Item 1A. Risk Factors.
Risks Related to a Health Emergency
COVID-19 disrupted the economy and future health emergencies may adversely impact our business.
The COVID-19 pandemic and government responses significantly impacted the economy. Although our business did not experience significant negative effects from the initial spread of COVID, its variants or another virus could negatively affect our business in the future. Possible outcomes include declines in customer traffic at our restaurants, our inability to fully staff our restaurants and, in more severe cases, may cause a temporary closure, our inability to obtain supplies, and increased commodity costs, possibly for prolonged periods of time. While most of our restaurants have remained operational, some locations were temporarily closed. More recently, we have had to modify some store hours in response to recent labor availability issues. We expect to continue to experience isolated labor shortages and supply chain issues due to disruptions to the economy.
The extent to which health emergencies may impact our business, markets, supply chain, customers and the workforce will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of a health emergency and the actions to contain it or to otherwise limit its impact, a rapidly spreading virus could contribute to the perceived health risk and may affect our business.
If any or all of the foregoing events were to occur, our business, liquidity, financial condition and results of operations could be materially adversely impacted.
Risks Related to our Growth Strategy
Finding a suitable acquisition target may be challenging.
Our growth plans include continuing to acquire restaurants and developing new brands. Although we believe that acquisition opportunities will be available, competition for acquisition candidates will likely exist and intensify, and fewer opportunities may be available to us at increased prices. There can be no assurance that we can identify, acquire, manage, or successfully integrate the restaurants we acquire without substantial costs, delays, or operational or financial problems.
Acquiring or opening new restaurants is subject to risks and challenges.
We will face challenges as we acquire or open new restaurants; many of these challenges pose risks that are potentially beyond our control, including, but not limited to, our ability to acquire locations at a favorable cost, the expense and other factors involved in remodeling or updating locations, hiring managerial personnel and our lack of familiarity with local regulations. Any one of these challenges, as well as others we may not have identified, could result in significant unanticipated costs being incurred by us. If we are unable to open new restaurants, or if restaurant openings are significantly delayed or costlier, our revenue growth and earnings could be adversely impacted, and our business negatively affected.
As discussed throughout this Annual Report, difficulties of integration include coordinating and consolidating geographically separated systems and facilities, integrating the management and personnel of the acquired brands, maintaining employee morale and retaining key employees, implementing our management information systems and financial accounting and reporting systems, establishing and maintaining effective internal control over financial reporting, and implementing operational procedures and disciplines to control costs and increase profitability. In addition, we must have the liquidity to financially nurture our acquisitions after the consummation of transactions.
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If we acquire additional restaurant businesses, the integration and operation of acquisitions may place significant demands on our management, which could adversely affect our ability to manage our existing restaurants. In addition, we may be required to obtain additional financing to fund future acquisitions, and there can be no assurance that we can obtain additional financing on acceptable terms or at all.
Our expansion into new markets will subject us to risks.
We are now operating restaurants in markets where we have no operating experience. New markets we enter may have competitive conditions, consumer tastes and discretionary spending patterns that are difficult to anticipate. We may need to invest more than we originally planned in advertising and promotional activity in new markets. In addition, we may find it more difficult to hire, motivate and keep qualified employees. As a result, these new restaurants may be less successful than projected. Our inability to fully implement or failure to successfully execute our plans could have a material adverse effect on our business, financial condition and results of operations.
Our business could suffer if we fail to effectively acquire new or existing restaurants.
As we grow our business, one of our biggest challenges is identifying and securing suitable acquisition opportunities. Competition for acquisition opportunities such as those we seek is intense. Competitors may have significantly greater financial resources than we do, allowing them to bid more aggressively for those opportunities. These include other restaurant businesses seeking to grow through acquisitions and venture capital firms and leveraged buyout firms that specialize in restaurant industry transactions. We cannot be assured that new opportunities will be available in desirable areas or on terms that are acceptable to us in order to grow our business. If we are unable to acquire new restaurants, or if the acquisitions are significantly delayed, our revenue growth and earnings could be adversely impacted.
There are numerous factors involved in identifying, evaluating, and securing restaurant acquisition, including:
· competition in new markets, including competition for restaurant sites;
· obtaining licenses or permits for development projects on a timely basis;
· the proximity of potential restaurant sites to existing restaurants;
· anticipated infrastructure development near the potential restaurant site; and
· availability of acceptable acquisition or lease terms and arrangements.
Given the numerous factors involved, we may not be able to successfully identify and secure attractive restaurant acquisitions and following an acquisition we may not be able to successfully operate the acquired business, which could have a material adverse effect on our business, financial condition and results of operations.
Acquisition of existing restaurants is subject to risks that could negatively impact our operations and financial condition.
We expect to continue expanding our business through the acquisition of existing restaurant businesses. Any such business may be in geographic regions in which we have not operated and may offer food concepts significantly different from our existing business. Our strategy to pursue expansion through the acquisition of existing restaurant businesses is subject to risks and uncertainties, including all the risks of our current operations as outlined in this Annual Report and other factors, including:
· the business that we acquire may be financially unstable;
· our ability to assess the management of a target business may be limited;
· the target business may have unknown liabilities;
o other disadvantages compared to competitors with lower leverage.
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These factors, among the many other risks and uncertainties that typically are associated with acquisitions of existing businesses, could negatively impact our Company, which would have a material adverse effect on our business, financial condition and results of operations.
Acquisitions may have unanticipated consequences that could harm our business and our financial condition.
Any acquisition that we pursue, whether completed or not, involves risks, including:
· problems retaining key personnel;
· potential unknown liabilities;
· difficulties of integration and failure to realize anticipated synergies; and
Future acquisitions may be through a cash purchase transaction, the issuance of our equity securities or a combination of both which could result in potentially dilutive issuances of our equity securities, or we may incur debt and assume contingent liabilities which could harm our business and financial condition.
Failure to manage new restaurants properly could negatively impact our operations and deplete our capital resources.
Though we expect to retain key personnel of any existing restaurant group to assist with managing the restaurants, we may not be able to retain such personnel for any meaningful period. Moreover, even if we retain management from the acquired business, our executive officers may not manage the new restaurants profitably for numerous reasons, including our inability to predict the consumer preferences and trends that drive the success of these types of restaurants. Any failure to effectively manage the restaurants comprising an acquired restaurant group could, among other negative effects, adversely impact our operations and deplete our capital resources, affecting our financial condition and the market price for our common stock.
Our growth strategy requires substantial additional capital to execute which may not be available.
Our growth depends principally on acquiring new restaurants and operating those restaurants on a profitable basis. The cost of acquiring a business will be based on a number of factors, including the number of restaurants comprising the group and their profitability. If we require additional capital to continue our growth plans, we may seek to raise capital by way of equity or debt financing. If we raise additional funds through issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and pursue business opportunities, including making further attractive acquisitions or opening new restaurants. Moreover, if we issue debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets. In addition, we might not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing on satisfactory terms our ability to support our business growth and to respond to business challenges could be significantly limited.
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Rising interest rates could negatively impact our performance and acquisition plans.
Rising interest rates could significantly increase our borrowing costs or make it difficult or impossible for us to obtain financing in the future. An increased cost of borrowing would make it more expensive for us to borrow funds to acquire new businesses, which may negatively impact our performance. If we cannot obtain financing in the future, our growth could be affected, negatively impacting our operating results.
Our growth strategy may divert management’s attention from operating our existing restaurants.
As we execute our growth strategy, management will be focused on the numerous complex and time-consuming activities required to acquire or open new restaurants, and to integrate and operate an existing restaurant group. These activities may divert management’s attention from our existing restaurants, and our existing restaurants may suffer. If the time management allocates to implementing our growth strategies interferes with its ability to manage our existing restaurants and our revenues decline at existing restaurants, our business, financial condition and results of operations will be adversely affected.
We may enter into additional long-term non-cancelable leases.
In connection with restaurants that we acquired over the last year, we have entered into long-term non-cancelable leases for the space in which such restaurants operate. Further, future acquisitions may be subject to long-term non-cancelable leases. Under non-cancelable leases, we may be required to pay all or a portion of the real estate taxes, insurance, common area maintenance charges and other operating costs associated with the property. In addition, some non-cancelable leases may provide for contingent rental payments based on sales thresholds. If acquired restaurants are subject to long-term non-cancelable leases or we enter into such leases when we acquire a restaurant and such restaurants are not profitable, and we decide to close one or more of them, we may nonetheless be committed to perform our obligations under the applicable leases including, among other things, paying the base rent and other expenses that we agreed to pay for the balance of the lease term. In addition, as leases for our restaurants expire, we may need to negotiate renewals which could cause us to pay increased occupancy costs or to close restaurants in desirable locations. These payments and costs, as well as the failure to negotiate new leases for restaurants, could have a material adverse effect on our business, financial condition and results of operations.
Difficulties managing our growth could adversely affect our results of operations.
If we experience rapid and substantial growth, it will strain our administrative infrastructure and our managerial and financial resources. To manage the significant growth of our operations, we will be required to:
· install enhanced management information systems; and
· hire, train, motivate, manage and retain our employees.
We may not be able to install adequate management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. Our business could be seriously harmed if we cannot manage growth effectively.
Our inability to sufficiently raise menu prices could result in a decline in profitability.
We increase menu price increases to help offset costs, including the increased cost for commodities, minimum wages, employee benefits, insurance arrangements, construction, utilities and other key operating costs resulting from general inflation in the economy. If our selection and amount of menu price increases are not accepted by consumers and reduce guest traffic, or are insufficient to counter increased costs, our financial results could be negatively affected.
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Risks Related to the Nature of Our Business and Operating in the Restaurant Industry
Our inability to compete effectively may affect sales and restaurant-level profit margins, adversely affecting our business.
The restaurant industry is intensely competitive, with many well-established companies competing directly and indirectly with us. We compete in the restaurant industry with national, regional, locally owned, quick-service, casual, and full-service restaurants. Many of our competitors have significantly greater financial, marketing, personnel and other resources than we do. Many of our competitors are well-established in markets where we have existing restaurants or may acquire new ones. In addition, many of our competitors have greater name recognition nationally. Failure to successfully compete with the restaurants in our markets will place downward pressure on our customer traffic and may prevent us from increasing or sustaining our revenues and profitability. Consumer tastes, nutritional and dietary trends, traffic patterns and the type, number and location of competing restaurants often affect the restaurant. Our competitors may react more efficiently and effectively to those conditions. Further, we face growing competition from the supermarket industry, with improvements in meal preparation and delivery alternatives. Additionally, there is increased competition from limited-service and fast-casual restaurants that are aggressively pursuing delivery and “to-go” programs. Meal kit delivery companies and other eat-at-home options also compete with traditional restaurants. In addition, our competitors in the past have offered and promoted price discounts on specific menu offerings, and they may continue to do so in the future. If we cannot continue to compete effectively, our traffic, sales and restaurant-level profit margins could decline, and our business, financial condition and results of operations would be adversely affected.
Our Dairy Queen franchise business must comply with the Dairy Queen franchise agreement.
We own a Dairy Queen (“DQ”) franchise in Ham Lake, Minnesota. We are contractually bound to abide by the franchise agreement with DQ, including certain financial obligations, monthly royalty payments, and marketing fees comprising a significant percentage of our DQ gross sales. Failure to abide by the terms of the franchise agreement or take actions prohibited by the franchise agreements could result in termination of the franchise agreement by the franchisor. If this franchise were terminated, our operating results would be adversely affected.
Public attitudes regarding diet and health could result in new regulations influencing consumers.
Changes in attitudes regarding diet and health or new information regarding the adverse health effects of consuming certain foods could result in changes in government regulation and shifts in consumer eating habits that may impact our business, financial condition or results of operations. These changes have resulted in and may continue to result in, laws and regulations requiring us to disclose the nutritional content of our food offerings.
We may not be able to effectively respond to changes in consumer health perceptions or successfully implement the nutrient content disclosure requirements and adapt our menu offerings to trends in eating habits. The imposition of menu labeling laws and an inability to keep up with consumer eating habits could materially adversely affect our business, financial condition or results of operations, as well as our position within the restaurant industry in general.
Negative publicity could reduce sales at our restaurants.
We may face negative publicity, including comments on social media, relating to aspects of our business, including, among others, food quality, public health concerns, restaurant facilities, customer complaints or litigation alleging illness or injury, health inspection scores, the integrity of our suppliers’ food processing and other policies, practices and procedures, employee relationships or other matters at one or more of our restaurants. Negative publicity generated against our restaurants may adversely affect us, regardless of whether the allegations are valid or whether we are held to be responsible. In addition, the negative impact of adverse publicity relating to one restaurant may extend beyond the restaurant involved to affect our other restaurants. A similar risk exists concerning food service businesses unrelated to us if customers mistakenly associate such unrelated businesses with our operations. Employee claims against us based on, among other things, wage and hour violations, discrimination, harassment, or wrongful termination may also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be exerted in favor of our operations. These risks are amplified because of the prevalence of social media. Adverse social media comments and negative publicity could materially adversely affect our business, financial condition, results of operations and cash flows.
Food safety concerns could have an adverse effect on our business by reducing demand and increasing costs.
The occurrence or reports of food-borne illnesses and food safety issues have occurred in the food industry in the past and could occur in the future. Any report or publicity linking us to food-borne illness or other food safety issues, including food tampering or contamination, could adversely affect our brand, reputation, revenues, and profits. In addition, instances of food-borne illness, food tampering or food contamination occurring at restaurants of our competitors could result in negative publicity about the food service industry generally and adversely impact our sales.
Furthermore, our reliance on external food suppliers and distributors increases the risk that food-borne illness incidents could be caused by factors outside our control and that multiple locations would be affected rather than a single restaurant. We cannot assure that all food items are properly maintained during transport throughout the supply chain and that our employees will identify all products that may be spoiled or contaminated and should not be used in our restaurants. If our customers become ill from food-borne illnesses, we could temporarily close some restaurants. Furthermore, any instances of food contamination, whether or not at our restaurants, could subject our suppliers or us to a food advisory, recall or withdrawal under the Food Safety Modernization Act.
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Risks Related to Labor and Supply Chain
Increased commodity, energy and other costs could decrease our restaurant-level profit margins.
Our profitability depends in part on our ability to anticipate and react to changes in the price and availability of food commodities, including, among other things, beef, poultry, grains, dairy and produce. Prices may be affected due to market changes, increased competition, public health issues, the general risk of inflation, shortages or interruptions in supply due to weather, disease or other conditions beyond our control, or other reasons. Other events could increase commodity prices or cause shortages that could affect the cost and quality of the items we buy or require us to raise prices or limit our menu options. These events, combined with other more general economic and demographic conditions, could impact our pricing and negatively affect our sales and restaurant-level profit margins. We do not enter into forward pricing arrangements with our suppliers, making us more susceptible to changes in commodity prices.
Our profitability is also adversely affected by increases in the price of utilities, such as natural gas, whether due to inflation, shortages or interruptions in supply, or otherwise. Our profitability is also affected by the costs of insurance, labor, marketing, taxes and real estate, all of which could increase due to inflation, changes in laws, competition or other events beyond our control. Our ability to respond by raising menu prices depends on our ability to anticipate and react to such increases and other more general economic and demographic conditions, as well as the responses of our competitors and customers. All these things may be difficult to predict and beyond our control. In this manner, increased costs could adversely affect our performance.
Shortages or interruptions in the supply or delivery of fresh food products could adversely affect our operating results.
We are dependent on frequent deliveries of fresh food products that meet our specifications. Shortages or interruptions in the supply of fresh food products caused by problems in production or distribution, inclement weather, unanticipated demand, or other conditions could adversely affect the availability, quality and cost of ingredients, adversely affecting our operating results.
We rely on certain vendors, suppliers and distributors for all our supplies.
We purchase substantial food, paper, packaging and related supplies from Sysco Corporation, the nation’s largest distributor of food products. In fiscal 2022, approximately 60% of our cost of goods sold, food and paper, for all locations was purchases were from Sysco. In addition, for Burger Time, we purchase our beverages, other than coffee, tea or milk, from affiliates of PepsiCo. These entities also are responsible for delivering these products to us. Our reliance on these vendors exclusively to provide us with our entire inventory at reasonable prices presents certain risks. We do not control the businesses of our vendors, and our efforts to specify and monitor the standards under which they perform may not be successful. If our current vendors are unable to support our expansion into new markets, or if we are unable to find vendors to meet our supply specifications or service needs as we expand, we could likewise encounter supply shortages and incur higher costs to secure adequate supplies, which would have a material adverse effect on our business, financial condition and results of operations.
We rely on the services of our Chief Executive Officer and Chief Operating Officer to operate our business.
We rely on Gary Copperud, our Chief Executive Officer, and Kenneth Brimmer, our Chief Operating Officer, to make all key decisions relating to our operations and finances. The unexpected loss of the services of Messrs. Copperud or Brimmer would have a material adverse effect on our business and plans for future growth. Further, neither of these individuals devotes full-time efforts to the Company, as further described under the heading “Management.”
The inability to attract, train and retain personnel could adversely impact our business and financial results.
Our success depends on our ability to attract, motivate, and retain qualified managers and the services of skilled personnel. Qualified individuals may be in short supply in some communities. Competition for qualified staff and improvement in regional or national economic conditions could increase the difficulty of attracting and retaining qualified individuals, resulting in higher costs. The Our inability to attract and retain staff could adversely affect our business, including restaurant operating hours. We believe managers are the key component of our business. We devote resources to recruiting and training our restaurant managers and staff. We attempt to reduce employee turnover in our restaurants. Employee turnover may hurt our operating results by increasing training costs and making it more difficult to deliver outstanding customer service, which could have a material adverse effect on our financial results. Challenges in retaining or recruiting qualified employees increase costs and could adversely affect our business and our results of operations.
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Unionization activities or labor disputes could disrupt our operations and affect our profitability.
Although none of our employees are currently covered under collective bargaining agreements, our employees may elect to be represented by labor unions in the future. If a significant number of our employees were to become unionized and collective bargaining agreement terms were significantly different from our current compensation arrangements, it could adversely affect our business, financial condition or results of operations. In addition, a labor dispute involving some or all of our employees may harm our reputation, disrupt our operations and reduce our revenues, and the resolution of disputes may increase our costs.
Also, as an employer, we may be subject to employment-related claims, such as individual or class actions or government enforcement actions relating to alleged employment discrimination, employee classification and related withholding, wage-hour, labor standards or healthcare and benefits issues. Such actions, if brought against us and successful in whole or in part, may affect our ability to compete or could adversely affect our business, financial condition or results of operations.
Risks Related to Information Technology Systems, Cybersecurity and Data Privacy
System failures or breaches of our network security could interrupt our operations and adversely affect our business.
We rely on our computer systems and network infrastructure across our operations, including point-of-sale processing at our restaurants. Our operations depend upon our and our third-party vendors’ ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure, or other catastrophic events, as well as from internal and external security breaches, viruses and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us to litigation or actions by regulatory authorities. In addition, an increasing number of transactions are processed through our mobile application. Disruptions, failures, or other performance issues with technology systems could impair the benefits such systems provide to our business and negatively impact our relationship with our customers.
Security breaches of customer information may adversely affect our business.
Any intentional attack or unintentional event that results in unauthorized access to systems to disrupt operations, corrupt data or steal or expose confidential information or intellectual property that compromises the information of our customers or employees could result in widespread negative publicity, damage to our reputation, a loss of customers, disruption of our business and legal liabilities. As our reliance on technology has grown, the scope and severity of risks posed to our systems from cyber threats have increased. The techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are only recognized once attacks are launched or have been in place for some time. We continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, malware and other events that could have a security impact; however, there can be no assurance that these or any measures will be effective.
Additionally, the majority of our sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which their customers' credit and debit card information has been compromised. In the event of a data breach, we may become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising from the actual or alleged theft of confidential or personal information and credit or debit card information.
Failure to effectively manage social media could adversely impact our business.
In recent years, there has been a marked increase in the use of social media platforms, including blogs, chat platforms, social media websites, and other forms of Internet-based communications, which allow individuals access to a broad audience of consumers and other interested persons. The rising popularity of social media and other consumer-oriented technologies has increased the speed and accessibility of information dissemination. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests or may be inaccurate. The dissemination of information via social media could harm our business, reputation, financial condition, and results of operations, regardless of the information’s accuracy. The damage may be immediate without affording us an opportunity for redress or correction.
In addition, we may use social media to communicate with our customers and the public in general. Failure by us to use social media effectively or appropriately, particularly as compared to our brands’ respective competitors, could lead to a decline in brand value, customer visits and revenue. Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our brands, exposure of personally identifiable information, fraud, hoaxes or malicious dissemination of false information. The inappropriate use of social media by our customers or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation and adversely affect our results of operations.
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Legal and Regulatory Risks
Displaying nutritional information could affect consumer preferences and negatively impact our results of operations.
Government regulation and changes in consumer eating habits resulting from shifting attitudes regarding diet and health or the latest information regarding changes in the health effects of consuming our menu offerings may impact our business. These changes have resulted in, and may continue to result in, the enactment of laws and regulations that affect the ingredients and nutritional content of our menu offerings or laws and regulations requiring us to disclose the nutritional content of our food offerings.
We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions or our ability to successfully implement the nutrient content disclosure requirements and adapt our menu offerings. The imposition of menu-labeling laws could have an adverse effect on our results of operations and financial position, as well as the restaurant industry in general.
We are subject to many federal, state, and local laws with which compliance is both costly and complex.
The restaurant industry is subject to extensive federal, state and local laws and regulations, including those relating to the preparation and sale of food, licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards. Our relationships with employees (including the Fair Labor Standards Act of 1938, the Immigration Reform and Control Act of 1986, and applicable requirements concerning the minimum wage, overtime, family leave, working conditions, safety standards, immigration status, unemployment tax rates, workers’ compensation rates and state and local payroll taxes) and federal and state laws which prohibit discrimination. Our ability to respond to labor cost increases by raising menu prices will depend on the responses of our competitors and customers. Our distributors and suppliers could also be affected by higher wage costs, benefit standards, and compliance costs, resulting in higher costs for us.
We are subject to the ADA, which, among other things, requires our restaurants to meet federally mandated requirements for the disabled. The ADA prohibits discrimination in employment and public accommodations based on disability. Under the ADA, we could be required to expend funds to modify our restaurants to provide service to or make reasonable accommodations for the employment of disabled persons. In addition, our employment practices are subject to the requirements of the Immigration and Naturalization Service relating to citizenship and residency. Government regulations could also affect and change the items we procure for resale.
The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and, therefore, hurt our results of operations. Failure to comply with the laws and regulatory requirements of federal, state, and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws, including the ADA, could require us to expend significant funds.
Failure to comply with food control regulations could lead to the loss of our food service licenses harming our business.
Restaurants are required under various federal, state, and local government regulations to obtain and maintain licenses, permits and approvals to operate their businesses. Such regulations are subject to change from time to time. We must keep these licenses, permits and approvals to operate. Typically, licenses must be renewed annually and may be revoked, suspended, or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses and approvals could adversely affect our existing restaurants and delay or result in our decision to cancel the opening of new restaurants, adversely affecting our business.
Restaurant companies have been the target of lawsuits and other proceedings alleging violations of employment laws.
Our business is subject to the risk of litigation by employees, consumers, suppliers, stockholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action and regulatory actions, is difficult to assess or quantify. In recent years, restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters.
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A customer may file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to one of our restaurants, including actions seeking damages resulting from food-borne illness or accidents in our restaurants. We are also subject to a variety of other claims from third parties arising in the ordinary course of our business, including contract claims. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain customers. The Company may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission, or others alleging violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters.
Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations. In addition, they may generate adverse publicity, which could reduce customer traffic and sales. Although we maintain what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims or any adverse publicity resulting from claims could adversely affect our business.
We may not be able to adequately protect our intellectual property, which could harm the value of our brands.
Our ability to successfully implement our business plan depends on our ability to build brand recognition using our existing trademarks, service marks and other proprietary intellectual property, and intellectual property that we may develop in the future. We have registered or applied to register a number of our trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our goods and services, which could result in a loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. If our efforts to register, maintain and protect our intellectual property are inadequate, or if any third party misappropriates, dilutes or infringes on our intellectual property, the value of our brands may be harmed, which could have a material adverse effect on our business and might prevent our brands from achieving or maintaining market acceptance. We may also face the risk of claims that we have infringed third parties’ property rights. If third parties claim that we infringe upon their intellectual property rights, our operating profits could be adversely affected. Any claims of intellectual property infringement, even those without merit, could be expensive and time-consuming to defend, require us to rebrand our services, if feasible, divert management’s attention and resources or require us to enter into royalty or license agreement to obtain the right to use a third party’s intellectual property.
General Risk Factors
Economic conditions in the United States could materially affect our business, financial condition, and results of operations.
The restaurant industry depends on consumer discretionary spending. During periods of economic downturn, continuing disruptions in the overall economy, including the impacts of high unemployment and financial market volatility and unpredictability, may cause a related reduction in consumer confidence, which could negatively affect customer traffic and sales throughout our industry. These factors, as well as national, regional and local regulatory and economic conditions, gasoline prices, and disposable consumer income affect discretionary consumer spending. If economic conditions worsen and our customers choose to dine out less frequently or reduce the amount they spend on meals while dining out, customer traffic could be adversely impacted. If adverse economic conditions persist for a period of time or become pervasive, consumer changes to their discretionary spending behavior, including the frequency with which they dine out, could be more permanent. They will likely be affected by many national and international factors beyond our control. If sales decrease, our profitability could decline as we spread fixed costs across a lower level of sales. Prolonged negative trends in restaurant sales could cause us to, among other things, reduce the number and frequency of new restaurant openings, close restaurants or delay remodeling of our existing restaurants or take asset impairment charges.
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We are susceptible to regional economic developments, including adverse weather conditions.
Our financial performance depends on restaurants in Minnesota, North Dakota, South Dakota, Michigan, and Florida, comprising all but one of our restaurants as of January 1, 2023. As a result, adverse economic conditions in any of these areas could have a material adverse effect on our overall results of operations. In addition, given our geographic concentrations, negative publicity regarding any of our restaurants in these areas could adversely affect our business, as could other regional occurrences such as local strikes, terrorist attacks, increases in energy prices, or natural or other disasters.
In particular, adverse weather conditions, such as regional winter storms, floods, severe thunderstorms and hurricanes, could negatively impact our results of operations. Temporary or prolonged restaurant closures may occur, and customer traffic may decline due to the actual or perceived effects of future weather-related events.
Damage to our reputation could negatively impact our business, financial condition, and the results of operations.
We have built our reputation on the high quality of our food, service and staff, and we must protect and grow the value of our brands to continue to succeed. Any incident that erodes consumer affinity for our brands could significantly reduce their value and damage our business. For example, one brand’s value could suffer, and our business could be adversely affected if customers perceive a reduction in the quality of our food, service or staff, or an adverse change in our culture or ambiance, or otherwise believe we have failed to deliver a consistently positive experience.
We may be adversely affected by news reports or other negative publicity (regardless of their accuracy) regarding food quality issues, public health concerns, illness, safety, injury or government or industry findings concerning our restaurants, restaurants operated by other food service providers, or others across the food industry supply chain. The risks associated with such negative publicity may materially harm our results of operations and damage our brand.
Our marketing programs may not be successful.
We intend to continue to invest in marketing efforts that we believe will attract and retain customers. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues. Additionally, if these initiatives are not successful, we may engage in additional promotional activities to attract and retain customers, including buy-one-get-one offers and other offers for free or discounted food, and any such additional promotional activities could adversely impact our results of operations.
We plan to continue emphasizing mobile and other digital ordering, delivery and pick-up orders. These efforts may fail or may result in unexpected operational challenges that adversely impact our costs. We may also introduce new menu items that may not achieve the expected sales levels. Additionally, some of our competitors have greater financial resources, which enable them to spend significantly more on marketing and advertising than we are able to. Should our competitors increase spending on marketing and advertising, or should our advertising and promotions be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition.
Our business is subject to seasonal fluctuations.
Historically, customer spending patterns for our midwestern restaurants are lowest in the first and fourth quarters of the year due to holidays, consumer habits and adverse weather. Likewise, our restaurants in Florida may experience declines in customer spending during the summer, when Florida has fewer tourists. Our restaurant in Woods Hole, Massachusetts, experiences reduced customer traffic outside the summer months. The result is that our quarterly will continue to be affected by seasonality. As a result of these and other factors, our financial results for any quarter may not be indicative of the results that may be achieved for a full fiscal year.
If we cannot offset rising labor costs with price increases, our financial performance could be adversely affected.
Increases in minimum wages and minimum tip credit wages, extensions of personal and other leave policies, other governmental regulations affecting labor costs and a diminishing pool of potential staff members when the unemployment rate falls and legal immigration is restricted, especially in certain localities, could increase our labor costs and make it more difficult to fully staff our restaurants, any of which could materially adversely affect our financial performance. We believe the federal government may significantly increase the federal minimum wage and tip credit wage (or eliminate the tip credit wage) and require significantly more mandated benefits than is currently required under federal law. In addition to increasing the overall wages paid to our minimum wage and tip credit wage earners, these increases could create pressure to increase salaries and other benefits paid to other staff members who, in recognition of their tenure, performance, job responsibilities and other similar considerations, historically received a rate of pay exceeding the applicable minimum wage or minimum tip credit wage. Because we employ a large workforce, any wage increase, or expansion of benefits could significantly impact our labor costs. Our vendors, contractors and business partners are similarly impacted by wage and benefit cost inflation. Many have increased prices for goods and services to offset their increasing labor costs.
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Failure of our internal control over financial reporting could adversely affect our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. The identification of a material weakness could indicate a lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock. We cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods or maintain all of the controls necessary for continued compliance. Likewise, we cannot assure you that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.
Risks Related to Ownership of Our Common Stock
Our business could be negatively affected as a result of the actions of activist stockholders.
The Company may be subject to proposals by stockholders urging us to take certain corporate action. If activist stockholder activities ensue, our business could be adversely impacted because:
Any litigation could result in substantial costs and divert management’s attention and resources potentially harming our business.
You may be unable to resell your shares at or above the price you paid.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares. The stock market in general has been highly volatile, and this may be especially true for our common stock given our growth strategy and stage of development. As a result, the market price of our common stock is likely to be similarly volatile. You may experience a decrease, which could be substantial, in the value of your stock, including decreases unrelated to our operating performance or prospects and could lose part or all of your investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this Annual Report and others, such as:
· our failure to meet analysts’ projections or guidance;
· additions and departures of key personnel;
· changes in accounting principles;
· litigation and governmental investigations;
· terrorist acts, acts of war or periods of widespread civil unrest;
· a foodborne illness outbreak;
· severe weather, natural disasters, and other calamities; and
· changes in the general market and economic conditions.
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Our by-laws and Wyoming law may discourage a change of control of our company and depress the price of our stock.
Our certificate of incorporation and by-laws include certain provisions that could have the effect of discouraging, delaying or preventing a change of control of our company or changes in our management, including, among other things:
We have no plans to pay cash dividends on our common stock.
We likely will retain future earnings, if any, for future operations, expansion and debt repayment and have no plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness our subsidiaries or we incur, including our credit facility. As a result, you may not receive any return on an investment in our common it for a price greater than that eater than that which you paid for it.
Raising additional equity capital may be more difficult while the warrants are outstanding.
While the warrants issued in our IPO are outstanding, the holders of such warrants will be given the opportunity to profit from a rise in the market price of our common stock. We may find it more difficult to raise additional equity capital while the warrants are outstanding.
Our board of directors is authorized to issue preferred stock without obtaining stockholder approval.
Our articles of incorporation authorize the issuance of up to 2,000,000 shares of preferred stock with designations, rights and preferences that may be determined from time to time by the board of directors. Our board of directors is empowered, without stockholder approval to create and issue a series of preferred stock with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of We. Although we have no present intention to issue any shares of preferred stock, there can be no assurance that We will not do so in the future.
These provisions might discourage, delay or prevent a change in control of our company or a change in our management. These provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims.
Our articles of incorporation and bylaws provide that the Company will indemnify our directors and officers, in each case, to the fullest extent permitted by Wyoming law.
In addition, as permitted by the Wyoming Business Corporation Act, our bylaws and the indemnification agreements that we have entered into with our directors and officers provide that:
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Reduced disclosure requirements may make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. We may take advantage of certain exemptions from various reporting requirements that apply to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive, there may be a less active trading market for our common stock, and our stock price may be more volatile.
We have elected to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B).
We could remain an “emerging growth company” for up to five years from the last day of our fiscal year in which the first sale of our common equity securities occurred pursuant to an effective registration statement under the Securities Act, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, and (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
Notwithstanding the above, we are also currently a “smaller reporting company.” Specifically, similar to “emerging growth companies,” “smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings. Decreased disclosures in our SEC filings due to our status as an “emerging growth company” or “smaller reporting company” may make it harder for investors to analyze our results of operations and financial prospects.
We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Corporate Offices
Our principal offices are in leased office space in West Fargo, North Dakota with additional leased space in Minnetonka, Minnesota. Both locations are leased on a month-to-month basis for a total of $1,800 per month.
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Burger Time Properties
The table below provides basic information about each of our Burger Time restaurants.
Grand Forks, North Dakota 1989 650 29,580 BTND, LLC BTND, LLC
Sioux Falls, South Dakota 1991 650 17,688 BTND, LLC BTND, LLC
___________
(1) The land is leased from a third party.
(2) Dairy Queen franchise.
(4) Restaurant operations closed in December 2018.
At Property for sale.
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, an affiliate of the Company, for the monthly rent of $1,250 on 1100 square feet in Minnetonka, Minnesota, at 10501 Wayzata Blvd Ave S, Suite 102 where administrative activities are performed. Our office space is adequate for its intended purposes and our near-term expansion plans.
On June 28, 2021, we refinanced our BTND mortgage debt, bearing interest at 4.75%. As of January 1, 2023, we had $2,826,093 in contractual obligations relating principally to amounts due under mortgages on the real property on which our Burger Time restaurants are situated. Our monthly required payment is approximately $22,700.
We currently lease the land for one of our Sioux Falls, South Dakota, Burger Time locations on a month-to-month basis, and the monthly rent is $1,600.
Keegan’s Restaurant
Concurrent with our acquisition of Keegan’s assets in March 2022, we entered into a 132-month triple-net lease for the property occupied by Keegan’s with an unrelated landlord. Terms of the lease provide for an initial rent of $5,000 per month, increasing annually at the greater of 3% or the increase in the Consumer Price Index over that period. The location comprises approximately 2,900 square feet of dining, kitchen, and storage space and includes typical features for a full-service restaurant.
Pie In The Sky Restaurant
Concurrent with our purchase of PIE assets in May 2022, we entered into a five-year triple-net lease for the property occupied by PIE with the seller of the assets that provides us with three five-year extensions at our option. Terms of the lease provide for an initial rent of $10,000 per month, increasing annually to approximately $11,000 per month during the first five-year term. The location comprises approximately 3,500 square feet of dining, kitchen and storage space on two levels, with a production kitchen and storage and office space on the lower level; there is also approximately 1,500 square feet of outdoor dining, which is serviced by an outdoor service bar. The landlord granted us a right of first refusal to purchase the property on terms it receives from a third party during the entire term and any lease extension.
Village Bier Garten Restaurant
Concurrent with our acquisition of the Village Bier Garten assets, we entered a five-year lease with the seller for approximately 3,000 square feet of restaurant space and access to an additional 3,000 square feet of shared entertainment and seating area and includes all of the features typical for a full-service restaurant. The terms of the triple-net 60-month lease provide for an initial rent of $8,200 per month with an annual escalation of 3%. The lease includes three five-year renewal option periods.
Item 3. Legal Proceedings.
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.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock began trading on Nasdaq under the symbol “BTBD” on November 12, 2021. Our warrants issued as part of the units we sold in the IPO commenced trading on Nasdaq under the symbol “BTBDW” on November 12, 2021.
Stockholders
As of April 9, 2023, there were approximately 41 stockholders of record of 6,396,118 shares of common stock issued and outstanding and one holder of record of 2,746,838 warrants issued and outstanding. A significant number of beneficial owners of our common stock and listed warrants hold their shares in street names.
Dividends
We have never declared or paid cash dividends on our capital stock. We do not anticipate paying cash dividends on our common stock in the foreseeable future. We intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects, the requirements of current or then-existing debt instruments and other factors our board of directors may deem relevant.
Recent Sales of Unregistered Securities
During the year that ended January 1, 2023, we did not sell any equity securities.
Securities Authorized for Issuance under Equity Compensation Plans
In October 2019, our board of directors and stockholders adopted the 2019 Incentive Stock Plan (the “Plan”). At the Annual Stockholders Meeting held in December 2022, the stockholders authorized the increase of shares available for grant under the Plan from 250,000 shares to 1,000,000 shares. The Plan is a comprehensive incentive compensation plan under which we can grant equity-based and other incentive awards to officers, employees and directors of, and consultants and advisers to, BT Brands and its subsidiaries. The plan aims to help attract, motivate and retain qualified personnel and enhance stockholder value. Awards that lapse or are forfeited become available again for grant.
As of January 1, 2023, the Company has granted outstanding options to purchase 220,250 shares, including 213,700 common stock purchase options to employees, 10,000 to a consultant, and 15,000 to non-employee directors. Non-employee director options were immediately vested and grants to employees were subject to a four-year vesting requirement, with one-fourth of the options vesting each year.
Effective February 27, 2023, our board of directors approved a total grant of 250,000 shares of its common stock to two officers (the “Grant Shares”). The Grant Shares vest if our common stock trades at a price of $8.50 per share for 20 consecutive trading days. This requirement triggers the Company’s right to redeem the common stock warrant issued in our November 2021 IPO.
Equity compensation plans approved by security holders 220,250 $ 2.74 779,750
Equity compensation plans not approved by security holders - - -
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
During the quarter ended January 1, 2023, the Company purchased less than 0.1 million shares of our common stock in open market purchases, as disclosed in the table below.
(1) Calculated inclusive of commissions.
Report of Offering of Securities and Use of Proceeds Therefrom.
On November 12, 2021, we completed our IPO of 2,400,000 units with a public offering price of $5.00 per unit, each containing one share of common stock and one warrant to purchase one share of Common Stock at an exercise price of $5.50 per share pursuant to our Registration Statement on Form S-1 (as amended) (File No. 333-250957). Maxim Group LLC and Joseph Gunnar & Co., LLC served as the representatives of several underwriters in the underwritten public offering. The net proceeds from the offering were approximately $10.68 million after deducting underwriting discounts, commissions, and offering expenses.
There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus, dated November 16, 2021, which was filed with the SEC on November 16, 2021, pursuant to Rule 424(b) under the Securities Act.
No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates or our affiliates other than payments in the ordinary course of business to officers for salaries. Including our three restaurant business acquisitions and our purchase of 41.2% of Bagger Dave’s for $1,260,000, we have invested the net proceeds in money market funds and equity securities including the purchase of 1,098,690 shares of Noble Roman’s Inc. for an aggregate cost of $231,115 at January 1, 2023. Noble Roman’s, Inc., is a public company, based in Indianapolis, Indiana operating pizza-focused food services including nine full-service locations.
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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
Our fiscal year is a 52/53-week year, ending on the Sunday closest to December 31. The 52-week fiscal 2022 ended on January 1, 2023, and the 52-week fiscal 2021 year ended on January 2, 2022.
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Introduction
As of January 1, 2023, including our partially owned Bagger Dave’s business, we owned and operated eighteen restaurants comprising the following:
· Keegan’s Seafood Grille in Indian Rocks Beach, Florida (“Keegan’s”);
· Pie In The Sky Coffee and Bakery in Woods Hole, Massachusetts (“PIE”).
Burger Time opened its first restaurant in Fargo, North Dakota, in 1987. Burger Time restaurants feature a traditional grilled hamburger and other 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.
The average customer transaction at our Burger Time restaurants increased by approximately 30% in fiscal 2022 compared to 2021 and currently is about $16.90. This recent increase is principally because of the menu price increases implemented in 2021 and 2022. A 2022 price increase of approximately 10% on our popular “Deal of the Day” significantly increased our check average. We implemented an additional menu price increase in September 2022 and regularly monitor market prices to remain competitive. Many factors influence our sales trends. Our business environment is challenging as competition is intense.
We operate through a central management organization that provides continuity across our restaurant base by utilizing the efficiencies of a central management team.
Notable 2022 Events
Our recent acquisitions have allowed us to diversify our operations into new restaurant segments and new geographic regions, reducing our dependency on the financial performance of our Burger Time restaurants. During the 2022 fiscal year, we acquired three operating restaurants and a 41.2% ownership interest in BD, an operator of six casual restaurants. We expect to consider acquisition opportunities in the future.
Keegan’s Seafood Grille, acquired in March 2022, has served customers in the Indian Rocks Beach and Clearwater, Florida markets for over 35 years. Keegan’s 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, we acquired the assets and business operations of the iconic Pie In The Sky Coffee Restaurant and Bakery. PIE is adjacent to the ferry terminal in Woods Hole, Massachusetts. PIE 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 August 2022, we purchased the assets of Van Stephan Village Bier Garten, a full-service bar and restaurant in Cocoa, Florida. We have rebranded the restaurant Village Bier Garten. The restaurant features a German-themed menu, specialty imported European beers, and regular entertainment.
In June 2022, we acquired shares of stock representing 41.2% ownership of publicly held Dave’s Burger Tavern, Inc., the owner and operator of six Bagger Dave’s restaurants, a casual restaurant and bar concept. Bagger Dave’s provides an inviting, entertaining atmosphere specializing in burgers, hand-cut fries, craft beer, milkshakes, salads, 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.
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Material Trends and Uncertainties
Industry trends have a direct impact on our business. Current trends include difficulties attracting food service workers and rapid inflation in the cost of 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 will continue to discount prices through aggressive promotions.
Food costs have increased over the last two years, and we expect to see continued inflationary pressure during 2023. Beef and egg costs continued to increase in 2022. Given the competitive nature of the restaurant industry, it may be challenging to raise menu prices to fully cover cost increases. Future margin improvements may be difficult to achieve. Margin improvement will be achieved through operational enhancements, equipment advances, and increased volumes offsetting food cost increases.
Labor is a critical factor in operating our stores. Securing staff to run our locations at full capacity has become more challenging in most areas where we operate our restaurants. 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.
Although moderating over the last twelve months, since March 2020, COVID-19 and its variants have adversely affected workforces, customers, economies, and financial markets globally and disrupted the US economy’s normal flow. Our stores have, with some exceptions, generally remained open for drive-through business. However, many businesses have experienced a disruption of operations. More recently, food service businesses, including ours, have faced challenges in attracting and hiring workers. Labor shortages have resulted in some store curtailment of operating hours which may become more acute as market participants compete to attract employees.
We cannot determine the future effects of any public health matters on our operations and financial results. We have and could continue to experience the impact of recent events including but not limited to commodity inflation, disruption in our supply chain, and labor availability challenges at certain shops. We have increased and plan to continue increasing prices to offset additional costs due to a higher inflationary economic environment in the U.S. These price increases may not be sufficient to mitigate higher costs, and further increases may negatively impact consumer behavior.
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Result of operations for the 52 weeks ending January 1, 2023, compared to the 52 weeks ending January 2, 2022.
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.
Amount % Amount %
COSTS AND EXPENSES
Restaurant operating expenses
UNREALIZED LOSS ON MARKETABLE SECURITIES (86,422 ) (.7 )
INTEREST AND DIVIDEND INCOME 125,529 1.0 - -
EQUITY IN AFFILIATE LOSS (194,813 ) (1.6 ) - -
Net Revenues:
Net sales for 2022 increased $4,149,299 or 49.1% to $12,601,169 from $8,451,870 in 2021. The sales increase resulted from the acquisition of three restaurants during the year contributing $5,595,003 in revenue. The BTND business experienced a sales decline of $1,041,000 as the business continued a trend toward a return to pandemic pre-lockdown sales levels. Sales results also reflect the closing of the West St Paul Burger Time location in the fourth quarter of 2022. Same store sales at BTND for stores open at year-end decreased by approximately 11.2%.
For BTND locations open at year-end, 2022 restaurant sales ranged from a low of $458,000 to a high of $1,012,000. The average sales for each Burger Time unit open at year-end were approximately $809,000 in 2022, a decline of approximately 6.1% from $858,700 in 2021.
Restaurant Operating Costs:
During 2022, restaurant operating costs (which refer to all the costs associated with operating our restaurants but do not include general and administrative expenses and depreciation and amortization) increased to 86.6% in restaurant sales in 2022 from 80.8% in 2021. 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. A decline in BTND restaurant sales also impacted the changes in restaurant-level costs from 2021 to 2022.
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The impact of cost increases and the addition of three non-BTND restaurants during the year and may be detailed as follows:
Restaurant operating costs for the period ended January 2, 2022 $ 6,820,340
Increase in food and paper costs 1,568,569
Increase in occupancy and operating cost 776,928
Restaurant operating costs for the periods ended January 1, 2023 $ 10,909,466
Costs of Sales - food and paper:
Cost of sales - food and paper - for 2022 decreased to 38.5% of restaurant sales from 38.9% of restaurant sales in 2021. The decrease results from the inclusion of PIE which operates at a lower food cost than BTND. The decrease also reflects the net result of price increases during the year offset by an inflationary cost environment, including increases in beef, paper and egg costs. PIE, because of its coffee-focused menu, has significantly lower food and paper costs than BTND and Keegan’s.
Labor Costs:
In 2022, labor and benefits cost increased to 32.7% of restaurant sales from 28.2% in 2021. The increase is the net result of lower BTND activity in 2022, and higher wages because of labor shortages in some of our markets, contributing to an unfavorable utilization of the fixed portion of labor costs. PIE and Keegan’s businesses run at higher labor costs than BTND. We benefit from minimal turnover in 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 2022, occupancy and other costs increased to 15.3% of sales or $1,928,308 compared to $1,151,382 or 13.7% of restaurant sales in 2021, principally because of the impact on these costs of three leased restaurant locations added in 2022. All of which operate at a higher occupancy cost than our BTND locations where we own the majority of the real estate.
Depreciation and Amortization Costs:
For 2022, depreciation and amortization costs increased 91.9% or $215,011 to $449,038 (3.6% of sales) from $234,027 (2.8% of sales) in 2021. Depreciation and amortization costs increased principally due to the purchase of three restaurants during 2022 for approximately $2.4 million and capital additions in the last two years, including major parking lot repairs and significant replacement of HVAC equipment at several locations. These capital additions offset the decrease in depreciation and amortization resulting from a significant amount of our equipment reaching a fully depreciated status.
General and Administrative Costs
General and administrative costs in 2022 increased 292.0%, or $1,217,038, to $1,633,829 (13.0% of sales) from $416,791 (4.9% of sales) in 2021. The increase was principally the result of our transition to a public company and including higher officer salaries and bonus payments related to new senior management employment agreements, listing fees, increased quarterly review expenses, $118,700 of non-cash stock-based compensation for stock option expenses and costs associated with acquiring, transitioning to new ownership, and administering the three geographically dispersed businesses acquired during the year.
Income (loss) from Operations:
The loss from operations was $391,164 in 2022 compared to operating income of $980,712 in 2021. The change in income from operations in 2022 compared to 2021 was primarily due to the matters discussed in the “Net Revenues,” “General and Administrative Costs” and “Restaurant Operating Costs,” sections above.
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Interest expense:
In 2022, our interest expense decreased $58,095 to $114,766 (.9% of restaurant sales) from $172,861 (2.0% of restaurant sales) in 2021 as a result of schedule amortization reducing the loan balance and a full year of the refinanced lower interest rate which reduced the interest rate to 3.45% in 2021. Prior to the June 2021 refinancing the interest rate was 4.75%.
Interest and Dividends and Other Income:
Interest and Dividend income was $125,529 in 2022 resulting from interest and other investment income from the investment of the proceeds from the November 2021 IPO. Other expense of $80,649 in 2022 includes $100,000 accrual for property taxes on the Company’s St. Louis property.
Net Income (loss):
The net loss was $562,285 in 2022, compared to an income of $607,851 in 2021. The change in 2022 from 2021 was primarily attributable to the matters discussed in the “Net Revenues,” “Restaurant Operating Costs,” “General and Administrative Costs,” and “Other Income” sections.
Restaurant-level EBITDA:
To supplement the consolidated financial statements, which are prepared and presented in accordance with GAAP, we use restaurant-level EBITDA (earnings before interest, taxes, depreciation and amortization), which is not a measure defined by GAAP. This non-GAAP operating measure is useful to both management and, we believe, to investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. 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. General and administrative expenses are excluded as they are generally unrelated to restaurant-specific costs. Depreciation and amortization are excluded because they are not ongoing controllable cash expenses and are unrelated to ongoing operations' health.
Fiscal Year
Reconciliation:
General and administrative, corporate-level expenses 1,633,829 416,791
Restaurant-level EBITDA margin 13.4 % 19.3 %
Liquidity and Capital Resources
For the 52 weeks that ended January 1, 2023, we recorded an after-tax loss of $562,285. At January 1, 2023, we had $8,144,872 in cash and marketable securities and net working capital of $6,730,552.
The aftermath of the pandemic restrictions continues to have a significant impact on the U.S. economy, and it is difficult to predict the near-term variations in the economy in general and specifically the impact on our businesses, 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 that are synergistic with our business. Our operations do not require significant working capital as generally restaurants operate with negative working capital. Working capital deficits may be incurred in the future. Our liquidity and cash flows sources are operating cash flows and cash on hand. We have used available cash to make acquisitions, service debt, and to maintain our stores. 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.
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Summary of Cash Flows
Cash Flows Provided by Operating Activities
Operating cash flow in 2022 was $211,798, a decline in cash flow from operations from $813,955 in 2021.
Cash Flows Used in Investing Activities
In 2022, we invested approximately $5.7 million in marketable securities, including $4.9 million in short-term U.S. Treasury Bills and approximately $3 million in acquiring the operating assets of three existing restaurants and $1.26 million in acquiring our 41.2% ownership of Bagger Dave’s.
Cash Flows from Financing Activities
On November 12, 2021, the Company completeda public offering of Units, each consisting of one share of common stock and one five-year stock purchase warrant to purchase one common share at $5.50. We have the right to redeem the warrants under certain conditions. The Company issued 2,400,000 common shares in the offering and 2,760,000 stock purchase warrants. After deducting all fees and expenses, net proceeds from the offering were $10,696,575.
Contractual Obligations
As of January 1, 2023, we had $4,344,580 in contractual obligations, including $1,518,487 in contractual obligations relating to leases on restaurants acquired in 2022 and $2,826,093 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, we refinanced most of our outstanding mortgage debt with a new lender lowering its nominal interest cost from 4.75% to 3.45% fixed for the next ten years.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, we have elected to comply with certain scaled disclosure reporting obligations and are not required to provide the information required by this item.
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Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of BT Brands, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of BT Brands, Inc. (the “Company”) as of January 1, 2023 and January 2, 2022 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the fiscal years then ended (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of January 1, 2023 and January 2, 2022 and the results of its operations and its cash flows for the fiscal years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Boulay PLLP
We have served as the Company’s auditor since 2015.
Minneapolis, Minnesota
April 18, 2023
PCAOB ID: 542
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BT BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS
Prepaid expenses and other current assets 37,397 27,186
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 3,294,644 1,592,338
OPERATING LEASE RIGHT-OF-USE ASSETS 2,004,673 -
DEFERRED INCOME TAXES 61,000 -
INTANGIBLE ASSETS, NET 453,978 -
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current operating lease obligations 193,430 -
DEFERRED INCOME TAXES - 119,000
NONCURRENT LEASE OBLIGATIONS 1,825,057 -
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Less cost of 65,000 common shares held in Treasury (106,882 ) -
See Notes to Consolidated Financial Statements
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BT BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
52 Weeks Ended,
COSTS AND EXPENSES
Restaurant operating expenses
UNREALIZED LOSS ON MARKETABLE SECURITIES (86,422 ) -
INTEREST AND DIVIDEND INCOME 125,529 -
OTHER INCOME (EXPENSE) (80,649 ) -
EQUITY IN NET LOSS OF AFFILIATE (194,813 ) -
NET INCOME (LOSS) PER COMMON SHARE - Basic and Diluted $ (0.09 ) $ 0.14
See Notes to Consolidated Financial Statements
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BT BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Outstanding
Common shares issued for fractional holdings 4 - - - - -
Aggregate value of warrants purchased by underwriter - - 363,600 - - 363,600
See Notes to Consolidated Financial Statements
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BT BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
52 Weeks ended,
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Amortization of debt issuance costs included in interest expense 5,400 56,905
Loan forgiveness (13,750 ) -
Unrealized loss on marketable securities 86,422 -
Investment gains (47,708 ) -
Loss on equity method investment 194,813 -
Non-cash operating lease expense 13,814 -
Changes in operating assets and liabilities, net of acquisitions -
Prepaid expenses and other current assets (10,211 ) (21,838 )
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of net assets of Keegan's Seafood Grille (1,150,000 ) -
Acquisition of net assets of Pie In The Sky Coffee and Bakery (1,159,600 ) -
Acquisition of net assets of Village Bier Garten (690,000 ) -
Investment in Bagger Dave's Burger Tavern, Inc. (1,259,999 ) -
Investment in related company (229,000 ) -
Purchase of marketable securities (25,662,523 ) -
Proceeds from sale of marketable securities 19,629,514 -
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock and warrants - 10,696,575
Proceeds from exercise of common stock warrants 74,866 -
Proceeds from long-term debt - 3,107,100
Purchase of treasury shares (107,012 )
Payment of debt issuance costs - (49,699 )
SUPPLEMENTAL DISCLOSURES
Excess of fair value of warrants purchased by underwriter $ - $ 360,000
See Notes to Consolidated Financial Statements
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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
BT Brands, Inc. (“BT Brands,” “we,” “us,” “our” or the “Company”) was incorporated as Hartmax of NY Inc. on January 19, 2016. Effective July 30, 2018, we acquired 100% of the ownership of BTND, LLC (“BTND”) in exchange for common stock through a Share Exchange Agreement (the “Share Exchange”). In 2020 BT Brands, Inc. was reincorporated in the State of Wyoming.
Business
As of January 1, 2023, the Company owned and operated twelve restaurants and owned a 41.2% interest in an operator of six restaurants. We own eight Burger Time restaurants in the North Central region of the United States, a Dairy Queen fast-food franchised location in suburban Minneapolis, Minnesota, collectively (“BTND”). We closed stores in West St. Paul in 2022 and in Richmond, Indiana, in 2018. The West St. Paul location was sold in February of 2023 for a gain of approximately $313,000, which will be recognized in the first quarter of 2023. The Richmond location is currently offered for sale. We own Keegan’s Seafood Grille (“Keegan’s”), a dine-in restaurant located in Florida, Pie In The Sky Coffee and Bakery (“PIE”), a casual dining coffee shop bakery located in Woods Hole, Massachusetts, and the Village Bier Garten (“VBG”), a German-themed restaurant in Cocoa, Florida. Our Burger Time restaurants feature a variety of burgers and other affordable foods, sides, and soft drinks. Our Dairy Queen restaurant offers a proscribed menu consisting of burgers, chicken, sides, ice cream, other desserts, and various beverages. Keegan’s Seafood Grille has operated in Indian Rocks Beach, Florida, for over thirty-five years, offering a variety of fresh seafood items for lunch and dinner. The menu at Keegan’s includes beer and wine. PIE features an array of fresh baked goods, freshly made sandwiches, and locally roasted coffee. VBG is a full-service restaurant and bar featuring a German-themed menu, specialty imported European beers, and regular entertainment. Our revenues are derived from food and beverages at our restaurants, retail goods such as apparel, private-labeled “Keegan’s Hot Sauce,” and other items that account for an insignificant portion of our income.
On June 2, 2022, the Company purchased 11,095,085 common shares representing 41.2% of Bagger Dave’s Burger Tavern, Inc. (“Bagger Dave’s”). We acquired the shares from its founder for $1,260,000, or approximately $0.114 per share. Following the investment, representatives of BT Brands were appointed to two of the three positions on Bagger Dave’s board of directors. Bagger Dave’s specializes in locally sourced, never-frozen prime rib recipe burgers, all-natural lean turkey burgers, hand-cut fries, locally crafted beers on draft, milkshakes, salads, black bean turkey chili, and pizza. The first Bagger Dave’s opened in January 2008 in Berkley, Michigan. There are six Bagger Dave’s restaurants, including four in Michigan and single units in Ft. Wayne, Indiana, and Centerville, Ohio. Our investment in Bagger Dave’s is accounted for under the “Equity Method”.
Our Dairy Queen location is operated under a franchise agreement with International Dairy Queen. We pay royalty and advertising payments to the franchisor as the franchise agreement requires.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of BT Brands, Inc., BTND, LLC, and its wholly owned subsidiaries 10Water Street, LLC, 1519BT, LLC and BTNDDQ, LLC. Significant intercompany accounts and transactions were eliminated in consolidation.
Use of Estimates in Preparation of Financial Statements
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP) which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the period. Our significant estimates include the valuation of deferred tax assets and liabilities, valuation of long-lived assets in acquisitions, amortization period for intangible assets, valuation of equity-based compensation, and valuation of equity method and fair value investments. Actual results may differ from the estimates used in preparing the consolidated financial statements.
Fiscal Year
The Company’s fiscal year is a 52/53-week year, ending on the Sunday closest to December 31. Most years consist of four 13-week accounting periods comprising the 52-week year. Fiscal 2022 was the 52 weeks ending January 1, 2023, and Fiscal 2021 was the 52 weeks ending January 2, 2022, All references to years in this report refer to the fiscal years described above.
Reverse Stock Split
Our shareholders approved a 1-for-2 common shares reverse stock split effective January 25, 2021. All outstanding common shares and per-share data presented herein reflect the effect of the reverse split.
Fair Value of Financial Instruments
Our accounting for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the statements on a recurring or nonrecurring basis adheres to the Financial Accounting Standards Board (FASB) fair value hierarchy that prioritizes the input to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).
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The three levels of fair value hierarchy are as follows:
· Level 3 Inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to fair value measurement in its entirety.
The carrying values of cash, receivables, accounts payable and other financial working capital items approximate fair value at year-end due to the short maturity nature of these instruments.
Investments
Noncurrent investments include our net equity method investment of $1,065,187 in Bagger Dave’s and our $304,000 total investment in Next Gen Ice, Inc. (NGI). In 2020, the Company received equity ownership in NGI as consideration for a loan to NGI. Upon repayment of the note, $75,000 was attributed by us to the value of the equity received and this amount was reflected as additional interest income in 2020. The fair value determined in 2020 continues to be reflected as the value of the investment. On February 12, 2022, we invested $229,000 in Series A1 8% Cumulative Convertible Preferred Stock of NGI which included a five-year warrant to purchase 34,697 shares at $1.65 per share. See Note 11.
Bagger Dave’s files its quarterly and annual financial reports with OTCMarkets, Inc. The listing with OTC Markets does not require the information to be audited. Presented below is summary information filed by Bagger Dave’s for the fiscal years ended December 25, 2022, and December 26, 2021.
Unaudited summary financial information for Bagger Dave’s -
Balance Sheet Information - December 25,2022 December 26,2021
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Fair Value Measurements
Following is a summary of the fair value of Level 1 investments. As required, fair values have been determined by reference to quoted market prices in active markets as of January 1, 2023:
Fair Value Carrying Amount Level 1
Cash
For purposes of reporting cash and cash flows, cash includes money market funds and is net of outstanding checks and includes, amounts on deposit at banks and deposits in transit and excludes transfers out in transit and includes brokerage account money market funds which are not insured deposits.
Short-Term Investments
Marketable Securities at January 1, 2023, include $5,000,000 face value of a United States Treasury Bills maturing March 16, 2023, purchased for $4,907,378 in August 2023. At January 1, 2023, the Treasury Bills were planned to be held until maturity and had an amortized cost value of $4,964,395. The amortized cost value approximates fair value.
Broker Margin Loan
The broker margin account loan of $791,372 bears a variable margin interest rate as set by the lending brokerage firm of 4.6% on January 1, 2023. This broker margin loan is reflected as a current liability. The margin loan is collateralized by the Treasury Bills and any other marginable securities held in the margin account and is due on demand pursuant to Federal Reserve margin account regulations and the margin account agreement.
Revenue Recognition
Our revenues consist principally of selling food products for cash or bank-issued credit and debit card transactions at our restaurants. We follow Accounting Standards Update (ASU) 2014-09 (ASC 606). Under ASC 606, revenues are recognized when control of promised goods or services is transferred to a customer in an amount that reflects the expected consideration for those goods or services. Our sales are recognized at the point of purchase, presented net of discounts and incentives net of applicable sales taxes.
Receivables
In these consolidated financial statements, receivables consist of rebates due from a primary vendor.
Inventory
Inventory consists of food, beverages, supplies, and merchandise for resale and is stated at a lower of cost (first-in, first-out method) or net realizable value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives ranging from three to thirty years.
We review long-lived assets to determine if the carrying value of these assets may not be recoverable based on estimated cash flows. Assets are reviewed at the lowest level, for which cash flows can be identified at the restaurant level. In determining future cash flows, significant estimates are made for the future operating results of each restaurant over its remaining life. If such assets are concluded to be impaired, the impairment recognized is measured by the amount by which the carrying value of the assets exceeds the carrying value of the assets.
Impairment and Disposal of Long-Lived Assets
Land, building and equipment, operating right of use assets and certain other assets, including definite-lived intangible assets are reviewed regularly for impairment and whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount of the assets to the future undiscounted net cash flow expected to be generated and is determined at the restaurant level. If an asset is determined to be impaired, the recognized impairment is measured by the amount by which the carrying amount of the asset exceeds the fair value.
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We may sell an existing unit or close an operating unit and seek to liquidate the property. We are in the process of abandonment of the property in the St. Louis area in lieu of approximately $180,000 of unpaid property taxes. The St. Louis land and building were fully reserved in 2020 and real estate taxes have not been paid pending the disposition of the property including an additional $100,000 of accrued expense in the current year. We are in the process of transferring the deed in lieu of payment of the taxes and anticipate the transfer will be completed in 2023 and we anticipate that the result will be a gain of approximately $180,000 reflecting the reversal of the accrued property taxes. We closed stores in West St. Paul in the fourth quarter of 2022 and in Richmond, Indiana, in 2018. The West St. Paul location sale was completed in February of 2023 for a gain of $313,000, which will be recognized in the first quarter of 2023. The Richmond location is currently offered for sale. We believe the Richmond property will be sold at or above its current carrying value.
Leases
Three of our restaurant locations are subject to leases. We evaluate leases at commencement to determine their operating or finance lease classification. As required by FASB ASC Topic 842, we recognize operating and finance lease liabilities based on the present value of minimum future lease payment over the expected lease term and recognize a corresponding right-of-use asset. We recognize lease expense related to operating leases on a straight-line basis. At lease inception, we determine the likelihood of exercising any future lease option periods. Where we are reasonably certain to exercise our renewal option, we include that option period in calculating the present value of future lease payments. See Note 4 for additional information.
Goodwill, Other Intangible Assets and Other Assets
Goodwill is not amortized, but instead, Goodwill is tested for impairment at least annually. The cost of other intangible assets is amortized over the expected useful life.
Other assets include the allocated fair value of the acquired Dairy Queen franchise agreement related to our location in Ham Lake, Minnesota, and amortized over an estimated useful life of 14 years. Amortization for each of the next five years is estimated to be $2,000 per year. Accumulated amortization was approximately $11,000 and $9,000 at the end of 2022 and 2021, respectively.
Advertising and Marketing Costs
We expense advertising and marketing costs as incurred. Advertising expenses for fiscal 2022 and 2021 totaled $76,701 and $28,934, respectively.
Income Taxes
We provide for income taxes under ASC 740, Accounting for Income Taxes, using an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. ASC 740 requires the nest of deferred tax assets and deferred tax liability be presented as a single amount on the balance sheet.
Per Common Share Amounts
Net income per common share is computed as required by section 260-10-45 of the FASB Accounting Standards Codification. Basic net income or (loss) per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period. Common stock equivalents are excluded from diluted net income (loss) computation per share because their effect is anti-dilutive. As a result, no common stock equivalents were dilutive as of the years ending in 2022 and 2021. There are currently 2,746,838 five-year warrants exercisable at $5.50 per share outstanding. These warrants were issued as a part of our November 12, 2021, initial public offering. In addition, 102,503 private placement warrants are outstanding at an exercise price of $4.00 per share, and 16,401 Placement Agent warrants are outstanding at an exercise price of $3.30 per share. At the end of fiscal 2022 and 2021, all outstanding warrants were exercisable at prices above the underlying stock’s market price and therefore were not dilutive.
Restaurant Pre-opening expenses
Restaurant pre-opening and other development expenses are non-capital expenditures and are expensed as incurred as part of other operating expenses. Restaurant pre-opening expenses may include the costs of hiring and training the initial hourly workforce for each new restaurant, travel, the cost of food and supplies used in training, grand opening promotional expenses, the cost of the initial stocking of operating supplies, and other direct costs related to the opening of a restaurant, including rent during the construction and in-restaurant training period.
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Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and the differences could be significant.
Stock-Based Compensation
We recognize stock-based compensation as an expense in our consolidated financial statements. Equity classified awards are measured at the grant date fair value of the award. We estimated the grant date fair value using the Black-Scholes option-pricing model. We recognize a compensation expense, net of estimated forfeitures, on a straight-line basis over the employee service periods for awards granted.
Segment Reporting
We follow the guidance of FASB Accounting Standards for reporting and disclosure on operating segments requiring segment disclosures about products and services, geographic areas, and significant customers. We have determined that we did not have separately reportable operating segments.
NOTE 2 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at the end of the respective fiscal year:
(1) Reflected in Current Asset at January 1, 2023 and included in Other Assets, net on the Consolidated Balance Sheet at January 1, 2022.
Depreciation expense for 2022 and 2021 was $412,016 and $232,261, respectively.
NOTE 3 – INTANGIBLE ASSETS
On January 1, 2023, based on the value of acquired assets, intangible assets comprise the following:
Tradename assets are being amortized over 15 years at the rate. Total amortization expense for 2022 was $37,022. The total amortization of intangible assets including the covenants not to compete will approximate $58,900 in both 2023 and 2024 and $40,500 in 2025 and $26,200 per year thereafter, for next the six years and approximately $7,500 in 2037.
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NOTE 4 – LEASES
Concurrent with acquiring Keegan’s net assets, we entered into a lease for approximately 2,800 square feet of restaurant space. The 131-month Keegan’s lease provides for an initial rent of $5,000 per month with an annual escalation equal to the greater of 3% or the Consumer Price Index. Variable lease costs consist primarily of property taxes, insurance, certain utility expenses, and sales tax. The lease is being accounted for as an operating lease. At the inception of the lease, we recorded an operating lease obligation and a right-of-use asset of $624,000. The present value discounted at 3.75% of the remaining lease obligation of $588,363 is reflected as a liability in the accompanying financial statements as of January 1, 2023.
When we acquired the PIE assets, we entered into a lease for approximately 3,500 square feet of restaurant and bakery production space. Variable lease costs consist primarily of property taxes, insurance, certain utility expenses, and sales tax. The terms of the 60-month lease provide for an initial rent of $10,000 per month with an annual escalation of 3% after 24 months. The PIE lease includes three five-year renewal option periods at our option. The PIE lease is accounted for as an operating lease. At the inception of the lease, we concluded it was reasonably certain the initial five-year option would be exercised and recorded an operating lease obligation and a right-of-use asset of approximately $1,055,000. The present value discounted at 5% of the remaining lease obligation of $995,206 is reflected as a liability in the accompanying financial statements as of January 1, 2023.
With the acquisition of VBG assets, we entered a five-year lease with the seller for approximately 3,000 square feet of restaurant space and access to an additional 3,000 square feet of shared entertainment and seating area. The terms of the triple-net 60-month lease provide for an initial rent of $8,200 per month with an annual escalation of 3%. The VBG lease includes three five-year renewal periods at our option. Variable lease costs consist primarily of property taxes, insurance, certain utility expenses, and sales tax. The VBG lease is accounted for as an operating lease. At the inception of the lease, we recorded an operating lease obligation and a right-of-use asset of $470,000. The present value discounted at 4.5% of the remaining lease obligation of $434,918 is reflected as a liability in the accompanying financial statements as of January 1, 2023.
Following is a schedule of the approximate minimum future lease payments on the operating leases as of January 1, 2023, including amounts assuming we exercise to extend leases where we believe that exercise of the option is likely.
Total
Total future minimum lease payments 2,474,570
Present value of lease obligations $ 2,018,487
The weighted average remaining lease term is approximately 6.3 years, and the weighted average discount rate is approximately
4.36%. We cannot determine the interest rate implicit in our leases. Therefore, the discount rate represents our estimated incremental interest rate to borrow an amount approximating the aggregate lease payments collateralized by the property at the commencement of the lease.
The total operating lease expense for 2022 was $239,092. Cash paid for leases during the year totaled $207,000, and variable expenses for leased properties were $16,584.
We are a party to a month-to-month land lease agreement for one Burger Time location. The net book value of the building on this land is approximately $18,500. The monthly lease payment is $1,600 plus the cost of property taxes.
We pay a monthly rent, for month-to-month arrangements, for corporate and administrative office spaces in West Fargo, North Dakota, and Minnetonka, Minnesota, for a combined monthly rent of approximately $2,200.
NOTE 5 – INCOME TAXES
Principally as a result of bonus tax depreciation allowing for depreciation of assets acquired in a business acquisition, the 2022 loss for tax purposes is approximately $1.4 million net operating loss carryforward that we believe will be fully realized in future periods. Combined with other timing differences a net deferred tax asset of $61,000 is reflected in the accompanying balance sheet.
Deferred tax assets are recognized for temporary deductible differences, and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for temporary taxable differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
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We continually review the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. We assessed whether a valuation allowance should be recorded against its deferred tax assets based on consideration of all available evidence using a “more likely than not” standard. In assessing the need for a valuation allowance, We considered both positive and negative evidence related to the likelihood of the realization of deferred tax assets. In making such an assessment, more weight was given to evidence that could be objectively verified, including recent cumulative losses. Future sources of taxable income were also considered in determining the amount of the recorded valuation allowance.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The tax effect of the temporary differences and carryforwards are as follows for the respective fiscal years:
Property and equipment tax depreciation difference $ (445,000 ) $ (197,000 )
Stock-based compensation 34,000 —
Goodwill deducted for tax purposes (9,000 ) —
Unrealized loss on short-term investments 19,000 —
Reserve for property tax 23,000 —
Accrued compensation 12,000 —
Future tax benefit of impairment allowance 78,000 78,000
Net operating loss carryforward 349,000 —
Net deferred tax (liability) benefit $ 61,000 $ (119,000 )
The following table summarizes the components of the provision for income taxes:
Current income tax expense (benefit) $ — $ 199,000
Total income tax expense for the years ended January 1, 2023, and January 2, 2022, differed from the amounts computed by applying the U.S. Federal statutory tax rate of 21% to pre-tax income as follows:
State income tax (benefit), net of federal tax benefit (35,000 ) 30,350
Equity in loss of unconsolidated subsidiary 40,000 —
Accounting Standards require that deferred tax assets and liabilities, along with any related valuation allowance, be classified as a noncurrent item on the balance sheet.
The Company had no accrued interest or penalties relating to income tax obligations and currently has no federal or state examinations in progress, nor has it had any federal or state tax examinations since its inception. The last three years are subject to federal and state tax examinations. With few exceptions, the Company is no longer subject to U.S. Federal and state income tax examinations by tax authorities for years before 2018.
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NOTE 6 – ACCRUED EXPENSES
Accrued expenses consisted of the following at the end of the respective reporting periods:
NOTE 7 – SHAREHOLDERS’ EQUITY
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. We issued 2,400,000 common shares in the offering and 2,760,000 stock purchase warrants which included 360,000 warrants to purchase an aggregate of 360,000 shares of common stock purchase pursuant to a partial exercise of the over-allotment option granted to underwriters for $.01 per warrant, totaling $3,600. The estimated fair value of the warrants at the date of issuance, net of the exercise proceeds, was $360,000, and this amount is reflected as an additional cost of the offering. After deducting all fees and expenses, net proceeds from the offering were $10,696,575. In 2018, We issued 3,708,000 common shares as part of the Share Exchange. Upon closing of a related private offering, 205,002 additional common shares and 102,503 common stock warrants to purchase shares at $4.00 through July 31, 2023, were issued to investors for a net amount of approximately $492,266. During 2022, 13,612 public warrants were exercised for $74,866. The remaining warrants were outstanding as of the end of the year. In addition, upon closing the private offering, the placement agent was issued an aggregate of 16,401five-year stock purchase warrants to purchase shares at $3.30 per share, which are also outstanding at year-end.
NOTE 8 – STOCK-BASED COMPENSATION
In 2019 we adopted the BT Brands, Inc 2019 Incentive Plan (the "Plan") 2019 Plan, under which the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance stock units, and other stock and cash awards to eligible participants. At the Annual Stockholders Meeting held in December 2022, the stockholders authorized the increase of shares available for grant under the 2019 Plan from 250,000 shares to 1,000,000 shares. As of January 1, 2023, there were 779,750 shares available for a grant under the 2019 Plan.
During 2021, we issued options to purchase 15,000 shares of common stock under the 2019 Plan as stock awards to three Company directors in connection with their joining the board of directors. The options are exercisable at $5 per share through 2031. In 2022, we granted 216,000 options, including 175,000 options to company officers and 41,000 options to employees and a consultant all to purchase shares at $2.58 per share.
Stock options granted to employees and directors vest over four years in annual installments, as outlined in each agreement. Options expire ten years from the date of the grant. Compensation expense equal to the fair value of the options at the grant date is recognized in general and administrative fee over the applicable service period. Compensation expense for 2022 was $118,700 in 2022 and $26,250 in 2021. Based on current estimates, we project that for current grants, approximately $180,000 in stock-based compensation expense will be recognized over the next three years at approximately $60,000 per year.
We utilize the Black-Scholes option pricing model when determining the compensation cost associated with stock options issued using the following significant assumptions:
· Exercise price – The stated exercise price of the stock option;
· Expected life – The simplified method;
· Volatility – Estimated volatility;
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Information regarding our stock options is summarized below:
Number of Weighted Average Weighted Average Remaining Term AggregateIntrinsic
Options Exercise Price (In Years) Value
Exercised 0 0
Canceled, forfeited, or expired (10,750 ) 2.58
The Black-Scholes option-pricing model was used to estimate the fair value of the stock options with the following weighted-average assumptions for grants during the year ended January 1, 2023:
The fair value of options granted during the period $ 1.39
Expected life (in years) 4.83
Expected dividend $ —
Expected stock volatility 63 %
Risk-free interest rate 2 %
On February 27, 2023, the independent members of the board of directors Compensation Committee approved a proposal wherein, so long as the Company’s publicly traded warrants are outstanding, senior management will be granted 250,000 shares of common stock as an award upon our share price reaching $8.50 per share for twenty consecutive trading days, which triggers our ability to redeem the warrants issued in our initial public offering.
NOTE 9 – LONG-TERM DEBT
We had the following long-term debt obligations:
Less - unamortized debt issuance costs (41,599 ) (46,999 )
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Scheduled maturities of long-term debt, excluding amortization of debt issuance costs, are as follows:
NOTE 10 – ACQUISITIONS
We acquired three separate restaurant properties in 2022. The acquisitions were accounted for using the acquisition method of accounting following ASC 805 “Business Combinations.” Accordingly, the consolidated statements of operations include the results of these operations from the date of acquisition. The assets acquired were recorded at their estimated fair values.
Keegan’s
On March 2, 2022, BT Brands, through its 1519BT, LLC subsidiary (“1519BT“), purchased the net assets of Keegan’s, a fresh seafood restaurant in Indian Rocks Springs, Florida. Concurrent with the purchase, we entered a 131-month lease for the approximately 2800 square foot space that Keegan’s has occupied for over thirty-five years. We acquired Keegan’s tradename as part of the purchase and continue to operate the business as Keegan’s Seafood Grille. The purchase price was approximately $1.15 million, paid in cash at closing. For the Keegan’s acquisition, based on an appraisal of asset values, we recorded $547,900 in goodwill, representing the excess of fair value over the purchase price of the identifiable assets; the allocation to purchased goodwill is expected to be deductible for income tax purposes over fifteen years.
Pie In The Sky Coffee and Bakery
On May 11, 2022, our 10Water Street, LLC subsidiary (“10Water”) purchased the net assets of PIE, a bakery and coffee shop in Woods Hole, Massachusetts. Concurrent with the purchase, we entered into a 60-month lease, including three additional five-year renewal options. The lease covers the approximately 3,500 square feet PIE has operated in for over twenty years. We acquired the Pie In The Sky tradename and the piecoffee.com website URL as part of the purchase. We continue to operate the assets as Pie In The Sky. The purchase price was approximately $1.16 million, including $1.15 million in cash paid at closing. For PIE, based on an appraisal of asset values, we recorded $40,320 in goodwill, representing the excess of fair value over the purchase price of the identifiable assets; the allocation to purchased goodwill is expected to be deductible for income tax purposes over fifteen years.
Village Bier Garten
On August 4, 2022, through our 1519BT, LLC subsidiary, we purchased the assets and the business operating as Van Stephan Village Bier Garten, now rebranded as the Village Bier Garten (“VBG”), a full-service bar and restaurant in Cocoa, Florida. The restaurant features a German-themed menu, specialty imported European beers, and regular entertainment. The purchase price was $690,0000, paid in cash at closing. Concurrent with the purchase, we entered a five-year lease with three five-year renewal options for the property currently occupied by the business. Triple net lease terms call for an initial monthly rent of $8,200. For VBG, based on an appraisal of asset values, we recorded $83,000 in goodwill, representing the excess of fair value over the purchase price of the identifiable assets; the allocation to purchased goodwill is expected to be deductible for income tax purposes over fifteen years.
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The following table presents the fair value of the assets acquired, and liabilities assumed in the acquisitions. Goodwill recognized in acquired businesses is the excess over the fair value of the acquired assets and represents the value of existing repetitive customers of the businesses, employees, management and management systems acquired and are in use in the acquired businesses:
Assets acquired: Keegan’s PIE VBG
NOTE 11 – RELATED PARTY TRANSACTIONS
Next Gen Ice
In 2019, the Company made cash advances to Next Gen Ice, Inc. (“NGI”), totaling $179,000. Our CEO, Gary Copperud, was and continues to serve as Chairman of the board of directors of NGI. Our Chief Operating Officer, Kenneth Brimmer, is a member of the board of directors of NGI and serves as its Chief Financial Officer on a contract basis. At the time the loans were made, Mr. Copperud controlled approximately 34% of the outstanding equity of NGI. As consideration for a loan maturity extension, we received 179,000 shares of NGI common stock and warrants to purchase 358,000 shares at $1.00 per share through March 23, 2028. The Company invested $229,000 in NGI Series A1 8% Cumulative Convertible Preferred Stock on February 2, 2022, including a five-year warrant to purchase 34,697 shares at $1.65 per share. The NGI common stock and common stock purchase warrants received in March 2020 were recorded in 2020 at a value determined by us of $75,000. The investment in NGI does not have readily determinable market value. The NGI investment is carried at the cost we determined when the shares and warrants were received.
NOTE 12 – MAJOR VENDOR
For the year ended January 1, 2023, approximately 60% of our food and paper cost of goods sold is represented by product purchases from one vendor. On January 1, 2023, the amount due to the major vendor totaled $272,657. In fiscal 2021, approximately 83% of our purchases were from the same vendor. On January 2, 2022, the amount due to this vendor was $229,046.
NOTE 13 – CONTINGENCIES
In the course of its business, the Company may be a party to claims and legal or regulatory actions arising from its business. We are not aware of any significant asserted or potential claims which could impact its financial position.
NOTE 14 – SUBSEQUENT EVENTS
The sale of the West St. Paul location sale was completed in February 2023 for a gain of $313,000, which will be recognized in the first quarter of 2023.
In the first quarter of 2023 we initiated the process of deeding the St. Louis property held for resale to the taxing authority in lieu of payment of accrued property taxes, we expect this administrative process to be completed in the second quarter of 2023 which we anticipate will result in the company recording a gain of approximately $180,000 as previously accrued property taxes, including $100,000 of expense accrued in 2022 are reversed.
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Item 9. Changes in and Disagreements with on Accounting and Financial Disclosure.
None.
Item 9A. Evaluation of Disclosure Controls and Procedures.
(a) DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such 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. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
As of January 1, 2023, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934.
Based on the evaluation of our disclosure controls and procedures, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of January 1, 2023, due to the material weaknesses in our internal control over financial reporting described below.
In light of this fact, our management has performed additional analysis and has concluded that, notwithstanding this material weaknesses in our internal controls over financial reporting, the consolidated financial statements for the periods covered by and including this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
(b) REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(e) and 15d-15(f) of the Exchange Act. The Company has designed internal controls to provide reasonable, but not absolute, assurance that financial statements are prepared in accordance with U.S. GAAP. The Company assesses the effectiveness of internal controls based on the criteria set forth in the 2013 Internal Control - Integrated Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission.
As a result of this evaluation, management has concluded that, as of January 1, 2023, our internal control over financial reporting was not effective due to the material weaknesses in internal control over financial reporting described below.
(c) MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As of January 1, 2023, the company identified a material weakness in its design of controls over accounting and reporting of significant, non-recurring events, and complex transactions.
This material weakness could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.
(d) REMEDIATION PLAN
The Company has a remediation plan for the identified material weakness and in fiscal 2023 will engage an accounting expert to assist with the accounting for significant, non-recurring events and complex transactions.
The remediation actions are subject to ongoing senior management review, as well as Audit Committee oversight. The Company will not be able to conclude whether the steps to be taken will fully remediate the material weaknesses in internal controls over financial reporting until remediation efforts are completed, tested, and evaluated for effectiveness.
(e) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
In addition to the matters discussed previously, the Company engaged consultants as an extension of management to assist in the accounting for acquisitions that occurred during the fiscal year ended January 1, 2023. Except for the items described above, there were no other changes in the Company’s internal control over financial reporting that occurred during our most recently completed fiscal quarter ended January 1, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Item 9B. Other Information.
None
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth information regarding our executive officers and directors as of the date of this Annual Report:
Name Age Position
Executive Officers and Directors:
Gary Copperud 64 Chief Executive Officer and Director
Kenneth Brimmer 67 Chief Operating Officer and Chairman
Allan Anderson 69 Director
Terri Tochihara-Dirks 61 Director
Steven W. Schussler 66 Director
Background Information about our Officers and Directors