FLANIGANS ENTERPRISES INC 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Except for the historical information contained herein, the following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under the captions “Risk Factors”. In addition, the following discussion and analysis should be read in conjunction with the 2020 Consolidated Financial Statements and the related Notes to Consolidated Financial Statements included elsewhere in this report. OVERVIEW Financial Information Concerning Industry Segments Our business is conducted principally in two segments: the restaurant segment and the package liquor store segment. Financial information broken into these two principal industry segments for the two fiscal years ended October 3, 2020 and September 28, 2019 is set forth in the Consolidated Financial Statements which are attached hereto. General As of October 3, 2020, Flanigan’s Enterprises, Inc., a Florida corporation, together with its subsidiaries (“we”, “our”, “ours” and “us” as the context requires), (i) operated 27 units, consisting of restaurants, package liquor stores and combination restaurants/package liquor stores that we either own or have operational control over and partial ownership in; and (ii) franchises an additional five units, consisting of two restaurants (one of which we operate) and three combination restaurants/package liquor stores. Franchised Units . In exchange for our providing management and related services to our franchisees and granting them the right to use our service marks "Flanigan's Seafood Bar and Grill" and "Big Daddy's Liquors", our franchisees (four of which are franchised to members of the family of our Chairman of the Board, officers and/or directors), are required to (i) pay to us a royalty equal to 1% of gross package liquor sales and 3% of gross restaurant sales; and (ii) make advertising expenditures equal to between 1.5% to 3% of all gross sales based upon our actual advertising costs allocated between stores, pro-rata, based upon gross sales. Affiliated Limited Partnership Owned Units . We manage and control the operations of the eight restaurants owned by limited partnerships, except the Fort Lauderdale, Florida restaurant which is managed and controlled by a related franchisee. Accordingly, the results of operations of all limited partnership owned restaurants, except the Fort Lauderdale, Florida restaurant are consolidated with our results of operations for accounting purposes. The results of operations of the Fort Lauderdale, Florida restaurant are accounted for by us utilizing the equity method. 37 Table of Contents RESULTS OF OPERATIONS REVENUES (in thousands): 53 Weeks Ended 52 Weeks Ended Oct. 3, 2020 Sept. 28, 2019 Sales Restaurant, food $ 68,685 61.9% $ 71,814 63.2% Restaurant, bar 15,967 14.4% 22,476 19.8% Package goods 26,276 23.7% 19,327 17.0% Total 110,928 100.0% 113,617 100.0% Franchise related revenues 1,260 1,610 Other operating income 109 213 Rental income 680 762 Total Revenues $ 112,977 $ 116,202 Comparison of Fiscal Years Ended October 3, 2020 and September 28, 2019 Revenues. Total revenue for our fiscal year 2020 decreased $3,225,000 or 2.78% to $112,977,000 from $116,202,000 for our fiscal year 2019. The decrease in total revenue was due primarily to the negative impact of COVID-19 on our operations. Due to COVID-19, from mid-March 2020 through mid-May 2020, we ceased all dining and bar services at all of our restaurants, limiting service to take-out and delivery only of food, and implemented reduced hours at our retail package liquor stores. From mid-May 2020 through the beginning of July 2020, there was a gradual elimination of restrictions on our restaurant operations, permitting us to, among other things, provide dining for outdoor seating patrons with appropriate social distancing and provide dining for indoor patrons at up to 50% capacity (depending on the location of the restaurant), but with no bar service and increased operating hours at our package liquor stores. From the beginning of July 2020 through the beginning of September 2020, we ceased dine-in service at all of our Miami-Dade County, Florida restaurants, (two Company-owned and six limited partnership owned restaurants). Since the beginning of September 2020, we have been offering both food and bar options at all of our restaurants, including those located in Miami-Dade County, Florida, with appropriate social distancing and dine-in service at up to 100% capacity, including outdoor dining. The negative effect of COVID-19 on our operations was partially offset by the fifty-third week in our fiscal year 2020, the 2019 Price Increases (defined below) and increased package liquor store sales. Effective June 16, 2019 we increased certain menu prices for our bar offerings to target an increase to our total bar revenues of approximately 6.2% annually and effective June 23, 2019 we increased certain menu prices for our food offerings to target an increase to our total food revenues of approximately 3.4% annually, (the “2019 Price Increases”). We expect that total revenue for our fiscal year 2021 will decrease due to our operations being adversely impacted by COVID-19. We expect that Store #19 will remain closed during our fiscal year 2021 and accordingly do not expect to generate any revenue from it. Restaurant Food Sales . Restaurant revenue generated from the sale of food, including non-alcoholic beverages, at restaurants (food sales) totaled $68,685,000 for our fiscal year 2020 as compared to $71,814,000 for our fiscal year 2019. The decrease in restaurant food sales for our fiscal year 2020 as compared to restaurant food sales during our fiscal year 2019 is attributable to the negative effects of COVID-19 on our operations, partially offset by the fifty-third week in our fiscal year 2020 and the 2019 Price Increases. Comparable weekly restaurant food sales (for restaurants, subject to closures for COVID-19, open for all of our fiscal years 2020 and 2019, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for our fiscal years 2020 and 2019 due to a fire on October 2, 2018) and eight restaurants owned by affiliated limited partnerships) was $1,287,000 and $1,379,000 for our fiscal years 2020 and 2019, respectively, a decrease of 6.67%. Comparable weekly restaurant food sales for Company-owned restaurants only was $649,000 and $696,000 for our fiscal years 2020 and 2019, respectively, a decrease of 6.75%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only was $638,000 and $683,000 for our fiscal years 2020 and 2019, respectively, a decrease of 6.59%. We expect that restaurant food sales, including non-alcoholic beverages, for our fiscal year 2021 will decrease due to the negative effects of COVID-19 on our operations. 38 Table of Contents Restaurant Bar Sales . Restaurant revenue generated from the sale of alcoholic beverages at restaurants totaled $15,967,000 for our fiscal year 2020 as compared to $22,476,000 for our fiscal year 2019. The decrease in restaurant bar sales for our fiscal year 2020 as compared to restaurant bar sales during our fiscal year 2019 is attributable to the negative effects of COVID-19 on our operations, partially offset by the fifty third week in our fiscal year 2020 and the 2019 Price Increases. Comparable weekly restaurant bar sales (for restaurants, open (except, however, when closed due to government directives in fiscal year 2020) for all of our fiscal years 2020 and 2019, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for our fiscal years 2020 and 2019 due to a fire on October 2, 2018) and eight restaurants owned by affiliated limited partnerships) was $301,000 and $432,000 for our fiscal years 2020 and 2019, respectively, a decrease of 30.32%. Comparable weekly restaurant bar sales for Company-owned restaurants only was $135,000 and $197,000 for our fiscal years 2020 and 2019, respectively, a decrease of 31.47%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $166,000 and $235,000 for our fiscal years 2020 and 2019, respectively, a decrease of 29.36%. We expect that restaurant bar sales, including non-alcoholic beverages, for our fiscal year 2021 will decrease due to the negative effects of COVID-19 on our operations. Package Liquor Store Sales . Revenue generated from sales of liquor and related items at package liquor stores totaled $26,276,000 for our fiscal year 2020 as compared to $19,327,000 for our fiscal year 2019, an increase of $6,949,000 or 35.95%. This increase was primarily due to increased package liquor store traffic despite COVID-19 and because of the opening of our new retail package liquor store (Store #45) located in Kendall, Florida during the first quarter of our fiscal year 2020. The weekly average of same store package liquor store sales, which includes eight (8) Company-owned package liquor stores, (excluding Store #19, which was closed for our fiscal years 2020 and 2019 due to a fire on October 2, 2018 and also excluding Store #45, which opened for business on October 10, 2019), was $462,000 and $372,000 for our fiscal years 2020 and 2019 respectively, an increase of 24.19%. We anticipate that revenue generated from the sale of liquor and related items at package liquor stores for our fiscal year 2021 will increase when compared to our fiscal year 2020 due to what appears to be an increased demand for package liquor store products resulting from COVID-19. Operating Costs and Expenses . Operating costs and expenses, (consisting of cost of merchandise sold, payroll and related costs, occupancy costs and selling, general and administrative expenses), for our fiscal year 2020 increased $180,000 or 0.16% to $110,066,000 from $109,886,000 for our fiscal year 2019. The minimal increase was primarily due to cost cutting measures we have implemented since mid-March 2020 to reduce and/or control costs because of the negative effects of COVID-19 on our operations. We expect our operating costs and expenses will increase for our fiscal year 2021 as cost cutting measures are reversed. Operating costs and expenses increased as a percentage of total sales to approximately 97.42% in our fiscal year 2020 from 94.56% in our fiscal year 2019. Gross Profit . Gross profit is calculated by subtracting the cost of merchandise sold from sales. 39 Table of Contents Restaurant Food and Bar Sales . Gross profit for restaurant food and bar sales for our fiscal year 2020 decreased to $56,134,000 from $61,212,000 for our fiscal year 2019. Our gross profit margin for restaurant food and bar sales (calculated as gross profit reflected as a percentage of restaurant food and bar sales), was 66.31% for our fiscal year 2020 and 64.92% for our fiscal year 2019. Gross profit margin for restaurant food and bar sales increased during our fiscal year 2020 when compared to our fiscal year 2019 due to the inclusion of a 10% take-out charge on restaurant food sales, offset by the negative effects of COVID-19 on our restaurant bar operations and higher gross profit margin items as well as higher food costs. If we can maintain the same level of our take out charges on restaurant food sales, we expect that our gross profit margin for restaurant food and bar sales will increase during our fiscal year 2021 for the same reasons. Package Liquor Store Sales . Gross profit for package liquor store sales for our fiscal year 2020 increased to $7,084,000 from $5,269,000 for our fiscal year 2019, due primarily to increased package liquor store traffic which we believe has been caused by COVID-19, as well as the opening of our new Store #45 during the first quarter of our fiscal year 2020. Our gross profit margin (calculated as gross profit reflected as a percentage of package liquor store sales) for package liquor store sales was 26.96% for our fiscal year 2020 and 27.26% for our fiscal year 2019. We anticipate that the gross profit margin for package liquor store merchandise will decrease during our fiscal year 2021 due to higher costs and a reduction in pricing of certain package store merchandise to be more competitive. Payroll and Related Costs . Payroll and related costs for our fiscal year 2020 decreased $474,000 or 1.32% to $35,399,000 from $35,873,000 for our fiscal year 2019. Lower payroll and related costs for our fiscal year 2020 were due to certain cost cutting measures including material layoffs at our restaurants and reduced corporate personnel salaries from mid-March 2020 through mid-May 2020 and thereafter due to an adjustment to our traditional staffing model to meet customer demand, increased by payroll for our package liquor store in Kendall, Florida, which opened for business during the first quarter of our fiscal year 2020. We anticipate that until our restaurant operations are restored to pre-COVID-19 levels, of which there can be no assurance, payroll and related costs will be less than our costs from 2019. Payroll and related costs as a percentage of total sales was 31.33% in our fiscal year 2020 as compared to 30.87% of total sales in our fiscal year 2019. Occupancy Costs . Occupancy costs (consisting of percentage rent, common area maintenance, repairs, real property taxes, amortization of leasehold purchases and rent expense associated with operating lease liabilities under ASC 842) for our fiscal year 2020 increased $986,000 or 16.29% to $7,040,000 from $6,054,000 for our fiscal year 2019 primarily due to our adoption of ASC 842. We anticipate that our occupancy costs will remain stable throughout our fiscal year 2021. Selling, General and Administrative Expenses . Selling, general and administrative expenses (consisting of general corporate expenses, including but not limited to advertising, insurance, professional costs, clerical and administrative overhead) for our fiscal year 2020 decreased $906,000 or 4.35% to $19,917,000 from $20,823,000 for our fiscal year 2019. Selling, general and administrative expenses decreased as a percentage of total sales in our fiscal year 2020 to 17.63% as compared to 17.92% in our fiscal year 2019. We anticipate that until our operations are restored to pre-COVID-19 levels, of which there can be no assurance, our selling, general and administrative expenses will be less than our expenses for our fiscal year 2020, offset by increases in expenses across all categories. Depreciation and Amortization. Depreciation and amortization for our fiscal year 2020, which is included in selling, general and administrative expenses, increased $200,000 or 6.58% to $3,240,000 from $3,040,000 for our fiscal year 2019. As a percentage of revenue, depreciation and amortization expense was 2.87% of revenue for our fiscal year 2020 and 2.62% of revenue for our fiscal year 2019. 40 Table of Contents Interest Expense, Net . Interest expense, net, for our fiscal year 2020 increased $128,000 to $836,000 from $708,000 for our fiscal year 2019. Interest expense, net, increased for our fiscal year 2020 due to our borrowing of an additional $4.5 million during the first quarter of our fiscal year 2020 on the re-financing by our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, of its mortgage loan with an unrelated third party lender, increasing the principal amount borrowed from $2.72 million to $7.21 million and our borrowing of an additional approximately $10.0 million during the third quarter of our fiscal year 2020 on our PPP Loans. Interest expense, net, will increase for our fiscal year 2021 due to our borrowing of an additional $10.0 million during the third quarter of our fiscal year 2020 on our PPP Loans, if not forgiven. Income Taxes. Income tax expense for our fiscal year 2020 was a benefit of $60,000, as compared to an expense of $887,000 for our fiscal year 2019. Net Income. Net income for our fiscal year 2020 decreased $3,193,000 or 59.38% to $2,184,000 from $5,377,000 for our fiscal year 2019. Net income for our fiscal year 2020 decreased when compared to net income for our fiscal year 2019 due to the negative effects of COVID-19 on our operations, our adoption of ASC 842, higher food costs and overall expenses, offset by our implementation of the cost cutting measures and the 2019 Price Increases. As a percentage of sales, net income in our fiscal year 2020 is 1.93%, as compared to 4.63% in our fiscal year 2019. Net Income (Loss) Attributable to Stockholders. Net income attributable to stockholders for our fiscal year 2020 decreased $2,538,000 or 69.57% to $1,110,000 from $3,648,000 for our fiscal year 2019. Net income attributable to stockholders for our fiscal year 2020 decreased when compared to our fiscal year 2019 primarily due to the negative effects of COVID-19 on our operations, our adoption of ASC 842, higher food costs and overall expenses, offset by our implementation of the cost cutting measures, increased revenue at our package retail stores and the 2019 Price Increases. As a percentage of sales, net income for our fiscal year 2020 is 0.98%, as compared to 3.14% for our fiscal year 2019. New Limited Partnership Restaurants As new restaurants open, our income from operations will be adversely affected due to our obligation to advance pre-opening costs, including but not limited to pre-opening rent for the new locations. During our fiscal year 2020, we had one new restaurant location in Sunrise, Florida in the development stage. During the fourth quarter of our fiscal year 2019, we entered leases for two spaces adjacent to each other, to house a new “Flanigan’s Seafood Bar and Grill” as well as a “Big Daddy’s Wine and Liquors” in a shopping center in Miramar, Florida, which shopping center is currently under construction. Menu Price Increases and Trends Effective June 16, 2019 we increased menu prices for our bar offerings to target an increase to our bar revenues of approximately 6.2% annually and effective June 23, 2019 we increased menu prices for our food offerings to target an increase to our food revenues of approximately 3.4% annually to offset higher food costs and higher overall expenses. Prior to these increases, we previously raised menu prices in the fourth quarter of our fiscal year 2017. Subsequent to the end of our fiscal year 2020, we increased menu prices for our bar offerings (effective November 29, 2020) to target an increase of our bar revenues of approximately 1.83% annually and we increased menu prices for our food offerings (effective December 6, 2020) to target an increase to our food revenues of approximately 2.45% annually to offset higher food costs and higher overall expenses. COVID-19 has and will continue to materially and adversely affect our restaurant business for what may be a prolonged period of time. This damage and disruption has resulted from events and factors that were impossible for us to predict and are beyond our control. As a result, and despite experiencing increased sales and traffic at certain of our package liquor stores, COVID-19 has materially adversely affected our results of operations for our fiscal year 2020 and will, in all likelihood, impact our results of operations, liquidity and/or financial condition for our fiscal year 2021. The extent to which our restaurant business may be adversely impacted and its effect on our operations, liquidity and/or financial condition cannot be accurately predicted. 41 Table of Contents We are not actively searching for locations for the operation of new package liquor stores, but when our attempt to expand “The Whale’s Rib” restaurant concept in Miami, Florida was abandoned, we decided that the space we had targeted for the “The Whales Rib” would be ideal for the operation of a package liquor store and during the fourth quarter of our fiscal year 2018, we received governmental approval to operate a package liquor store at that location. The new package liquor store (Store #45) located in Kendall, Florida opened for business in October 2019. During the fourth quarter of our fiscal year 2019, we entered a lease to house a new “Big Daddy’s Wine & Liquors” package liquor store in space adjacent to where we are planning a new “Flanigan’s Seafood Bar and Grill”, restaurant in a shopping center in Miramar, Florida, which shopping center is currently under construction. LIQUIDITY AND CAPITAL RESOURCES We fund our operations through cash from operations. As of October 3, 2020, we had cash of approximately $29,922,000, an increase of $16,250,000 from our cash balance of $13,672,000 as of September 28, 2019. During the third quarter of our fiscal year 2020, we, certain of the entities owning the limited partnership stores (the “LP’s”), franchised stores (the “Franchisees”) as well as the store we manage but do not own (the “Managed Store”) (collectively, the “Borrowers”), applied for and received loans from an unrelated third party lender (the “Lender”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted March 27, 2020, in the aggregate principal amount of approximately $13.1 million (the “PPP Loans”), of which approximately: (i) $5.9 million was loaned to us; (ii) $4.1 million was loaned to 8 of the LP’s; (iii) $2.6 million was loaned to 5 of the Franchisees; and (iv) $0.5 million was loaned to the Managed Store. During the first quarter of our fiscal year 2020, our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, re-financed its mortgage loan with an unrelated third party lender, increasing the principal amount borrowed from $2.72 million to $7.21 million. The PPP Loans, which are in the form of Notes issued by each of the Borrowers, mature two years from the date of funding (dates ranging from May 5, 2022 to May 11, 2022) and bear interest at a rate of 1.00% per annum, payable monthly commencing approximately six months from the date of issuance of the Notes (issuance dates ranging from April 30, 2020 to May 6, 2020). The Notes may be prepaid by the applicable Borrower at any time prior to maturity with no prepayment penalties. Proceeds from the PPP Loans are available to the respective Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, including rent and interest on mortgages and other debt obligations incurred before February 15, 2020. Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent the proceeds of the PPP Loans are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. No assurance can be given that the Borrowers will obtain forgiveness of the PPP Loan in whole or in part. With respect to any portion of any of the PPP Loans that is not forgiven under the terms of the PPP, such amounts will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the applicable PPP Note and cross-defaults on any other loan with the Lender or other creditors. Notwithstanding the negative effects of COVID-19 on our operations, we believe that our current cash availability from our cash on hand, positive cash flow from operations and borrowed funds will be sufficient to fund our operations and planned capital expenditures for at least the next twelve months. 42 Table of Contents Any future determination to pay cash dividends will be at our Board’s discretion and will depend upon our financial condition, operating results, capital requirements and such other factors as our Board deems relevant. There can be no assurances that any future dividends will be paid. CASH FLOWS Fiscal Years 2020 2019 (in thousands) Net cash and cash equivalents provided by operating activities $ 8,785 $ 9,627 Net cash and cash equivalents used in investing activities (3,271 ) (4,609 ) Net cash and cash equivalents provided by (used in) financing activities 10,736 (4,760 ) Net increase in cash and equivalents 16,250 258 Cash and equivalents, beginning of year 13,672 13,414 Cash and equivalents, end of year $ 29,922 $ 13,672 Capital Expenditures In addition to using cash for our operating expenses, we use cash to fund the development and construction of new restaurants and to fund capitalized property improvements for our existing restaurants. During our fiscal year 2020, we acquired property and equipment of $2,766,000, (of which $379,000 was for construction in progress; $118,000 was deposits recorded in other assets; and $10,000 was deposits transferred to construction in progress as of September 28, 2019), which amount included $278,000 for renovations to two (2) existing limited partnership restaurant and $466,000 for renovations to five (5) Company-owned restaurants. During our fiscal year 2019, we acquired property and equipment of $6,323,000, (of which $1,300,000 was for the purchase of vacant real property in Pompano Beach, Florida; $1,058,000 was for construction in progress; $595,000 was deposits recorded in other assets; and $386,000 was deposits transferred to construction in progress as of September 29, 2018), which amount included $120,000 for renovations to one (1) existing limited partnership restaurant and $559,000 for renovations to three (3) Company-owned restaurants. We anticipate the cost of this refurbishment in our fiscal year 2021 will be approximately $950,000, excluding construction/renovations to Store #19 (our combination package liquor store and restaurant which is being rebuilt due to damages caused by a fire) and Store #85 (our Sunrise, Florida restaurant location in development), which funds will be provided from operations. Debt As of October 3, 2020, we had long term debt of $26,323,000, as compared to $13,080,000 as of September 28, 2019. Our long term debt increased as of October 3, 2020 as compared to September 28, 2019 due to (i) the PPP Loan to us of $5.9 million; (ii) the PPP Loans to our eight limited partnerships of $4.1 million; (iii) the re-financing of its mortgage loan by our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, increasing the principal amount borrowed from $2.72 million to $7.21 million; and (iv) $1,317,000 for financed insurance premiums, less any payments made on account thereof. 43 Table of Contents Prior to obtaining the PPP Loans, we were in compliance with the financial covenants contained in our loans with our unrelated third party institutional lender (the “Institutional Lender”) under which as of October 3, 2020, we owe in the aggregate approximately $12,209,000 (the “Institutional Loans”). We determined that as of the end of the third quarter of our fiscal year 2020, we were not in compliance with our financial covenants contained in the Institutional Loans related to the Rent Adjusted Funded Debt to EBITDA Ratio because our consolidated debt during the third quarter of our fiscal year 2020 increased due to our repayment obligations under the PPP Loans (the “Covenant Breach’). Pursuant to the terms of the Institutional Loans, the Covenant Breach, grants the Institutional Lender the right to exercise certain remedies under the Institutional Loans, including the right to accelerate the indebtedness owed by us to the Institutional Lender thereunder. On August 10, 2020, we received a written waiver of the Covenant Breach from the Institutional Lender, which, among other things, waives the Covenant Breach through June 30, 2021. As of October 3, 2020, we are in compliance with the financial covenants contained in our loans with our Institutional Lender. There can be no assurances that we will be in compliance with our financial covenants thereafter due to, among other things, that our results of operations will likely continue to be materially impacted by the COVID-19 pandemic. Absent a waiver, failure to be in compliance with our financial covenants would constitute a default under the Institutional Loans with our Institutional Lender when reported. Such a default, if not cured or waived, would allow the Institutional Lender to accelerate the maturity of the indebtedness we owe under the Institutional Loans, making it due and payable at the time. If maturity of the Institutional Loans were accelerated, it would have a material adverse impact on our consolidated financial statements and results of operations. We repaid long term debt, including auto loans, financed insurance premiums and mortgages in the amount of $2,540,000 and $2,820,000 in our fiscal years 2020 and 2019, respectively. (a) Mortgage on Real Property On November 27, 2019, our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, re-financed its mortgage loan with an unrelated third party lender, increasing the principal amount borrowed from $2.72 million to $7.21 million. The principal balance and all accrued interest of the mortgage loan that had been outstanding matured November 30, 2019. The re-financed mortgage loan earns interest at the fixed annual rate of 3.86%, is amortized over twenty (20) years, requires us to pay monthly payments of principal and interest in the amount of $43,373 with the entire principal balance and all accrued interest due in November 2026. We intend to use the excess funds we received from the re-financing of this mortgage loan (approximately $4.4 million) for working capital. ( b) Financed Insurance Premiums During our fiscal year 2020, we bound and financed through an unrelated third party lender the premiums on the following property, general liability, excess liability and terrorism insurance policies: (i) For the policy year beginning December 30, 2019, our general liability insurance, excluding limited partnerships, is a one (1) year policy, including automobile and excess liability coverage. The annual premium for this insurance coverage is $418,000; (ii) For the policy year beginning December 30, 2019, our general liability insurance for our limited partnerships is a one (1) year policy, including excess liability coverage. The annual premium for this insurance coverage is $459,000; (iii) For the policy year beginning December 30, 2019, our property insurance is a one (1) year policy and the annual premium for this insurance coverage is $561,000; 44 Table of Contents (iv) For the policy year beginning December 30, 2019, our excess liability insurance is a one (1) year policy and the annual premium for this insurance coverage is $360,000; and (v) For the policy year beginning December 30, 2019, our terrorism insurance is a one (1) year policy and the annual premium for this insurance coverage is $12,000. Of the $1,810,000 annual premium amounts, which includes coverage for our franchises which are not included in our consolidated financial statements, we financed $1,656,000 through an unaffiliated third party lender. The finance agreement obligates us to repay the amounts financed together with interest at the rate of 2.55% per annum, over 11 months, with monthly payments of principal and interest, each in the amount of $158,000. The finance agreement is secured by a first priority security interest in all insurance policies, all unearned premium, return premiums, dividend payments and loss payments thereof. As of October 3, 2020, the aggregate principal balance owed to the third party lender from the financing of our insurance policies is $365,000, excluding amounts which are reimbursed by our franchises for insurances covering their operations, but including the annual premiums for boiler insurance ($2,000) and directors and officers liability insurance ($34,000), which were added to the finance agreement during the third quarter of our fiscal year 2020 and are financed over the balance of the term of the same. (c) Paycheck Protection Loans During the third quarter of our fiscal year 2020, we, certain of the entities owning the limited partnership stores (the “LP’s”), franchised stores (the “Franchisees”), as well as the store we manage but do not own (the “Managed Store”) (collectively, the “Borrowers”), applied for and received loans from an unrelated third party lender pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) enacted March 27, 2020, in the aggregate principal amount of approximately $13.1 million, (the “PPP Loans”), of which approximately: (i) $5.9 million was loaned to us ; (ii) $4.1 million was loaned to 8 of the LP’s ; (iii) $2.6 million was loaned to 5 of the Franchisees; and (iv) $0.5 million was loaned to the Managed Store. The PPP Loans to the Franchisees and the Managed Store are not included in our consolidated financial statements. The PPP Loans, which are in the form of Notes issued by each of the Borrowers, mature two years from the date of funding (dates ranging from May 5, 2022 to May 11, 2022) and bear interest at a rate of 1.00% per annum, payable monthly commencing approximately six months from the date of issuance of the Notes (issuance dates ranging from April 30, 2020 to May 6, 2020). The Notes may be prepaid by the applicable Borrower at any time prior to maturity with no prepayment penalties. Proceeds from the PPP Loans are available to the respective Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, including rent and interest on mortgages and other debt obligations incurred before February 15, 2020. Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent the proceeds of the PPP Loans are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. No assurance can be given that the Borrowers will obtain forgiveness of the PPP Loans in whole or in part. With respect to any portion of any of the PPP Loans that is not forgiven under the terms of the PPP, such amounts will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the applicable PPP Note and cross-defaults on any other loan with the Lender or other creditors. 45 Table of Contents Leases To conduct certain of our operations, we lease restaurant and package liquor store space in South Florida from unrelated third parties. Our leases have remaining lease terms of up to 10 years, some of which include options to renew and extend the lease terms for up to an additional 30 years. We presently intend to renew some of the extension options available to us and for purposes of computing the right-of-use assets and lease liabilities required by ASC 842, we have incorporated into all lease terms which may be extended, an additional term of the lesser of (i) the amount of years the lease may be extended; or (ii) 15 years. Following adoption of ASC 842, common area maintenance and property taxes are not considered to be lease components. The components of lease expense are as follows: 53 Weeks Ended October 3, 2020 Operating Lease Expense, which is included in occupancy costs $ 4,521,000 Supplemental balance sheet information related to leases as follows: Classification on the Condensed Consolidated Balance Sheet October 3, 2020 Assets Finance lease assets $ 4,749,000 Operating lease assets 22,150,000 $ 26,899,000 Liabilities Finance current liabilities $ 4,772,000 Operating current liabilities 3,116,000 Operating lease non-current liabilities 20,337,000 Weighted Average Remaining Lease Term: Finance leases 0.42 Years Operating leases 7.71 Years Weighted Average Discount: Finance leases 5.5% Operating leases 5.5% The following table outlines the minimum future lease payments for the next five years and thereafter: For fiscal year Operating Leases Finance Leases 2021 $ 4,246,000 $ 4,881,000 2022 2,927,000 2023 2,942,000 2024 2,975,000 2025 2,957,000 Thereafter 14,131,000 Total lease payments (Undiscounted cash flows) 30,178,000 4,881,000 Less imputed interest (6,772,000 ) (109,000 ) Total $ 23,406,000 $ 4,772,000 Total rent expense for all of our operating leases was approximately $3,963,000 in our fiscal year 2019 and is included in “Occupancy Costs” in our accompanying consolidated statements of income. The total rent expense is comprised of the following: 2019 Minimum Base Rent $ 3,149,000 Contingent Percentage Rent 814,000 Total $ 3,963,000 46 Table of Contents Construction Contracts (a) 2505 N. University Drive, Hollywood, Florida (Store #19) During the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated architect for design and development services totaling $77,000 for the re-build of our restaurant located at 2505 N. University Drive, Hollywood, Florida (Store #19) which has been closed since October 2018 due to damages caused by a fire, of which $62,000 has been paid. Additionally, during the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated general contractor for site work at this location totaling $1,618,000, (i) to connect the real property where this restaurant operated (Store #19) to city sewer and (ii) to construct a new building on the adjacent parcel of real property for the operation of a package liquor store. During our fiscal year 2020, we agreed to change orders to the agreement for additional construction services increasing the total contract price by $112,000 to $1,730,000, of which $-0- has been paid through October 3, 2020. Subsequent to the end of our fiscal year 2020, we agreed to additional change orders to the agreement for additional construction services increasing the total contract price by $28,000 to $1,757,000 of which $64,000 has been paid. (b) 14301 W. Sunrise Boulevard, Sunrise, Florida (Store #85) During the third quarter of our fiscal year 2019, we also entered into an agreement with a third party unaffiliated design group for design and development services of our new location at 14301 W. Sunrise Boulevard, Sunrise, Florida 33323 (Store #85) for a total contract price of $122,000. During our fiscal year 2020, we agreed upon amendments to the $122,000 Contract for additional design and development services which had the effect of increasing the total contract price by $18,000 to $140,000, of which $106,000 has been paid through October 3, 2020. Additionally during the fourth quarter of our fiscal year 2020, we entered into an agreement with a third party unaffiliated general contractor for interior renovations at this location totaling $1,236,000, of which $-0- has been paid through October 3, 2020. Subsequent to October 3, 2020, $111,000 has been paid. Purchase Commitments/Supply In order to fix the cost and ensure adequate supply of baby back ribs for our restaurants, on November 9, 2020, we entered into a purchase agreement with our current rib supplier, whereby we agreed to purchase approximately $6,420,000 of baby back ribs during calendar year 2021 from this vendor at a fixed cost. While we anticipate purchasing all of our rib supply from this vendor, we believe there are several other alternative vendors available, if needed. Flanigan’s Fish Company, LLC During the third quarter of our fiscal year 2020, we temporarily suspended the operation of our Flanigan’s Fish Company, LLC, a Florida limited liability company (“FFC”) due to the decrease in demand for imported fresh fish caused by restrictions placed upon the operation of our restaurants due to COVID-19, relying instead on outside fresh fish purveyors. The suspension of operations lasted approximately 5 ½ weeks, after which we resumed operations. As of October 3, 2020, FFC supplies certain of the fish to all of our restaurants. Since we hold the controlling interest of FFC, the balance sheet and operating results of this entity are consolidated into the accompanying financial statements of the Company. Sales and purchases of fish are recognized in restaurant food sales and restaurant and lounges (cost of merchandise sold), respectively, in the consolidated statements of income at the time of sale to the restaurant. In addition, the 49% of FFC owned by the unrelated third party is recognized as noncontrolling interest in our consolidated financial statements. 47 Table of Contents Purchase of Limited Partnership Interests During our fiscal year 2020, we did not purchase any limited partnership interests. During our fiscal year 2019, we purchased from one limited partner (who is not an officer, director or family member of officers or directors) a limited partnership interest of 0.63% in a limited partnership which owns a restaurant, for a purchase price of $4,800. Working Capital The table below summarizes our current assets, current liabilities and working capital as of the end of our fiscal years 2020 and 2019: Oct. 3, 2020 Sept. 28, 2019 (in thousands) Current assets $ 36,508 $ 19,593 Current liabilities 25,362 13,129 Working capital 11,146 6,464 Our working capital as of our fiscal year ended October 3, 2020 increased $4,682,000 or 72.43% to $11,146,000 from $6,464,000 as of September 28, 2019 due to the cash received from (i) the PPP Loan to us of $5.9 million; (ii) the PPP Loans to our eight limited partnerships of $4.1 million; and (iii) the re-financing of its mortgage loan by our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, increasing the principal amount borrowed from $2.72 million to $7.21 million, offset by $1,281,000 due to our adoption of ASC 842. During our fiscal year 2019, we used working capital of approximately $1,300,000 to close on our purchase of the vacant parcel of property located at 2119 S.E. 9 th Street, Pompano Beach, Florida. While there can be no assurance due to, among other things, unanticipated expenses or unanticipated decline in revenues, or both, we believe that our cash on hand, cash flow from operations and funds available from our borrowings will adequately fund operations, debt reductions and planned capital expenditures throughout our fiscal year 2021. During our fiscal year 2021, we plan to use certain funds on-hand, borrowed funds and/or insurance proceeds (i) to construct a new building on a parcel of real property which we own which is adjacent to the real property where our combination package liquor store and restaurant located at 2505 N. University Drive, Hollywood, Florida (Store #19) operated into which we plan to re-locate our package liquor store and to re-build the restaurant; (ii) to exercise the option to purchase the real property and improvements located at 5450 N. State Road 7, North Lauderdale, Florida from which we operate our combination “Flanigan’s Seafood Bar and Grill” restaurant and “Big Daddy’s Liquors” package liquor store (Store #40); (iii) to exercise the option to purchase the real property and improvements located at 14301 W. Sunrise Boulevard, Sunrise, Florida which we are currently developing for a limited partnership for operation as a “Flanigan’s Seafood Bar and Grill” restaurant (Store #85); (iv) advance the cost of renovations to develop the “Flanigan’s Seafood Bar and Grill” restaurant which we are currently developing (Store #85). There can be no assurances as to the timing for us to construct the new building for the package liquor store and re-build the restaurant for Store #19 or to complete the renovations for the restaurant for Store #85. 48 Table of Contents Off-Balance Sheet Arrangements We do not have off-balance sheet arrangements. Recently Adopted and Recently Issued Accounting Pronouncements Adopted Effective September 29, 2019, we adopted Accounting Standards Codification 842, Leases (“ASC 842”). The new guidance requires that lease arrangements be presented on the lessee’s balance sheet by recording a right-of-use asset and a lease liability equal to the present value of the related future minimum lease payments. We adopted the standard in the first quarter of fiscal 2020, using the retrospective approach. Upon adoption, the Company recorded a right-of-use asset of $27.8 million and a lease liability of $27.8 million. At October 1, 2020, the Company decreased the operating lease right-of-use asset by $2.6 million and the operating lease liability by $2.6 million with the reclassification of an operating lease to a finance lease due to the exercise of a purchase option subsequent to the end of our fiscal year 2020. The Company recorded a finance lease right-of-use asset of $4.8 million and a finance lease liability of $4.8 million. We elected the transition package of practical expedients, under which the Company does not have to reassess (1) whether any expired or existing contracts are leases, or contain leases, (2) the lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. In addition, we made an accounting policy election to exclude leases with an initial term of 12 months or less from the balance sheet. This standard had a material impact on the Condensed Consolidated Statements of Income due to the escalations of rent in the extensions but did not have a material impact on the Condensed Consolidated Statement of Cash Flows. See Note 13 for further disclosures resulting from the adoption of this new standard. Issued There are no recently issued accounting pronouncements that we have not yet adopted that we believe will have a material effect on our financial statements. Critical Accounting Policies Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements located in Item 8 of this Annual Report on Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosures of contingent assets and liabilities. Actual results could differ from those estimates under different assumptions or conditions. We believe that the following critical accounting policies are subject to estimates and judgments used in the preparation of our consolidated financial statements: Estimated Useful Lives of Property and Equipment The estimates of useful lives for property and equipment are significant estimates. Expenditures for the leasehold improvements and equipment when a restaurant is first constructed are material. In addition, periodic refurbishing takes place and those expenditures can be material. We estimate the useful life of those assets by considering, among other things, expected use, life of the lease on the building, and warranty period, if applicable. The assets are then depreciated using a straight line method over those estimated lives. These estimated lives are reviewed periodically and adjusted if necessary. Any necessary adjustment to depreciation expense is made in the income statement of the period in which the adjustment is determined to be necessary. 49 Table of Contents Consolidation of Limited Partnerships As of October 3, 2020, we operate eight (8) restaurants as general partner of the limited partnerships that own the operations of these restaurants. We expect that any expansion which takes place in opening new restaurants will also result in us operating the restaurants as general partner. In addition to the general partnership interest we also purchased limited partnership units ranging from 5% to 49% of the total units outstanding. As a result of these controlling interests, we consolidate the operations of these limited partnerships with ours despite the fact that we do not own in excess of 50% of the equity interests. All intercompany transactions are eliminated in consolidation. The non-controlling interests in the earnings of these limited partnerships are removed from net income and are not included in the calculation of earnings per share. Income Taxes We account for our income taxes using FASB ASC Topic 740, “ Income Taxes ”, which requires among other things, recognition of future tax benefits measured at enacted rates attributable to deductible temporary differences between financial statement and income tax basis of assets and liabilities and to tax net operating loss carryforwards and tax credits to the extent that realization of said tax benefits is more likely than not. For discussion regarding our carryforwards refer to Note 11 to the consolidated financial statements for our fiscal year 2020. Other Matters Impact of Inflation The primary inflationary factors affecting our operations are food, beverage and labor costs. A large number of restaurant personnel are paid at rates based upon applicable minimum wage and increases in minimum wage directly affect labor costs. To date, inflation has not had a material impact on our operating results, but this circumstance may change in the future if food and fuel costs continue to rise.