Item 7. Management’s Discussion and Analysis
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 52/53 weeks long, ending on the Sunday closest to December 31. The 52-week budgetary 2023 ended on December 31, 2023, and the 52-week fiscal 2022 ended on January 1, 2023.
Introduction
As of December 31, 2023, including our partially owned Bagger Dave’s business, we owned and operated seventeen restaurants comprising the following:
·
Seven Burger Time (Net of one unit closed in February 2024), fast-food restaurants and one Dairy Queen franchise (“BTND”);
·
Village Bier Garten is a German-themed restaurant, bar, and entertainment venue in Cocoa, Florida. (“VBG”):
·
Keegan’s Seafood Grille in Indian Rocks Beach, Florida (“Keegan’s”);
·
Pie In The Sky Coffee and Bakery in Woods Hole, Massachusetts (“PIE”).
·
Unconsolidated affiliate Bagger Dave’s Burger Tavern, Inc., 39.6% owned and operates six Bagger Dave’s restaurants in Michigan, Ohio, and Indiana (“BDVB”).
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 2023 compared to 2022 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.
Recent Events
Our 2022 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 own a 39.6% interest in BDVB, an operator of six casual restaurants. We expect to consider and evaluate additional 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.
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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 common stock representing initially 41.2%, now 39.6% 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.
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 2024. Beef and egg costs continued to increase in 2023 and we expect cost to continue to be volatile in 2024. 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 has been 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 since March 2020, representing a return to normalcy, COVID-19 and its variants adversely affected workforces, customers, economies, and financial markets globally, disrupting the US economy’s normal flow. Our stores, with some exceptions, generally remained open for drive-through business through the peak of the pandemic. However, many businesses have experienced a disruption of operations. More recently, food service businesses, including ours, have faced challenges in hiring workers. Labor shortages have resulted in some store curtailment of operating hours, and these closures 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 raising 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 December 31, 2023, compared to the 52 weeks ending January 1, 2023.
The following table sets forth, for the years indicated, our Consolidated Statements of Operations expressed as a percentage of total revenues. The percentages below may not reconcile because of rounding.
52 weeks ended,
December 31, 2023
52 weeks ended,
January 1, 2023
Amount
%
Amount
%
SALES
$ 14,076,653
100.0 %
$ 12,601,169
100.0 %
COSTS AND EXPENSES
Restaurant operating expenses
Food and paper costs
5,597,167
39.8
4,854,321
38.5
Labor costs
5,458,351
38.8
4,126,837
32.7
Occupancy costs
1,312,717
9.3
1,147,744
9.1
Other operating expenses
841,894
6.0
780,564
6.2
Depreciation and amortization
598,540
4.3
449,038
3.6
General and administrative
1,650,755
11.7
1,633,829
13.0
Gain on sale of assets
(310,182 )
(2.2 )
-
-
Total costs and expenses
15,149,242
107.6
12,992,333
103.1
Loss from operations
(1,072,589 )
(7.6 )
(391,164 )
(3.1 )
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES
80,139
.6
(86,422 )
(.7 )
INTEREST EXPENSE
(97,608 )
(.7 )
(114,766 )
(.9 )
INTEREST AND DIVIDEND INCOME
300,923
2.1
125,529
1.0
OTHER INCOME (EXPENSE)
103,848
.7
(80,649 )
(.6 )
EQUITY IN AFFILIATE LOSS
(347,081 )
(2.7 )
(194,813 )
(1.6 )
INCOME TAX BENEFIT
145,000
1.0
180,000
1.4
NET INCOME (LOSS)
$ (887,368 )
(6.3 )%
$ (562,285 )
(4.5 )%
Net Revenues:
Net sales for 2023 increased $1,475,484, or 11.7%, to $14,076,653 from $12,601,169 in 2022. The sales increase resulted from a full year of revenue from the 2022 restaurant acquisitions. Restaurants acquired in 2022 contributed approximately $7.2 million in sales in 2023 and $5.6 million in 2022. The BTND business experienced a sales increase of $157,000. Same-store sales at BTND for stores open at year-end increased by approximately 2.2%.
For BTND locations open at year-end, 2023 restaurant sales ranged from a low of $472,000 to a high of $1,208,000. The average sales for each Burger Time unit open at year-end were approximately $821,600 in 2023, an increase of approximately 6.1% from $809,000 in 2022.
Restaurant Operating Costs:
In 2023, 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 93.9% of restaurant sales from 86.5% in 2022. This increase was due primarily to continued price inflation on input costs, including food and labor, and the matters discussed in the “Cost of Sales,” “Labor Costs,” and “Occupancy and Other Operating Cost” sections below.
The impact of cost increases and the addition of three non-BTND restaurants during the year may be detailed as follows:
Restaurant operating costs for the period ended January 1, 2023
$ 10,909,466
Increase in food and paper costs
742,846
Increase in labor costs
1,331,514
Increase in occupancy and operating cost
226,303
Restaurant operating costs for the periods ended December 31, 2023
$ 13,210,129
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Costs of Sales - food and paper:
Cost of sales - food and paper - for 2023 increased to 39.4% of restaurant sales from 38.5% of restaurant sales in 2022. The increase results from the inclusion of a full year of VBG and Keegan’s results, which operate at a lower gross profit. The increase also reflects the net result of price increases during the year offset by a moderating inflationary cost environment where we saw a slight rise in beef, paper and lower flour, bacon and egg costs. Because of its coffee-focused menu, PIE has significantly lower food and paper costs than BTND and Keegan’s.
Labor Costs:
In 2023, labor and benefits costs increased to 38.8% of restaurant sales from 32.7% 2022. The increase results from higher wages for hourly employees and managers in all of our markets, and an unfavorable utilization of the fixed portion of labor costs. Also, 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.
Occupancy and Other Operating Costs:
For 2023, occupancy and other costs increased to 15.3% of sales or $2,154,611 compared to $1,928,308 or 15.3% of restaurant sales in 2022.
Depreciation and Amortization Costs:
For 2023, depreciation and amortization costs increased 33.3%, or $149,502, to $598,540 (4.3% of sales) from $449,038 (3.6% of sales) in 2022. Depreciation and amortization costs increased principally due to a full year of depreciation expense for the three restaurants purchased during 2023 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 substantial amount of our equipment reaching a fully depreciated status.
General and Administrative Costs
General and administrative costs in 2023 increased 1%, or $16,926, to $1,650,755 (11.7% of sales) from $1,633,829 (13.0% of sales) in 2022.
Income (loss) from Operations:
The loss from operations was $1,072,589 in 2023 compared to operating loss of $391,164 in 2022. The change in income from operations in 2023 compared to 2022 was primarily due to the matters discussed in the “Net Revenues,” “General and Administrative Costs,” and “Restaurant Operating Costs” sections above.
Interest expense:
In 2023, our interest expense decreased $17,158 to $97,608 (.7% of restaurant sales) from $114,766 (.9% of restaurant sales) in 2022 as a result of schedule amortization reducing the loan balance.
Interest and Dividends and Other Income:
Interest and Dividend income was $300,923 in 2023 resulting from generally rising interest rates. Other income of $103,848 in 2023 includes the reversal of a 2022 fiscal year $100,000 accrual for property taxes on the St. Louis property.
Net Income (loss):
The net loss was $887,368 in 2023, compared to a loss of $562,285 in 2022. The change in 2023 from 2022 was primarily attributable to the matters discussed in the “Net Revenues,” “Restaurant Operating Costs,” “General and Administrative Costs,” and “Other Income” sections.
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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, 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
2023
2023
Revenues
$ 14,076,653
$ 12,601,169
Reconciliation:
Loss from operations
(1,072,589 )
(391,164 )
Depreciation and amortization
598,540
449,038
Gain on sale of assets
(310,182 )
0
General and administrative, corporate-level expenses
1,650,755
1,633,829
Restaurant-level EBITDA
$ 866,524
$ 1,691,703
Restaurant-level EBITDA margin
6.2 %
13.4 %
Liquidity and Capital Resources
For the 52 weeks ending December 31, 2023, we recorded an after-tax loss of $887,368. At that time, we had $6,692,506 in cash and marketable securities and a net working capital of $5,724,483.
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 and cash equivalents and marketable securities on hand. We have used available cash to make acquisitions, service debt, and 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.
Summary of Cash Flows
Cash Flows Provided by Operating Activities
Operating cash flow in 2023 was negative $258,787 compared to a positive $211,798 in 2022, representing a decline in cash flow from operations from $594,316 in 2022.
Cash Flows Used in Investing Activities
In 2023, on a net basis we sold or held to maturity marketable securities, including $4.9 million in short-term U.S. Treasury Bills. The Company used cash of approximately $500,000 in capital improvements at it restaurants and received $496,000 in cash from the sale of one of its locations.
Cash Flows from Financing Activities
Cash flow from financing activities reflects a reduction of $675,471 in broker margin borrowing, $250,525 used to purchase shares of the Company’s common stock held in treasury and principal payments on long-term debt.
Contractual Obligations
As of December 31, 2023, we had $4,269,505 in contractual obligations, including $1,815,948 in contractual commitments relating to leases on restaurants acquired in 2022. Our monthly required payments total approximately $59,300.
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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