly, and profit and loss statements and balance sheets monthly.

The general manager of each restaurant reports directly to a Director of Operations, who 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.

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 food and supplies usually does not exceed $10,000 at any individual restaurant. These procedures ensure that our food is consistently fresh and frees cash flow for other purposes. Our agreement with Sysco expires on May 30, 2022, and will automatically be extended for additional one-year terms unless terminated by either party. Either party may terminate the agreement with 180 days’ notice or in the event of a material breach that is not cured within 60 days. In addition, Sysco may terminate the contract if 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. We have agreed for Burger Time locations to purchase our beverages, other than coffee, tea, and milk, from PepsiCo, including its affiliated bottlers, through December 21, 2025. Under this agreement, PepsiCo provides 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 most significant product cost item and is expected to remain such for the foreseeable future. As a result, fluctuations in supply and prices can significantly impact our financial results.

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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 have been principally allocated to social media with limited 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 online ordering capability and curbside delivery program through our website. We expect to emphasize direct database marketing supplemented by social media tools 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, 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 franchise’s remaining 1% ownership interest is held by the General Manager of the location, who possesses specific 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 limits our flexibility in the operating model we may employ at this location. Expressly, we are prohibited from selling any non-Dairy Queen-approved items at this franchise location, and we may not market this restaurant as a part of Burger Time.

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 acquiring unrelated restaurant businesses. However, we may consider it if we become aware of an attractive opportunity to assume control of a Dairy Queen or other franchise restaurant.

Burger Time Restaurant Economic Model

Our Burger Time 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 square feet, 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. As a result, our real estate costs remain relatively low whether we purchase or lease.

Operationally, we take steps to maintain efficiency, including maintaining inventory of approximately $10,000 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 purchasing 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.

Growth Strategy

We are seeking to increase value for our shareholders in the foodservice industry. Our strategy is to acquire restaurant concepts and individual restaurant properties at attractive earnings multiples. Though we do not currently plan to do so, we may develop additional Burger Time locations under certain circumstances by acquiring and converting existing properties. Other key elements of our growth strategy encompass increasing same-store sales and introducing a campaign to boost brand awareness.

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As we develop and extend our business into new food concepts and geographic areas, we expect to pursue strategies that will leverage our multiple brands, capacity, and reach, which may include:

• introducing dual concept locations that allow for two or more of our brands to operate in a single space and share a single kitchen and staff, to enhance our return on investment;
• advancing aggressive third-party national branded and local delivery services;
• entering into local and regional product licensing agreements that allow for the sale in third-party retail establishments of popular products that we offer at our restaurants; and
• employing extensive use of direct database marketing, including social media, to drive business to all concepts under our control.

As a public company, we may be presented with and would evaluate any opportunities to become a reverse merger candidate in the restaurant industry, whereby a significantly larger private restaurant chain seeks to avail itself of our public company status by merging with our business.

Expansion Through Acquisitions

We intend to make strategic and opportunistic acquisitions that provide an entrance into targeted restaurant segments and geographic areas. Restaurant businesses become available for acquisition frequently. We believe that we may purchase either individual restaurant properties or multi-unit businesses at prices that provide an attractive return on our investment. We may acquire operating assets where a franchise program is the focus of the acquired foodservice business. We intend to follow a disciplined strategy of evaluating acquisition opportunities to ensure and enable the accretive and efficient acquisition and integration of additional restaurant concepts. Successful execution of our acquisition strategy will allow us to diversify our operations both into other dining concepts and geographic locations.

In evaluating potential acquisitions, we may consider the following characteristics, among others that management considers relevant to each opportunity:

• the value proposition offered by acquisition targets when comparing the purchase price to the potential return on our investment;
• established, recognized brands within their geographic footprint;
• steady cash flow;
• track records of long-term operating performance;
• sustainable operating results;
• geographic diversification; and
• growth potential.

Assuming we successfully acquire new businesses, we will operate the business or businesses with a shared central management organization. Following the acquisition, we expect to pursue a growth plan to expand the number of locations and increase comparable store sales and profits, as described below. We anticipate that by leveraging our management services platform, we will be able to achieve post-acquisition cost benefits by reducing the corporate overhead of the acquired business. If we acquire one or more restaurant chains or individual units near each other, we believe the concentration of operations will provide economic synergies with respect to management functions, marketing, and advertising, supply chain assistance, staff training, and operational oversight.

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Future Development of Additional Burger Time Restaurants

We may, in certain circumstances, consider developing an additional Burger Time location. Conditions which might give rise to developing additional Burger Time locations include the opportunity to acquire and convert a property that previously had operated as a fast-food establishment at a highly attractive price in a location that fits naturally within Burger Time’s geographic footprint so that we may share service expenses, including advertising costs.

If we elect to open additional Burger Time restaurants, we expect that the development of these restaurants will, based on our experience, require a minimum of six to nine months after opening to achieve the targeted restaurant-level sales and operating margins. If we were to open a Burger Time restaurant in new and untested markets, achieving targeted sales may take longer since the local population will not be familiar with our brand and building brand awareness takes time. 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, which is difficult to predict.

Increase Same-Store Sales

Same-store sales growth reflects the change in year-over-year sales for the comparable store base. We intend to deploy a multi-faceted same-store sales growth strategy to optimize restaurant performance. We will apply techniques proven in the restaurant industry to increase same-store sales at our Burger Time restaurants and our acquired properties and develop new approaches that reflect our corporate character and restaurant composition. We expect to utilize customer feedback and analyze sales data to introduce, test, and hone existing and new menu items. In addition, we will investigate using public relations and experiential marketing to engage customers. We expect our strategies to increase same-store sales will evolve as we acquire new restaurant concepts in new markets.

Increase Brand Awareness

Increasing brand awareness is important to the growth of our Company. We will develop and implement forward-looking branding strategies for our Burger Time concept and any acquired businesses. We will seek to leverage social media and employ targeted digital advertising to expand the reach of our brands and drive traffic to our stores. In addition, we intend to develop mobile applications that will allow consumers to find restaurants, order online and receive special offers. We will deploy cross-over ads with radio and social media interacting with each other. We expect our branding initiatives to evolve as we consummate acquisitions of restaurant concepts that appeal to distinct consumer markets in differing geographic areas.

Trademarks and Service Marks

We have registered “It’s Burger Time” and “Hot ‘n Now” with the United States Patent and Trademark Office. Our trademarks and service marks are valuable to us and essential to our marketing efforts. We may develop additional trademarks 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 significant chains that possess substantially greater financial and other resources than we have. The industry is affected by geographic competition changes; the public’s eating habits and preferences, local and national economic conditions that impact consumer spending, population trends, and local traffic patterns. The industry’s critical elements of competition 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 the 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 adversely impact 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 we operate includes McDonald’s, Burger King, Carl’s Jr., and Wendy’s.

Seasonality

Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per Burger Time 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. Future acquisitions may have a different seasonal pattern than our Burger Time restaurants.

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Employees

As of January 2, 2022, the Company had three members of its senior corporate personnel. Each of the Burger Time restaurants and the Dairy Queen franchise has a manager, a full-time, salaried employee, an assistant manager or supervisor, and a varying number of restaurant staff, all of whom are hourly employees. As of January 2, 2022, 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 Securities Act of 1934, as amended, (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 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 the cost of $500 per month. In addition, effective January 2, 2022, we have agreed to reimburse Brimmer Company, LLC for the monthly rent of approximately $1,300 on approximately 1100 square feet in Minnetonka, Minnesota, where certain administrative activities are performed. We believe our current office space is suitable and adequate for its intended purposes and our near-term expansion plans.

Mortgages

On June 28, 2021, we refinanced most of our existing mortgage debt, which bore interest at 4.75%. As of January 2, 2022, we had $3,049,971 in contractual obligations principally for amounts due under mortgages on the real property on which our stores are situated. Our monthly required payment is approximately $22,700. Under the terms of the refinanced mortgage debt, we lowered the nominal interest cost from 4.75% to 3.45% fixed for the next ten years.

Rental Properties

We currently lease the land for one of our Sioux Falls, South Dakota locations on a month-to-month basis, and the monthly rent is $1,600. We also pay a combined total of approximately $1,800 for office space in West Fargo, North Dakota and Minnetonka, Minnesota. Both corporate locations are paid for and utilized on a month-to-month basis.

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 could 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.

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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. 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 costs would not have a material adverse effect on our financial condition if assessed.

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 52-week fiscal 2021 ended on January 2, 2022, and the 53-week fiscal 2020 year ended on January 3, 2021.

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 affordable 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, 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 a “Bigger Burger” to deliver our customers “more good food for your 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 approximately $10,000 per store at any given time (which also has the advantage of allowing for frequent deliveries of fresh food). Historically, our Burger Time investment model targeted an average total cash investment of between $325,000 and $535,000. Real estate and finance costs vary materially by location but, assuming the average investment figure applies, the amount allocated to purchasing real estate would be approximately $225,000.

Our average customer transaction increased by approximately 7% in 2021 compared to 2020 and currently is approximately $12.30. This recent increase is principally because of a menu price increase implemented in the middle of 2020. Many factors influence our sales trends, and the environment remains challenging for smaller restaurant chains as competition from the major fast-food hamburger-focused business is intense.

In the fourth quarter of 2021, we completed an initial public offering of units of our securities at a public offering price of $5.00 per unit, each unit comprising one share of common stock and one warrant to purchase one share of common stock at an exercise price of $5.50 per share. The net proceeds to the Company from the offering, including the exercise of the underwriter’s option to purchase additional warrants, were approximately $10.7 million, after deducting underwriting discounts and commissions and payment of estimated offering expenses totaling approximately $1.3 million.

Material Trends and Uncertainties

There are industry trends that may have an impact on our business. These trends principally relate to the rapidly changing technology and food delivery area. The major companies in the restaurant industry have rapidly adopted and developed applications for smartphone and mobile delivery, have aggressively expanded drive-through, take-home and delivery operations, and have developed loyalty programs and database marketing supported by a robust technology platform. We expect these trends to continue as restaurants aggressively compete for customers. Further, the major industry participants have continued to discount prices through promotions strategically. We expect these significant trends will continue.

The cost of food has increased over the last two years, and we expect to see continued inflationary pressure continue and perhaps accelerate in 2022. Beef costs increased slightly in 2021, following stable prices in 2020. In 2021 beef price increased by approximately 4% per pound. Given the competitive nature of the fast-food burger restaurant industry, it may be challenging to raise menu prices to cover future cost increases fully. During 2020 and continuing in 2021, a significant increase in business volume contributed to improved profit margins. Additional margin improvements may have to be made through operational enhancements, equipment advances, and increased volumes to help offset any food cost increases due to the competitive state of the restaurant industry.

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Labor is a critical factor in operating our stores. In most areas where we operate our restaurants, there historically has been a shortage of suitable labor. Recently restaurant staffing has become more challenging, occasionally resulting in short hours and store closures. As a result of these challenges, we face higher wages as the competition for employees intensifies in the restaurant industry and all retail and service industries. The Company consistently develops and maintains programs to attract and retain quality employees.

Increases in the federally and state-mandated minimum wage may also impact our operations. A variety of proposals have been made to increase the federal minimum wage to $15 per hour, and state and local governments have, in some cases, implemented minimum wage rates. In North Dakota, the minimum wage is set at the federally mandated minimum wage of $7.25 per hour. The rates are annually adjusted to reflect any increase in the 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. On average, our hourly employees earn approximately $12 to $15 per hour. An increase in the minimum wage to $15 per hour would adversely impact our profit margins.

Since March 2020, we have faced the effects of COVID-19 and its more recent variants as a global pandemic that has been both unpredictable and persistent. The COVID-19 pandemic has adversely affected workforces, customers, economies, and financial markets globally and has disrupted the normal flow of the U.S. economy. For the most part, our stores have remained open for drive-through business during the last year; however; many businesses experienced a disruption of normal operations. More recently, food service businesses, including ours, have faced challenges attracting and hiring workers. The labor shortages may become more acute in the busier summer months.

In 2020 extending into 2021, many states and local jurisdictions, including Minnesota, mandated limited public gatherings and the wearing of masks to halt or delay the spread of disease. Under these emergency orders, certain essential services 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 generally allowed drive-through restaurant services to remain open. To date, our restaurants have remained open, although we have curtailed hours at some stores and have experienced temporary restaurant closures while locations have been cleaned and employees tested. Thus far, we have been able to reopen after two or three days after such temporary closing. Local, regional, or national governments may, at any time, implement directives that limit or order our business to close or take other measures intended to mitigate the spread of disease. Further, some 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, we can’t predict the duration or magnitude of the effects of the outbreak and its impact on our business or the 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. We expect to continue to navigate an unprecedented time for our company and industry.

As the restrictions on behavior eased with approved vaccines being distributed and administered, all the states in which we operate have lifted mandatory mask mandates, and we expect that, in most respects, restaurant industry operations will return to pre-pandemic norms. As a result, our restaurants may revert to more typical pre-pandemic operations and revenues, resulting in a decline in sales from recent levels. We may be subject to additional competition, as many restaurants initiated take-home and delivery services during the pandemic. Customers may have grown accustomed to a broader range of take-out foods beyond quick-service restaurant (QSR) options, which may negatively impact our revenue.

We continue to monitor the course of the pandemic and its impact on our customer base and the country. We can’t predict the future course of the pandemic in light of a multitude of factors, including the spread of new variants of the original coronavirus disease among the U.S. population and the efficacy of existing treatments and vaccines.

Growth Strategy and Outlook

We are seeking to increase value for our shareholders in the foodservice industry. Our principal strategy is to acquire multi-unit restaurant concepts and individual restaurant properties at attractive earnings multiples. Though we do not have plans to do so, we may, under certain circumstances, develop additional Burger Time locations. Other key elements of our growth strategy encompass increasing same-store sales and introducing a campaign to boost brand awareness.

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Expansion Through Acquisitions: We intend to make strategic and opportunistic acquisitions that provide an entrance into targeted restaurant segments and geographic areas. Restaurant businesses become available for acquisition frequently. We believe that we may purchase either individual restaurant properties or multi-unit businesses at prices that provide an attractive return on our investment. We may acquire operating assets where a franchise program is the focus of the acquired foodservice business. We intend to follow a disciplined strategy of evaluating acquisition opportunities to ensure and enable the accretive and efficient acquisition and integration of additional restaurant concepts. Successful execution of our acquisition strategy will allow us to diversify our operations both into other dining concepts and geographic locations. Assuming we successfully acquire new businesses, we will operate the business or businesses with a shared central management organization.

Expansion through the Development of Additional Burger Time Restaurants: We may develop additional Burger Time restaurants under limited circumstances. Conditions which might give rise to developing additional Burger Time locations include the opportunity to acquire and convert a property that previously had operated as a fast-food establishment at a highly attractive price in a location that fits naturally within Burger Time’s geographic footprint so that we may share service expenses, including advertising and marketing costs.

Increase Same-Store Sales: Same-store sales growth reflects the change in year-over-year sales for the comparable store base. We intend to deploy a multi-faceted same-store sales growth strategy to optimize restaurant performance. We will apply techniques proven in the restaurant industry to increase same-store sales at our Burger Time restaurants and our acquired properties and develop new approaches that reflect our corporate character and restaurant composition. We expect to utilize customer feedback and analyze sales data to introduce, test, and hone existing and new menu items. In addition, we will explore using public relations and experiential marketing to engage customers. We expect our strategies to increase same-store sales will evolve as we acquire new restaurant concepts in new markets. We intend to retain seasoned restaurant personnel to develop and implement programs appropriate for each concept.

Increase Brand Awareness: Increasing brand awareness is critical to our company’s growth. We expect to develop and implement forward-looking branding strategies for our Burger Time concept and any acquired businesses. We intend to leverage social media and employ targeted digital advertising to expand the reach of our brands and drive traffic to our stores. We recently introduced a mobile app that allows consumers to find restaurants, order online, and receive special offers. We plan to deploy internet advertising. We will deploy cross-over ads with radio and social media interacting with each other. We expect our branding initiatives to evolve as we consummate acquisitions of restaurant concepts that appeal to distinct consumer markets in differing geographic areas.

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Results of Operations.

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

52 Week Period Ended January 2, 2022 (Fiscal 2021) compared to the 53 weeks Ended January 3, 2021 (Fiscal 2020)

Net Revenues:

Net sales for 2021 increased $292,074 or 3.5% to $8,451,870 from $8,159,796 in 2020. The increase continued a trend beginning in March 2020 and was driven by the COVID-19 pandemic and the curtailment of many restaurant alternatives. The result was customers choosing drive-through alternatives, including Burger Time.

Restaurant sales for 2021 ranged from a low of $518,000 to a high of $1,124,000, and average sales for each Burger Time unit during the period was approximately $858,700 in 2021, an increase of approximately 2.3% from $839,000 in 2020.

Costs of Sales - food and paper:

Cost of sales - food and paper for 2021 increased to 38.9% of restaurant sales from 37.9% of restaurant sales in 2020. This increase resulted from an inflationary price environment that included increases in beef and paper costs, two of our principal cost items.

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Restaurant Operating Costs:

During 2021, restaurant operating costs (which refer to all the costs associated with the operation of our restaurants but do not include general and administrative expenses, depreciation and amortization, and impairment charges) as a percent of restaurant sales increased slightly to 80.8% in 2021 from 80.4% in 2020. This increase was due primarily to price inflation on input costs, including food and labor, and the matters discussed in the “Cost of Sales,” “Labor Costs,” and “Occupancy and Other Operating Cost” sections below. The changes in restaurant-level costs from 2020 to 2021 were also impacted by a significant increase in restaurant sales volume in 2020 continuing into early 2021 combined with a 2021 menu price increase and may be detailed as follows:

Labor Costs:

In 2021, labor and benefits cost decreased to 28.2% of restaurant sales from 28.6% in 2020. The decrease resulted from the increased activity levels beginning in 2020, which resulted in a favorable utilization of the fixed portion of labor costs and the difficulty in hiring hourly labor, which resulted in in-store managers providing more coverage. The Company continues to benefit from minimal turnover in its unit restaurant management. Payroll costs are semi-variable, meaning that they do not decrease proportionally to decreases in revenue; thus, they increase as a percentage of restaurant sales when there is a decrease in restaurant sales.

Occupancy and Other Operating Costs:

For 2021, occupancy and other costs declined as a percentage of sales to 13.7% or $1,151,382 compared to 13.9% of restaurant sales of $1,136,257 in 2020, a significant portion of these costs are fixed in nature and decline as a percentage as revenues increase.

Depreciation and Amortization Costs:

For 2021, depreciation and amortization costs increased 23.6% or $44,638 to $234,027 (2.8% of sales) from $189,389 (2.3 % of sales) in 2020. Depreciation costs increased due to capital additions in the last two years, including four stores having replaced point of sale equipment and significant replacement of HVAC equipment at several locations. These capital additions offset the decrease resulting in a significant amount of the company’s equipment reaching a fully depreciated status.

General and Administrative Costs

General and administrative costs in 2021 decreased 39.4%, or $270,733, to $416,791 (4.9% of sales) from $687,254 (8.4% of sales) in 2020. The decrease resulted from a decline in executive compensation, including bonus compensation and the temporary reduction of one corporate position.

Income from Operations:

The income from operations was $980,712 in 2021 compared to an operating income of $529,368 in 2020. The change in income from operations in 2021 compared to 2020 was due to the matters discussed in the “Net Revenues” and “Restaurant Operating Costs” sections above and the impact of $190,493 in asset impairment charges in 2020.

Interest Expense:

In 2021 our interest expense decreased $4,896 to $172,861 (2.0% of restaurant sales) from $177,757 (2.2% restaurant sales) in 2020, resulting from costs associated with the June 2021 mortgage refinancing offset by a lower nominal interest rate.

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Interest Income:

In 2021 the Company did not invest excess cash balances in interest-bearing accounts. The 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 included $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 2020 resulted primarily from borrowing $460,400 under the Paycheck Protection Program (PPP”). The entire amount of PPP advances was forgiven and reflected as “Other Income.” Under recent federal stimulus legislation, the PPP loan was treated as an SBA Grant during 2020. As a result, the funds advanced under the program were treated as non-taxable for federal income tax purposes in determining the provision for income taxes.

Net Income:

The net income was $607,851 for 2021, compared to $791,992 in 2020. The change in 2021 from 2020 was primarily attributable to the matters discussed in the “Net Revenues,” “Restaurant Operating Costs,” “General and Administrative Costs,” and “Other Income” sections and the impact of the PPP grant income included in other income and partially offset by impairment charges in 2020.

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, investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. However, this measure is not indicative of our overall results, nor does restaurant-level profit accrue directly to the benefit of stockholders, primarily due to the exclusion of corporate-level expenses. Restaurant-level EBITDA should not be considered a substitute for or superior to operating income, which is calculated in accordance with GAAP, and the reconciliations to operating income set forth below should be carefully evaluated.

We define restaurant-level EBITDA as operating income before pre-opening costs, if any, general and administrative costs, depreciation and amortization, and impairment charges. General and administrative expenses are excluded as they are generally not specific to restaurant-specific costs. Depreciation and amortization, and impairment charges are excluded because they are not ongoing controllable cash expenses and are not related to the health of ongoing operations.

Liquidity and Capital Resources

For the 52 weeks ended January 2, 2022, the Company earned an after-tax profit of $607,851, and principally as a result of the Company’s public offering of common stock and warrants in November 2021, on January 2, 2022, the Company had $12,385,632 in cash and working capital of $11,639,269.

Covid-19 continues to have a significant impact on the United States economy. However, as the situation is rapidly changing, it is challenging to predict the effect of the Covid-19 pandemic or its impact of governmental responses on the United States economy in general, and specifically the impact on the quick service drive-through segment of the foodservice industry and Company’s operating results and financial condition.

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In May 2020, the Company received pandemic-related loans totaling $487,900; of that amount, $460,400 was borrowed under the Small Business Administration’s Paycheck Protection Program (“PPP”). The Company accounted for the loan’s proceeds as a government grant under International Accounting Standard 20 (“IAS 20”), Accounting for Government Grants, and Disclosure of Government Assistance. Under IAS 20, the loan is initially recorded as deferred income on the balance sheet. Forgiveness income is recognized systematically over the qualifying expenses incurred when the Company determines that the forgiveness is reasonably assured. The loans were forgiven in 2021. As a result of the forgiveness of the PPP advances, the loan forgiveness was reflected as “Other Income” in 2020. Also, in May 2020, the Company borrowed $27,500 at no interest under the Minnesota Small Business Emergency Loan Program. Under the loan terms, the Company will seek loan forgiveness in 2022.

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 businesses that are synergistic with our business. Our operations do not require significant working capital, and, like many restaurant companies, we may operate with negative working capital. Our primary sources of liquidity and cash flows are operating cash flows and cash on hand. We use this to service debt, maintain our stores to operate efficiently and increase our working capital. Our working capital position benefits from the fact that we collect cash from sales from our customers at the point of sale or within a few days from our credit card processor, and in general, payments to our vendors are not due for thirty days.

Summary of Cash Flows

Cash Flows Provided by Operating Activities

Operating cash flow in 2021 was $813,955, which did not include a PPP advance that was not available in 2021, contributing to a decline in cash flow from operations from $1,397,519 in 2020.

Cash Flows Used in Investing Activities

In 2021 the Company focused on its primary business, completing its initial public offering and building its working capital reserves.

Cash Flows from Financing Activities

On November 12, 2021, the Company completed a public offering of Units consisting of one share of common stock and one five-year stock purchase warrant to purchase one common share at $5.50. The Company has the right to redeem the warrants under certain conditions. The Company issued 2,400,000 common shares in the offering and 2,760,000 common stock purchase warrants. After deducting all fees and expenses, net proceeds from the offering were $10,696,575.

Contractual Obligations

As of January 2, 2022, we had $3,49,9711 in contractual obligations relating to amounts due under mortgages on the real properties on which are stores are situated. Our monthly required payment is approximately $22,700. On June 28, 2021, the Company refinanced most of its outstanding mortgage debt with a new lender lowering its nominal interest cost from 4.75% to 3.45% fixed for the next ten years.

Qualitative and Quantitative Disclosure about Market Risk

Commodity Price Risk

We are subject to volatility in food costs due to 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 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 $175,000 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.

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Management does not believe that inflation has had a material effect on income in recent 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 offset increases in its operating costs substantially.

The cost of construction has also increased in recent years. We expect that costs to construct new or potential remodel restaurants will be more expensive than several years ago, but we expect to achieve higher restaurant sales volumes and margin improvements to offset these or additional construction cost increases. Construction cost increases could hurt our business and operations, particularly for new restaurant development.

Our business is subject to a wide range of federal, state and local regulations, which are subject to change in ways we cannot now anticipate. As a result, we are uncertain about the effect that changes in the regulatory environment may have on our Company.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

Recent Accounting Pronouncements

There has been no impact on our financial statements and our results of operations and financial condition as the result of the adoption of Recent Accounting Pronouncements.

Critical Accounting Policies and Estimates

Our discussion and analysis of operating results and financial conditions are based on our consolidated financial statements. The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures of contingent assets and liabilities. We base our estimates on experience, and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

Our critical accounting policies are those that materially affect our financial statements and involve subjective or complex judgments by management. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may be materially different from the estimates. All of our significant accounting policies are disclosed in our Form 10-K for the fiscal year ended January 2, 2022.

Jumpstart Our Business Startups Act of 2012

We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period. As a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Subject to certain conditions set forth in the JOBS Act, we are also eligible for and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We may take advantage of these exemptions until we are no longer an emerging growth company. We will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of that year, (ii) the last day of the year in which we had total annual gross revenue of $1 billion or more during such year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the year following the fifth anniversary of the date of the completion of our initial public offering.

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 is not required to provide the information required by this item.

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(1) Evaluation of Disclosure Controls and Procedures

We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Securities Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures.

Our management, including our CEO, who serves as our principal executive officer, and our CFO, who serves as our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Form 10-K. Our CEO and CFO have, as of January 2, 2022, 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 2, 2022, 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 CEO and CFO, as appropriate to allow timely decisions regarding required disclosure

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

We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Form 10-K. 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. We have established and maintain a system of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Securities Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures.

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 management including our CEO and CFO assessed the effectiveness of our internal control over financial reporting as of January 2, 2022.

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 our assessment process, we previously concluded that we had not designed and maintained 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 identify and reconcile deferred income taxes associated with the accounting for acquired assets and the related tax provision. During the preparation of financial statements for the fiscal year ended January 3, 2021, we determined that the deferred tax liability related to the difference between the tax basis and book value of acquired assets was not correctly calculated. We concluded that the error was not material to any prior annual periods; however, we determined it was appropriate to revise our consolidated financial statements and accordingly, the previously reported results were corrected through a revision of the consolidated financial statements for the years ended December 29, 2019, and December 30, 2018.

We have implemented and continue to adopt measures to remediate the underlying causes of the material weakness noted above. Although we plan to complete this remediation process as quickly as possible, we cannot determine if our measures will be successful in remediating this material weakness therefore, we concluded that we did not maintain effective internal control over financial reporting as of January 2, 2022.

Changes in Internal Control Over Financial Reporting

During the 13 weeks ended January 2, 2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to affect, our internal control over financial reporting materially.