BT Brands, Inc.: Form 10-Q for the period ended Jul 3, 2022

The following discussion of the financial condition, results of operations, liquidity and capital resources of BT Brands, Inc. and its wholly-owned subsidiaries (together, “BT Brands” or the “Company”) should be read in conjunction with the Company’s condensed consolidated financial statements and accompanying notes included under Part I, Item 1 of this quarterly report on Form 10-Q, as well as with the audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s annual report on Form 10-K for the year ended January 2, 2022.

Introduction

As of July 3, 2022, including our partially owned Bagger Dave’s business, we owned and operated eighteen restaurants, comprising the following:

• Nine Burger Time fast-food restaurants and one Dairy Queen franchise, all of which are in the North Central region of the United States;
• Bagger Dave’s Burger Tavern, Inc, a 41.2% owned affiliate, operates six Bagger Dave’s restaurants in Michigan, Ohio, and Indiana;
• Keegan’s Seafood Grille in Indian Rocks Beach, Florida;
• Pie in the Sky Coffee Shop and Bakery in Woods Hole, Massachusetts.

The first Burger Time restaurant opened in Fargo, North Dakota, in 1987. BTND, LLC purchased the assets of Burger Time in May 2007. Burger Time restaurants feature additional affordable foods such as chicken sandwiches, pulled pork sandwiches, sides, and soft drinks. Burger Time’s operating principles include: (i) offering bigger burgers and more value for the money; (ii) offering a limited menu to permit attention to quality and speed of preparation; (iii) providing fast service by way of single and double drive-thru designs and a point-of-sale system that expedites the ordering and preparation process, and (iv) great tasting and quality food made fresh to order at a fair price. Our primary strategy is to serve the drive-thru and take-out segment of the quick-service restaurant industry.

Operationally, we strive for efficiency at our Burger Time restaurants, including maintaining an inventory of approximately $15,000 per store, allowing for frequent fresh food deliveries. Historically, our Burger Time investment model targeted an average cash investment of between $325,000 and $535,000.

The average customer transaction at our Burger Time restaurants increased by approximately 4% in the first six months of fiscal 2022 compared to 2021 and currently is approximately $12.50. This recent increase is principally because of a menu price increase implemented in 2021 and a 2022 price increase of approximately 10% on our popular “Deal of the Day” offering. Many factors influence our sales trends. The business environment is challenging for smaller restaurant chains as competition is intense.

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

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Highlights

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

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

In May 2022, through our 10Water Street, LLC subsidiary, we acquired the assets and business operations of the iconic Pie In The Sky Coffee Shop and Bakery “PIE,” which is adjacent to the ferry dock in Woods Hole, Massachusetts. The business has operated in the same location for over thirty years, offering a range of breakfast and lunch options, freshly roasted coffee, and branded merchandise serving locals and tourists.

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

Material Trends and Uncertainties

There are industry trends that currently have an impact on our business. Current trends include difficulties attracting food service workers and rapid inflation in the cost of many input items. Recent trends also include the rapidly changing area of technology and food delivery. The major companies in the restaurant industry have rapidly adopted and developed smartphone and mobile delivery applications, have aggressively expanded drive-through operations, and developed loyalty programs and database marketing supported by a robust technology platform. We expect these trends to continue as restaurants aggressively compete for customers. Competitors likely will continue to discount prices through aggressive promotions.

The cost of food has increased over the last two years, and we expect to see continued inflationary pressure in the remainder of 2022. Beef costs were stable in 2020, continued to rise in 2021, and have recently increased by approximately 4% per pound. Given the competitive nature of the fast-food burger restaurant industry, it may be difficult to raise menu prices to cover future cost increases fully. During 2020 and early 2021, our Burger Time business experienced a significant increase in business volume contributing to improved profit margins. Additional margin improvements may have to be made through operational enhancements, equipment advances, and increased volumes to help offset food cost increases due to the competitive state of the restaurant industry.

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, and recently, securing staff has become more challenging. The current labor market has resulted in higher wages as the competition for employees intensifies, not only in the restaurant industry but in practically all retail and service industries. We must develop and retain quality employees.

Since March 2020, we have faced the effects of COVID and its variants. COVID infections have adversely affected workforces, customers, economies, and financial markets globally and have disrupted the normal flow of the U.S. economy. Our stores have, with only a few exceptions, remained open for drive-through business during the last two years; however, many businesses experienced a disruption of normal operations. More recently, food service businesses, including ours, have faced challenges in attracting and hiring workers. Labor shortages may continue and become more acute as market participants compete to attract employees.

We can’t predict the duration or magnitude of the effects of COVID and the impact on our business or the results of operations. The response to public health matters may influence restaurant customer traffic and our ability to staff our restaurants, receive deliveries on a timely basis or perform functions at the corporate level. Further, such conditions could impact the availability of the menu items we offer and the ability of suppliers to deliver such products. We also may be adversely affected by mandatory closures, seek voluntary closures, or impose restrictions on operations. Even if such measures are not implemented, the perceived risk of infection or significant health risk may adversely affect our business.

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We continue to monitor public health issues and their impact on our customer base and throughout the country. It is difficult to predict the future in light of many 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.

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

• identify suitable targets;
• complete comprehensive due diligence as to targets,
• integrate a target’s operations with our existing operations,
• retain management and key employees of the target;
• operate new restaurant concepts in new geographic areas outside of our traditional Burger Time platform;
• develop and implement appropriate and effective sales and marketing strategies for our new restaurants individually and our restaurant group as a whole;
• maintain and grow revenue at our new properties;
• identify and retain experienced managerial personnel to effectively administer our operations;
• improve existing, and implement new operational, financial, and management controls;
• install enhanced management information systems; and
• create a corporate brand identifying our restaurants as BT Brands’ properties.

Our failure to manage any of these aspects of our growth could adversely impact our business and our results of operations.

Future conditions may influence restaurant customer traffic and our ability to adequately staff our restaurants, receive deliveries on a timely basis or perform functions at the corporate level. Further, such conditions could impact the availability of the menu items we offer and the ability of suppliers to deliver such products. We also may be adversely affected if jurisdictions impose mandatory closures, seek voluntary closures, or impose restrictions on operations. Even if such measures are not implemented, the perceived risk of infection or significant health risk may adversely affect our business.

Growth Strategy and Outlook

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

Expansion Through Acquisitions

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

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

• 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.

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

Increase Same-Store Sales

Same-store sales growth reflects the change in year-over-year sales for the comparable store base and is a benchmark for the performance of our restaurants. We use a multi-faceted same-store sales growth strategy to optimize restaurant performance. We use techniques proven in the restaurant industry to increase same-store sales. We utilize customer feedback and analyze sales data to test and improve existing and new menu items. In addition, we may use social media and public relations, and experiential marketing to engage customers. Our strategies to increase same-store sales will evolve as we acquire new restaurant concepts in new markets.

Increase Brand Awareness

Increasing brand awareness is essential to the growth of our Company. We intend to develop and implement forward-looking branding strategies. We will seek to leverage social media and employ targeted digital advertising to expand the reach of our brands and drive traffic to our stores. In addition, we intend to develop mobile applications that will allow consumers to find restaurants, order online and earn rewards. We expect to deploy internet advertising to match specific menu items targeted to demographic groups. We will deploy cross-over ads with radio and social media. Our branding initiatives will evolve as we acquire restaurant concepts that appeal to distinct consumer markets in differing geographic areas.

Results of Operations for the Thirteen Weeks Ended July 3, 2022, and the Thirteen Weeks Ended July 4, 2021

The following table sets forth our Condensed Statements of Income and percentages of total revenues for the thirteen-week-fiscal periods. Percentages below may not reconcile because of rounding.

Net Revenues:

Net sales for the second fiscal quarter of 2022 increased $1,142,198 to $3,524,881 from $2,382,683 in fiscal 2021. The increase during the period resulted from sales from the recently acquired businesses contributing $1,639,588 in revenue. Revenues at the Burger Time locations declined approximately 20.1% as customer purchasing patterns returned to pre-pandemic levels. Burger Time was also adversely impacted by weather and staffing challenges, which resulted in limited hours and store closures during the quarter.

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Restaurant unit sales for Burger Time for the 13 weeks ranged from a low of approximately $139,000 to a high of approximately $272,000. The average sales for each Burger Time unit during the period was approximately $208,000 in 2022, approximately $29,200 below the same period in 2021.

Costs of Sales - food and paper:

Cost of sales - food and paper for the fiscal 2022 period decreased as a percentage of sales declined to 37.2% of restaurant sales from 38.1% of restaurant sales in the second quarter of fiscal 2021. This decrease was the net result of inflationary pressures of certain items, offset by the inclusion of results of PIE which operates at a significantly lower food and labor cost than our Burger Time business.

Restaurant Operating Costs:

Restaurant operating costs (which refer to all the costs associated with the operation of our restaurants but do not include general and administrative expenses and depreciation and amortization) as a percent of restaurant sales increased to 78.2% of sales in the second fiscal quarter of 2022 from 76.6% in the similar period of fiscal 2021. This increase was because of higher labor and occupancy cost, including lease costs associated with our two recently acquired locations and the matters discussed in the “Cost of Sales,” “Labor Costs,” and “Occupancy and Other Operating Cost” sections below.

Labor Costs

For the second quarter of fiscal 2022, labor and benefits cost increased as a percentage of sales to 33.5% of restaurant sales from 26.1% in fiscal 2021. The increase in the percentage resulted from tighter labor markets leading to higher hourly wage costs offset by leveraging existing staffing. Payroll costs are semi-variable, meaning they do not decrease proportionally to decreases in revenue.

Occupancy and Other Operating Expenses

For the second fiscal quarter of 2022, occupancy and other expenses increased to 13.4% of sales from 12.4% in 2021. This increase results from higher occupancy costs, including lease costs associated with our two new locations.

Depreciation and Amortization Expense:

For the second fiscal quarter of 2022, depreciation and amortization increased to $109,286 (3.1% of sales) from $58,558 (2.5% of sales) in the second quarter of fiscal 2021. The increase results from depreciation and amortization associated with our recent acquisitions.

General and Administrative Costs

General and administrative costs increased by $344,673 from $110,983 to $455,656; the increase is associated with the Company’s transition to a public company in November 2021, including the costs related to long-term management agreements. Second quarter general and administrative expenses were 12.9% of sales, a significant increase from 4.7% in the earlier year.

Income (Loss) from Operations

The loss from operations for the second quarter of fiscal 2022 was $4,148 compared to a profit from operations of $387,177 in the same period in 2021; the percentage of income from operations as a percentage of sales declined to negative .1% from 16.0%, reflecting a decline in profit margin at Burger Time, higher general and administrative expenses and the matters discussed in the “Net Revenues” and “Restaurant Operating Costs” sections above.

Restaurant-level EBITDA

To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, the Company uses restaurant-level EBITDA, which is not a measure defined by GAAP. This non-GAAP operating measure is useful to both management and, we believe, investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. This measure is not indicative of our overall results, nor does restaurant-level profit accrue directly to the benefit of stockholders, primarily due to the exclusion of corporate-level expenses. Restaurant-level EBITDA should not be considered a substitute for or superior to operating income, calculated under GAAP. 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 expenses are excluded as they are generally not specifically identifiable as restaurant-specific costs. Depreciation, amortization, and impairment charges are excluded because they are not ongoing controllable cash expenses and are not related to the health of ongoing operations.

Our Results of Operations for the Twenty-Six Weeks Ended July 3, 2022, and the Twenty-Six Weeks Ended July 4, 2021

The following table sets forth our Condensed Statements of Income and percentages of total revenues for the twenty-six-week fiscal periods. Percentages below may not reconcile because of rounding.

Net Revenues:

Net sales for 26-week period representing the first half of fiscal 2022 increased $1,274,521 or 29.5% to $5,598,076 from $4,323,555 in fiscal 2021. The increase in sales was principally the result of a favorable impact in the 26 weeks of two acquired restaurants which contributed approximately $1,775,247 in sales, offsetting a decline of approximately $500,726 or 11.6% in Burger Time revenues.

Burger Time unit sales for the 26 weeks ranged from a low of approximately $226,000 to a high of approximately $509,000. Average sales for each Burger Time unit were approximately $389,000 in 2022, a decline from approximately $438,200 in the same 26-week period in 2021. The sales decline in the first half of 2022 is the combined result of a return to pre-covid customer purchasing patterns as competitive dining options returned to normal, labor challenges resulting in some contraction of hours, and poorer weather conditions relative to the year-earlier period.

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Costs of Sales - food and paper:

Cost of sales - food and paper for the first half of fiscal 2022 decreased as a percentage of sales to 36.3% from 37.8% of restaurant sales in the same period in 2021. This decrease resulted from a strong performance at our PIE business which operates at lower food and paper costs than our traditional business and Keegan’s location.

Restaurant Operating Costs:

Restaurant operating costs, which are associated with operations, not including general and administrative expenses, and depreciation and amortization, increased as a percentage of restaurant sales to 81.9% of sales in 2021 from 77.0% in fiscal 2021. This increase was due to the increase in sales activity from new locations and its impact, as further discussed in the “Cost of Sales,” “Labor Costs,” and “Occupancy and Other Operating Cost” sections below.

Labor Costs:

For the first half of fiscal 2022, labor and benefits cost increased to 31.9% of restaurant sales from 27.4% in the fiscal 2021 period. Shortages in staffing levels combined with higher hourly wage rates at all locations increased the overall labor percentage. The hiring markets have become more challenging in terms of filling open positions. Payroll costs are semi-variable, meaning they do not decrease proportionally to decreases in revenue. Thus, they increase as a percentage of restaurant sales when there is a decrease.

Occupancy and Other Operating Expenses:

For the first 26 weeks of fiscal 2022, occupancy and other expenses increased to 13.7% of sales from 13.0% in 2021. Many of these costs are fixed, and the percentage reflects lower maintenance costs offset by higher lease occupancy costs at our new locations.

Depreciation and Amortization Expense:

Depreciation and amortization expenses in the first half of fiscal 2022 increased by $65,307 to $178,701 (3.2% of sales) from $113,394 (2.6% of sales) in the first half of fiscal 2021 and are the result of the purchase of two new restaurants and capital additions at several of our locations.

General and Administrative Costs:

General and administrative costs increased 238.4%, or $526,735 to $746,717, from $220,982 (5.1% of sales) in the first half of fiscal 2021. The increase results from the transition to a public reporting company, stock-based compensation costs, and the expense associated with long-term management employment agreements.

Income from Operations:

Operating income was $84,773 in the first half of fiscal 2022 compared to $610,672 in the first half of fiscal 2021. The change in income from operations in the first half of fiscal 2022 compared to fiscal 2021 was due primarily to the increase in general and administrative expenses, which included higher costs associated with the transition to a public company near the end of 2021, including the “Net Revenues” and “Restaurant Operating Costs” sections above.

Restaurant-level EBITDA:

To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we use restaurant-level EBITDA, which is not a measure defined by GAAP. This non-GAAP operating measure is useful to both management and, we believe, investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. This measure is not indicative of our overall results, nor does restaurant-level profit accrue directly to the benefit of stockholders, primarily due to the exclusion of corporate-level expenses. Restaurant-level EBITDA should not be considered a substitute for or superior to operating income, calculated under GAAP. 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 expenses are excluded as they are generally not specifically identifiable as restaurant-specific costs. Depreciation, amortization, and impairment charges are excluded because they are not ongoing controllable cash expenses and are not related to the health of ongoing operations.

Liquidity and Capital Resources

Initially, the public response to COVID positively impacted our sales and liquidity. More recently, as customer activities have returned to normal patterns, our Burger Time business has experienced a decline from the peak level we experienced during the height of COVID restrictions. For the 26 weeks ended July 3, 2022, operations reflected a net loss of $49,625. On July 3, 2022, we had $8,295,952 in cash and working capital of $7.7 million, a decrease of $3.9 million from January 2, 2022, resulting from the purchase of two restaurants for $2.3 million and investment of $1.3 million in shares of Bagger Dave’s.

In the future, COVID and its variants may continue to impact the United States economy. It is difficult to predict the ultimate impact on the United States economy in general, the impact on the quick service drive-through segment of the food service industry, and our operating results and financial condition.

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. 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. Our primary liquidity and cash flow sources 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 purchase or within a few days from our credit card processor; generally, payments to our vendors are not due for thirty days.

Summary of Cash Flows

Cash Flows Provided by Operating Activities

Operating cash flow in the first half of 2022 was $498,068. The cash flow from operations was impacted positively by our recent acquisitions. We expect operating cash flow in future periods to be significantly impacted by our recent acquisitions.

Cash Flows Used in Investing Activities

During fiscal 2022, we have focused on identifying acquisitions in the food service and related industries, purchasing two operating restaurants, and purchasing a 41.2% interest in a publicly traded casual dining business.

Cash Flows Used in Financing Activities

A significant portion of our cash flow used in financing activities is allocated to service our debt.

Contractual Obligations

As of July 3, 2022, we had $4.1 million in contractual obligations relating to amounts due under mortgages on the real property where stores are situated, including $2.9 million in capitalized lease obligations related to our recent acquisitions. Our monthly required payment is approximately $39,000. In the second quarter of fiscal 2021, we refinanced most of our outstanding mortgage debt with a new lender lowering our nominal interest cost from 4.75% to 3.45% fixed for the next ten years.

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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. Generally, we do not have 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.

Seasonality and Inflation

Many of our restaurants experience significant seasonal fluctuations in activity and revenue.

Seasonal factors and the timing of holidays cause our revenue at our Burger Time locations to fluctuate from quarter to quarter. Our revenue per Burger Time 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. PIE benefits from robust tourism on Cape Cod in the late spring through early fall months. The results of operations during the second and third fiscal quarters at this location will be materially more significant than during the first and fourth fiscal quarters.

Keegan’s will benefit from additional customer traffic in Florida during the colder months in the northern part of the country; as tourists and seasonal residents seek to escape to warmer climates, daily customer counts increase at Keegan’s.

Inflation has had a material effect on our business as food, labor, and other operating costs have adversely affected operations. Generally, we have been able to increase menu prices or modify our operating procedures to offset increases in operating costs substantially. As inflation continues, we may not be able to raise prices to keep pace with increasing costs, particularly when compared to larger competitors that may be able to manage the risk of rising prices better.

Inflation has had a material effect on our business as food, labor, and other operating costs have adversely affected operations. However, we generally have been able to increase menu prices or modify its operating procedures to offset increases in its operating costs substantially.

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 that changes in the regulatory environment may have on our Company.

Off-Balance Sheet Arrangements

The Company 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 to our financial statements and our results of operations and financial condition as the result of the adoption of Recent Accounting Pronouncements, see “Part I, Item 1, Note 1. Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements included in this quarterly report. The Company follows ASC 842, covering accounting for leases, and has recorded Right to Use Assets and related lease liabilities for the lease contracts.

Critical Accounting Policies and Estimates

Our discussion and analysis of operating results and financial condition are based upon our condensed consolidated financial statements. The preparation of our condensed 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.

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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. Our significant accounting policies are disclosed in our annual report 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 such standards are required for other public companies are adopted.

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 fiscal year, (ii) the last day of the fiscal year in which we had total annual gross revenue of $1 billion or more during such fiscal 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 fiscal year following the fifth anniversary of the date of the completion of our initial public offering.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are not required to provide the information under this item.

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Disclosure Controls and Procedures

(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 we filed under the Exchange Act is recorded, processed, summarized, and reported within the periods specified by the SEC’s rules and forms. Disclosure controls are also designed to ensure 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 July 3, 2022, 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 as disclosed in the Company’s Form 10-K for the fiscal year ended January 3, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of July 3, 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 Chief Executive Officer, Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(2) Changes in Internal Control over Financial Reporting

The Company disclosed a material weakness for lack of segregation of duties and not performing an adequate risk assessment on monitoring of internal controls over financial reporting in its Form 10-K for the fiscal year ended January 3, 2022. While we are addressing these deficiencies, there has been no significant 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 Exchange Act 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. As a result of recent restaurant acquisitions, we are integrating our controls and procedures into the acquired businesses. We will include the internal controls for the acquired businesses in our assessment of the effectiveness of our internal controls over financial reporting as of the end of our current fiscal year. Other than the recent acquisitions, during the period covered by this report, there were no changes in the Company’s internal controls over financial reporting which materially affected or are reasonably expected to impact our internal financial reporting controls.

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We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.