What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-11 compared with 2020-04-15 · 79 added, 76 removed, 138 unchanged (53% of the section changed)

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The Company’s fiscal year is a 52/53-week year, ending on the Sunday closest to December 31.

Fiscal 2019 ended on December 29, 2019 and fiscal 2018 ended on December 30, 2018, both of which were 52-week years.

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

We own and operate ten fast food restaurants, including nine Burger Time restaurants and one Dairy Queen restaurant, all of which are in the North Central region of the United States.

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Operationally, we take several steps to maintain efficiency, including maintaining inventory of no more than approximately $5,000 per store at any given time (which also has the advantage of allowing for frequent deliveries of fresh food).

Our Burger Time investment model targets an average total cash investment of between $325,000 and $525,000, or an average of $425,000.

Our Burger Time investment model targets an average total cash investment of between $325,000 and $535,000.

Real estate and finance costs may vary materially by location but, assuming the average investment figure applies, the amount allocated to the purchase of real estate would be approximately $225,000.

We would typically contribute 25% of the purchase price, or $56,250, in cash and the 75% balance, or $168,750, would be financed through third parties.

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

Historically, we acquired sites for restaurants that previously had been operated as a restaurant location, however, discontinued operations for any number of reasons.

Purchasing properties such as these allows us to utilize the existing structure and remodel or renovate it to our specifications.

We believe that we can convert these locations into Burger Time restaurants a meaningful cost savings relative to new restaurant construction.

We believe that we can make these locations successful because we have developed a successful business model based on low capital requirements to construct and operate our restaurants.

These low costs allow us to operate profitably where other fast food restaurants may not be able to because, for example, franchise fees may reduce the owner’s profits below what might be acceptable.

Our ability to execute this property acquisition strategy is dependent upon favorable real estate prices.

This strategy comprises many risks, including that the possibility that the previous operations failed to generate income prior to closing and we cannot assure you that we will be successful operating our restaurants at such locations at a profit.

Our average customer transaction increased by approximately 2--%[WR1] [KB2] in the fiscal 2019 compared to 2018.

Our sales trends are influenced by many factors and the macroeconomic environment remains challenging for smaller restaurant chains as competition from the major fast-food hamburger-focused business has continues to intensify.

The average customer transaction increased in fiscal 2019 as a result of a less aggressive promotional pricing including modifying, our “Deal of the Day” promotion which provided customers a discount of 10 to 20% from basic menu pricing.

This discounting program was discontinued in 2018 and was reintroduced in the fall of 2019.

Our average customer transaction increased by approximately 4% in the fiscal 2020 compared to 2019 principally the result of price increase implemented in the middle of 2020.

Our sales trends are influenced by many factors and the environment remains challenging for smaller restaurant chains as competition from the major fast-food hamburger-focused business is intense.

Material Trends and Uncertainties

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Further, the major QSR’s have been increasingly willing to strategically discount prices through promotions such as a “dollar menu”.

In the early years of its development Burger Time maintained a significant price advantage in comparison to the major competitors.

As competition for customers has intensified in recent years price promotions by the competitors have eliminated Burger Time’s price advantage.

We expect these significant trends will continue.

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however, we expect prices to remain stable or decrease in 2021.

Beef costs decreased by approximately 5% in 2019 and decreased by 2% in 2018.

The Company did not implement a menu price increase in fiscal 2018.

Beef costs were stable in 2020 following an increase of approximately 5% in 2019.

Given the competitive nature of the fast-food burger restaurant industry, it may be difficult to raise menu prices to fully cover future cost increases.

Additional margin improvements may have to be made through operational improvements, equipment advances and increased volumes to help offset these cost increases, due to the competitive state of the restaurant industry.

During 2020, a significant increase in business volume contributed to improved profit margins.

Additional margin improvements may have to be made through operational improvements, equipment advances and increased volumes to help offset any food cost increases, due to the competitive state of the restaurant industry.

Labor will continue to be a critical factor in the foreseeable future.

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Increases in the federally and state mandated minimum wage may also impact our operations.

Over the last several years, there has been a movement in Washington, D.C.

and various states to increase the minimum wage to $15 per hour.

While details have not been determined the initial proposal by the Biden Administration includes a proposal to increase the minimum wage to $15 per hour.

In North Dakota, the minimum wage is set at the federally mandated minimum wage of $7.25 per hour and the rates are annually adjusted to reflect any increase in cost of living.

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Minnesota’s minimum-wage rate for small employers, such as us, is $8.04 per hour.

Our hourly employees earn a wage of on average of approximately $12 per hour.

An increase in the minimum wage to $15 per hour would adversely impact our profit margins.

In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic.

A health pandemic is a disease outbreak that spreads rapidly and widely by infection and affects many individuals in an area or population at the same time.

This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, potentially leading to an economic downturn.

This contagious disease outbreak, which increases and decreases in intensity and any related adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, potentially leading to an economic downturn.

While our stores have remained open for drive-through business.

The response to COVID-19 has disrupted the normal operations of many businesses, including ours.

Several states including Minnesota, have ordered residents to “shelter-in-place” or “stay-at-home,” and limit or ban public gatherings to halt or delay the spread of disease.

Under these emergency orders, essential services remain open, including, but not limited to gas stations, pharmacies, grocery stores, food banks, convenience stores, take-out and delivery restaurants, banks, hospitals, and laundromats.

Under the shelter-in-place directions, regulators have generally allowed drive-through restaurant services to remain open.

To-date our restaurants, including those in Minnesota, remain open although we have curtailed some hours.

Most states, including Minnesota and North Dakota, have limited or banned public gatherings to halt or delay the spread of disease.

Under these emergency orders, essential services have remained open, including, but not limited to gas stations, pharmacies, grocery stores, food banks, convenience stores, take-out and delivery restaurants, banks, hospitals, and laundromats.

Under the directions limiting public gatherings, regulators have generally allowed drive-through restaurant services to remain open.

To date, our restaurants have remained open although we have curtailed some hours and have experiences temporary restaurant closures while locations have been cleaned and employees tested.

Thus far, we have been able to reopen after two or three days.

Local, regional or national governments may, at any time, implement directives that further limit or order our business to close or take other measures intended to mitigate the spread of disease.

Further, customers may choose to remain in self-imposed isolation and avoid public gathering places.

It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business or results of operations at this time.

The conditions may impact our restaurant customer traffic and our ability to adequately staff our restaurants, receive deliveries on a timely basis or perform functions at the corporate level.

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

The conditions may influence restaurant customer traffic and our ability to adequately staff our restaurants, receive deliveries on a timely basis or perform functions at the corporate level.

Further, such conditions could impact the availability of the menu items we offer and the ability of suppliers to deliver such products.

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We will seek to quickly and cost-effectively scale our growth by leveraging our general and administrative costs.

Our ability to acquire or open new restaurants is predicated on the availability of capital for such purposes.

We cannot be certain that capital will be available to us on acceptable terms if at all.

Results of Operations.

The following table sets forth, for the fiscal years indicated, our Consolidated Statements of Operations expressed as percentage of total revenues.

The following table sets forth, for the fiscal years indicated, our Consolidated Statements of Income expressed as percentage of total revenues.

Percentages below may not reconcile because of rounding.

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Depreciation and Amortization

Impairment of asset held for sale

Gain on sale of property and equipment

General and adminiastrative

Impairment charges

General and administrative

Total costs and expenses

Income (loss) from operations

INTEREST INCOME

INTEREST EXPENSE

Income before taxes

INCOME (LOSS) BEFORE TAXES

INCOME TAX (PROVISION) BENEFIT

NET INCOME (LOSS)

52 Week Period Ended December 29, 2019 (Fiscal 2019) compared to the 52 Week Period Ended December 30, 2018 (Fiscal 2018)

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

Net Revenues:

Net sales for Fiscal 2019 decreased $570,903 or 8.1% to $6,480,564 from $7,051,467 in Fiscal 2018.

The decrease in sales was principally the result of closing the Richmond, Indiana location at the end of 2018.

Restaurant sales for Fiscal 2019 ranged from a low of $497,000 to a high of $818,000 and average sales for each Burger Time unit during the period was approximately $669,000 in 2019 declining from $698,000 in 2018.

Net sales for Fiscal 2020 increased $1,679,232 or 25.9% to $8,159,796 from $6,480,564 in Fiscal 2019.

The significant increase, which occurred beginning in March of 2020, was principally the result of the COVID-19 pandemic and the temporary shutdown of many restaurant alternatives.

The result of limiting indoor seating at restaurants was customers choosing drive-through alternatives including Burger Time.

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

Costs of Sales - food and paper:

Cost of sales - food and paper for Fiscal 2019 decreased slightly to $2,574,388 (39.72% of restaurant sales) from $2,835,757 (40.2% of restaurant sales) in Fiscal 2018.

This decrease was mainly due to an increase in average beef prices of approximately 5.6% to an average of $2.36 per pound in 2019 offset by the favorable cost-saving results from the elimination of costs associated with the Richmond, Indiana location which we closed at the end of 2018.

Cost of sales - food and paper for Fiscal 2020 decreased to 37.9% of restaurant sales from 39.7% of restaurant sales in Fiscal 2019.

This decrease was mainly due to a price increase taken in the middle of 2020 during a relatively stable cost environment.

Restaurant Operating Costs:

Restaurant operating costs (which refer to all the costs associated with the operation of our restaurants, but do not include general and administrative costs and depreciation and amortization) as a percent of restaurant sales increased slightly to 89.2% in 2019 from 88.6% in Fiscal 2018.

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

This was due primarily to matters discussed in the “Cost of Sales,” “Labor Costs,” “Occupancy and Other Operating Cost” sections below.

The changes in restaurant-level costs from Fiscal 2018 to Fiscal 2019 are principally the result of closing of the Richmond location at the end of 2018 and may be detailed as follows:

Restaurant operating costs for the period ended December 30, 2018

Decrease in food and paper costs

Decrease in labor cost

Decrease in occupancy and operating

Restaurant operating costs for the periods ended December 29, 2019

For Fiscal 2019, labor and benefits costs decreased $97,221 to $2,140,157 (33.0% of restaurant sales) from $2,237,378 (31.7% of restaurant sales) in Fiscal 2018.

The decrease was the result the closing of the Richmond location offset by cost increases resulting from tight labor markets and higher starting wages in most of the locations in which the Company operates.

The Company benefited from virtually no turnover in its unit restaurant management which tends to cause unfavorable variations in labor costs.

Payroll costs are semi-variable in nature, 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.

The changes in restaurant-level costs from Fiscal 2019 to Fiscal 2020 are principally the result of a significant increase in restaurant sales volume in 2020 and may be detailed as follows:

Restaurant operating costs for the year ended December 29, 2019

Increase in food and paper costs

Increase in labor cost

Increase in occupancy and operating

Restaurant operating costs for the year ended January 3, 2021

For Fiscal 2020, labor and benefits costs decreased to 28.6% of restaurant sale from 33.0% of restaurant sales in Fiscal 2019.

The decrease was the result of the significant increase in business activity and the latter three quarters of 2020 which resulted in a favorable utilization of the fixed portion of labor costs.

The Company continues to benefit from minimal turnover in its unit restaurant management.

Payroll costs are semi-variable in nature, meaning that they do not decrease proportionally to decreases in revenue, thus they decrease as a percentage of restaurant sales when there is a increase in restaurant sales volume.

Occupancy and Other Operating Costs:

For Fiscal 2019, occupancy and other costs declined to 16.5% of sales or $1,072,407 compared to $1,175,983 (16.7% of restaurant sales in Fiscal 2018).

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

Depreciation and Amortization Costs:

For Fiscal 2020, depreciation and amortization costs decreased 11.0%, or $23,398, to $189,389 (2.3% of sales) from $212,787 (3.3 % of sales) in Fiscal 2019.

Depreciation costs primarily decreased due the transfer of the Richmond, Indiana restaurant to the asset held for sale classification following the closing of the store.

Depreciation costs have been declining as the Company’s equipment reaches a fully depreciated status and in 2020 decreased as percentage of sales because of the significant sales increase during 2020.

General and Administrative Costs

General and administrative costs increased 22.6%, or $126,639, from $560,885 (6.9% of sales) in Fiscal 2019 to $687,524 (9.4% of sales) in Fiscal 2020.

The increase in general and administrative costs is primarily attributable to approximately a $40,000 write-off in deferred offering costs and an impairment of $48,500 in Goodwill.

The increase was principally the result of increased executive bonus compensation based on the strong financial performance in 2020.

Impairment of Assets Held for Sale and Goodwill

In 2019, the Company recorded a $93,488 charge to provide for a loss resulting from the closing of its Richmond, Indiana location and the planned sale of the property.

In 2020, an additional $100,000 impairment charge was recognized for related to the Richmond property and a $90,493 charge was recorded to recognize impairment of the majority of costs associated with property in St.

Louis, Missouri which the company had originally acquired for development.

Additionally, in 2019, there was a $248,500 charge to write-off goodwill arising from the 2018 Share Exchange.

Income (loss) from Operations:

The loss from operations was $220,048 in Fiscal 2019 compared to income from operations of $240,158 in Fiscal 2018.

The change in income from operations in Fiscal 2019 compared to Fiscal 2018 was due primarily to the gain on sale of property and equipment of $158,358 and the matters discussed in the “Net Revenues” and “Restaurant Operating Costs” sections above.

The income from operations was $529,368 in Fiscal 2020 compared to a loss from operations of $373,548 in Fiscal 2019.

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

Interest expense:

For Fiscal 2019, our interest expense increased $30,806 to $207,841 (3.0% of restaurant sales) from $176,955 (2.5% restaurant sales) in Fiscal 2018.

Gain on Sale of Property and Equipment

In Fiscal 2018, we concluded not to develop a property located in St.

Louis, Missouri and the property was sold in 2018 for a gain of $158,358.

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

Interest Income:

The $103,623 increase in interest income in 2020 was the result of interest earned on the Company’s advances to Next Gen Ice, Inc.

(NGI), a related company, and includes $75,000 of interest income related to the value of equity received by the Company as part of a modification of the notes receivable.

Other Income:

The $466,758 of other income in Fiscal 2020 is the result of the Company having borrowed $460,400 under the Paycheck Protection Program (PPP).

The Company was informed by its lender in 2021 that the entire amount of PPP advances been forgiven and therefore the anticipated loan forgiveness is reflected as “Other Income”.

In accordance with recent Federal stimulus legislation, the PPP loan has been treated as an SBA Grant during 2020 and the funds advanced under the program have been treated as non-taxable for federal income tax purposes in determining the provision for income taxes.

Net Income (loss):

The net income was a loss of $368,577 for Fiscal 2019, compared to a profit of $20,803 in Fiscal 2018.

The change from Fiscal 2019 from Fiscal 2018 was primarily attributable to the matters discussed in the “Net Revenues,” “Restaurant Operating Costs,” “General and Administrative Costs,” and “Gain on Sale of Property and Equipment” sections above due to the matters discussed above.

The net income $791,992 for Fiscal 2020, compared to a loss of $466,577 in Fiscal 2019.

The change from Fiscal 2020 from Fiscal 2019 was primarily attributable to the matters discussed in the “Net Revenues,” “Restaurant Operating Costs,” “General and Administrative Costs,” and “Other Income” sections above due to the matters discussed above.

Restaurant-level EBITDA :

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Restaurant-level EBITDA margin

Liquidity and Capital Resources

The consolidated financial statements have been prepared on a going concern basis.

For the year December 29, 2019, the Company incurred a net loss of $368,577.

Cash flow provided by operating activities increased slightly to $50,489 in 2019 from $49,116 for fiscal 2018.

At December 29, 2019, the Company had $258,101 in cash and working capital deficit of $468,326.

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“Covid-19”) a global pandemic.

At this time, all of our units continue to operate, however, it is impossible to predict either the near-term effects or the ultimate impact of the Covid-19 pandemic on the Company’s operating results and financial condition as the situation is rapidly evolving.

A cash flow forecast for the next 12 months prepared by management has been adjusted to reflect recent offers by banks, in the wake of the COVID-19 Pandemic, including the Company’s principal lenders, Northview Bank and Bremer Bank, to abate all loan payments for the next three months.

As a result, the Company expects to have sufficient cash assets to meet its obligations for a year from the issuance of these consolidated financial statements.

No adjustments have been made relating to recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.

Liquidity and Capital Resource

Since March of 2020, the COVID-19 pandemic has had a positive impact of the Company’s sales and liquidity.

For the 53 weeks ended January 3, 2021, the Company earned an after-tax profit of $791,992.

On January 3, 2021, the Company had $1,321,244 in cash and working capital of $371,693, an increase of $843,688 from the prior year-end deficit of $471,995.

COVID-19 has had, and likely will to continue to have a significant adverse impact on the United States economy.

It is difficult to predict either the ultimate impact of the COVID-19 pandemic or the impact of governmental responses on the United States economy in general, and specifically the impact on the quick service drive-through segment of the food service industry and on Company’s operating results and financial condition as the situation is evolving.

In May 2020, the Company received pandemic-related loans totaling $487,900.

Included in that amount was $460,400 borrowed under the Small Business Administration’s Paycheck Protection Program under the terms of the program, the Company applied for forgiveness of the loans in 2020, anticipating its application qualified the loans for forgiveness.

Following application by the Company, the loans were forgiven in full 2021.

As a result of forgiveness of the PPP advances, the loan forgiveness is reflected as “Other Income” in 2020.

In accordance with federal stimulus legislation, the PPP loans have been treated as SBA Grants and the funds advanced under the program have been treated as non-taxable for federal income tax purposes in determining the provision for income taxes.

Also, in May 2020, the Company also borrowed $27,500 at no interest under the Minnesota Small Business Emergency Loan Program, and in addition, two of the Company’s mortgage lenders suspended and deferred current payments for a period of three months during the first half of 2020.

A total of $93,602 in payments were deferred under these programs.

The Company expects to have sufficient cash assets to meet its obligations for more than a year from the date of this Annual Report.

Our primary requirements for liquidity are to fund our working capital needs, capital expenditures, and general corporate needs, as well as to invest in or acquire companies that are synergistic with or complimentary to our business.

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We cannot be certain that additional funding will be available on acceptable terms, or at all.

The working capital deficit and debt outstanding could cause substantial doubt about the Company’s ability to continue as going concern, but our plans indicate that the Company can meet its working capital needs through 2020.

If we do identify sources for additional funding, the sale of additional equity securities or convertible debt could result in dilution to our shareholders.

Our plans indicate that the Company can meet its working capital needs through 2022.

If we identify sources for additional funding, the sale of additional equity securities or convertible debt could result in dilution to our shareholders.

Additionally, the sale of equity securities or issuance of debt securities may be subject to certain security holder approvals or may result in the downward adjustment of the exercise or conversion price of our outstanding securities.

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In the past, however, the Company generally has been able to increase menu prices or modify its operating procedures to substantially offset increases in its operating costs.

The cost of construction has also increased in recent history.

We expect that costs to construct new restaurants in our existing and contiguous markets will be more expensive than several years ago, but we expect to achieve higher restaurant sales volumes and/or margin improvements to offset these or addition construction cost increases.

Construction cost increases could have an adverse effect on our business and operations, particularly for new restaurant development.

Our business is subject to a wide range of federal, state and local regulations, which are subject to change in ways we cannot now anticipate.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis