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 2021 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 in two segments: the restaurant segment and the package liquor store segment. Financial information broken into these two industry segments for the two fiscal years ended October 2, 2021 and October 3, 2020 is set forth in the Consolidated Financial Statements which are attached hereto. General As of October 2, 2021, we (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. 41 Table of Contents RESULTS OF OPERATIONS REVENUES (in thousands): 52 Weeks Ended 53 Weeks Ended October 2, 2021 October 3, 2020 Amount (In thousands) Percent Amount (In thousands) Percent Restaurant food sales $ 84,466 62.75% $ 68,685 61.9% Restaurant bar sales 20,832 15.48% 15,967 14.4% Package store sales 29,304 21.77% 26,276 23.7% Total Sales $ 134,602 100.00% $ 110,928 100.00% Franchise related revenues 1,673 1,260 Rental income 770 680 Other operating income (Loss) 262 109 Total Revenue $ 137,307 $ 112,977 Comparison of Fiscal Years Ended October 2, 2021 and October 3, 2020 Revenues. Total revenue for our fiscal year 2021 increased $24,330,000 or 21.54% to $137,307,000 from $112,977,000 for our fiscal year 2020 due primarily to increased package liquor store and restaurant sales, increased menu prices and the comparatively more adverse effects of COVID-19 on our operations during our fiscal year 2020 as compared with our fiscal year 2021 and notwithstanding the fifty third week in our fiscal year 2020. Effective December 6, 2020 and then effective April 11, 2021 we increased menu prices for our food offerings to target an increase to our food revenues of approximately 2.45% and 4.60% annually, respectively, to offset higher food costs and higher overall expenses and effective November 29, 2020 we increased menu prices for our bar offerings to target an increase to our bar revenues of approximately 1.83% annually, (collectively the “Recent Price Increases”). Prior to these increases, we previously raised menu prices in the third quarter of our fiscal year 2019. We expect that total revenue for our fiscal year 2022 will increase due to increased traffic and the Recent Price Increases. We expect that the new package liquor store located at 7990 Davie Road Extension, Hollywood, Florida) will open for business during our fiscal year 2022 and we expect to generate revenue from it. We do not anticipate that the restaurant located at 2505 N. University Drive, Hollywood, Florida, which has been closed since October, 2018 due to a fire (the”Hollywood restaurant”) will open for business during our fiscal year 2022 and accordingly we 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 totaled $84,466,000 for our fiscal year 2021 as compared to $68,685,000 for our fiscal year 2020. The increase in restaurant food sales for our fiscal year 2021 as compared to restaurant food sales during our fiscal year 2020 is attributable to increased restaurant traffic, the Recent Price Increases and the comparatively more adverse effects of COVID-19 on our operations during our fiscal year 2020 as compared with our fiscal year 2021 and notwithstanding the fifty third week in our fiscal year 2020. Comparable weekly restaurant food sales (for restaurants, other than for closures due to COVID-19, open for all of our fiscal years 2021 and 2020, respectively, which consists of nine restaurants owned by us, (excluding the Hollywood Restaurant) and eight restaurants owned by affiliated limited partnerships) was $1,610,000 and $1,287,000 for our fiscal years 2021 and 2020, respectively, an increase of 25.10%. Comparable weekly restaurant food sales for Company-owned restaurants only was $797,000 and $649,000 for our fiscal years 2021 and 2020 respectively, an increase of 22.80%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only was $813,000 and $638,000 for our fiscal years 2021 and 2020, respectively, an increase of 27.43%. We expect that restaurant food sales, including non-alcoholic beverages, for our fiscal year 2022 will increase due to increased restaurant traffic and the Recent Price Increases. 42 Table of Contents Restaurant Bar Sales . Restaurant revenue generated from the sale of alcoholic beverages at restaurants totaled $20,832,000 for our fiscal year 2021 as compared to $15,967,000 for our fiscal year 2020. The increase in restaurant bar sales during our fiscal year 2021 as compared to restaurant bar sales during our fiscal year 2020 is primarily due to increased restaurant traffic, the Recent Price Increases and the comparatively more adverse effects of COVID-19 on our operations during our fiscal year 2020 as compared with our fiscal year 2021 and notwithstanding the fifty third week in our fiscal year 2020. Comparable weekly restaurant bar sales (for restaurants, other than for closures due to COVID-19, open for all of our fiscal years 2021 and 2020, respectively, which consists of nine restaurants owned by us, (excluding the Hollywood Restaurant), and eight restaurants owned by affiliated limited partnerships) was $401,000 and $301,000 for our fiscal years 2021 and 2020 respectively, an increase of 33.22%. Comparable weekly restaurant bar sales for Company owned restaurants only was $172,000 and $135,000 for our fiscal years 2021 and 2021, respectively, an increase of 27.41%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $229,000 and $166,000 for our fiscal years 2021 and 2021, respectively, an increase of 37.95%. We expect that restaurant bar sales, including non-alcoholic beverages, for our fiscal year 2022 will increase due to increased restaurant traffic and the Recent Price Increases. Package Liquor Store Sales . Revenue generated from sales of liquor and related items at package liquor stores totaled $29,304,000 for our fiscal year 2021 as compared to $26,276,000 for our fiscal year 2020, an increase of $3,028,000. This increase was primarily due to increased package liquor store traffic due to what appears to be continued increased demand for package liquor store products resulting from COVID-19 and notwithstanding the fifty third week in our fiscal year 2020. The weekly average of same store package liquor store sales, which includes nine (9) Company-owned package liquor stores, (excluding the package liquor store which in combination with the Hollywood Restaurant was the subject of a fire in October 2018 (Store #19), but including our new package liquor store located at 12776 S.W. 88 th Street, Miami, Florida, which opened for business on October 10, 2019 (Store #45)), was $564,000 and $496,000 for our fiscal years 2021 and 2020 respectively, an increase of 13.71%. 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 2021 increased $18,591,000 or 16.89% to $128,657,000 from $110,066,000 for our fiscal year 2020. The increase was primarily due to payroll and an expected general increase in food costs, offset by actions taken by management to reduce and/or control costs. We anticipate that our operating costs and expenses will continue to increase through our fiscal year 2022 for the same reasons. Operating costs and expenses decreased as a percentage of total revenue to approximately 93.70% in our fiscal year 2021 from 97.42% in our fiscal year 2020. Gross Profit . Gross profit is calculated by subtracting the cost of merchandise sold from sales. Restaurant Food and Bar Sales . Gross profit for food and bar sales for our fiscal year 2021 increased to $69,324,000 from $56,134,000 for our fiscal year 2020. 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 65.84% for our fiscal year 2021 and 66.31% for our fiscal year 2020. Gross profit margin for restaurant food and bar sales decreased during our fiscal year 2021 when compared to our fiscal year 2020 due to higher food costs, offset among other things by the Recent Price Increases. Package Liquor Store Sales . Gross profit for package store sales for our fiscal year 2021 decreased to $6,956,000 from $7,084,000 for our fiscal year 2020. Our gross profit margin, (calculated as gross profit reflected as a percentage of package liquor store sales), for package store sales was 23.74% for our fiscal year 2021 and 26.96% for our fiscal year 2020. We anticipate that the gross profit margin for package liquor store merchandise will decrease during our fiscal year 2022 due to higher costs and a reduction in pricing of certain package store merchandise to be more competitive. 43 Table of Contents Payroll and Related Costs . Payroll and related costs for our fiscal year 2021 increased $8,066,000 or 22.79% to $43,465,000 from $35,399,000 for our fiscal year 2020. Payroll and related costs for the fiscal year 2021 were higher due primarily to increased performance bonuses and higher costs for employees such as cooks. Payroll and related costs as a percentage of total revenue was 31.66% for our fiscal year 2021 and 31.33% of total revenue for our fiscal year 2020. 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 2021 decreased $445,000 or 6.32% to $6,595,000 from $7,040,000 for our fiscal year 2020. The decrease in occupancy costs were impacted by the termination of rent for our combination retail package liquor store and restaurant located at 5450 N. State Road 7, North Lauderdale, Florida (Store #40), the real property and improvements of which we purchased on December 31, 2020 and the elimination of occupancy costs due to the elimination of rent for our restaurant location which we are developing located at 14301 West Sunrise Boulevard, Sunrise, Florida (Store #85), the real property and improvements of which we purchased on March 2, 2021. We anticipate that our occupancy costs will increase through our fiscal year 2022 due to the commencement of rent for our retail package liquor store location in a shopping center at 11225 Miramar Parkway, #245, Miramar, Florida (Store #24) and our restaurant location in a shopping center at 11225 Miramar Parkway, #250, Miramar, Florida (Store #25). 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 2021 increased $358,000 or 1.80% to $20,275,000 from $19,917,000 for our fiscal year 2020. Selling, general and administrative expenses decreased as a percentage of total revenue in our fiscal year 2021 to 14.77% as compared to 17.63% for our fiscal year 2020. We anticipate that our selling, general and administrative expenses as a percentage of total revenue will increase through our fiscal year 2022 due primarily to increases in expenses across all categories. Depreciation and Amortization. Depreciation and amortization expense for our fiscal year 2021, which is included in selling, general and administrative expenses, decreased $177,000 or 5.46% to $3,063,000 from $3,240,000 from our fiscal year 2020. As a percentage of total revenue, depreciation and amortization expense was 2.23% of revenue for our fiscal year 2021 and 2.87% of revenue for our fiscal year 2020. Interest Expense, Net . Interest expense, net, for our fiscal year 2021 increased $102,000 to $938,000 from $836,000 for our fiscal year 2020. Interest expense, net, increased for our fiscal year 2021 due to interest on our borrowing of $2,200,000 during the second quarter of our fiscal year 2021 from an unrelated third party lender used to finance our purchase of the real property and improvements located at 14301 West Sunrise Boulevard, Sunrise, Florida (Store #85) (the “$2.2 Million Borrowing”), interest on our borrowing of $4,300,000 during the third quarter of our fiscal year 2021 from an unrelated third party lender to re-finance our mortgage loan of our property located at 13105 – 13205 Biscayne Boulevard, North Miami, Florida (the “$4.3 Million Borrowing”), and the borrowing by six of our limited partnerships of an additional approximately $3.35 million of 2 nd PPP Loans during the second quarter of our fiscal year 2021. Interest expense, net, will increase for our fiscal year 2022 due to (i) the $2.2 Million Borrowing; (ii) the $4.3 Million Borrowing; and (iii) the borrowing by certain of our limited partnerships of an additional $3.35 million of 2 nd PPP Loans during the second quarter of our fiscal year 2021, if not forgiven. Income Taxes. Income tax for our fiscal year 2021 was an expense of $1,185,000, as compared to a benefit of $60,000 for our fiscal year 2020. Net Income. Net income for our fiscal year 2021 increased $14,581,000 or 667.63% to $16,765,000 from $2,184,000 for our fiscal year 2020 due primarily to the forgiveness of debt of certain of the PPP Loans and increased revenue at our retail package liquor stores and restaurants, offset by higher food costs and overall expenses. As a percentage of revenue, net income in our fiscal year 2021 is 12.21%, as compared to 1.93% in our fiscal year 2020. 44 Table of Contents Net Income Attributable to Stockholders. Net income attributable to stockholders for our fiscal year 2021 increased $10,674,000 or 961.62% to $11,784,000 from $1,110,000 for our fiscal year 2020 due primarily to the forgiveness of debt of the PPP Loans and increased revenue at our retail package liquor stores and restaurants, offset by higher food costs and overall expenses. As a percentage of revenue, net income attributable to stockholders for our fiscal year 2021 is 8.58%, as compared to 0.98% for our fiscal year 2020. 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 2021, 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. During the fourth quarter of our fiscal year 2021, we received notification from the landlord that it had completed substantially all of the landlord’s work under the lease agreements and was delivering possession of the leased premises to us. Menu Price Increases and Trends During the third quarter of our fiscal year 2021, we increased menu prices for our food offerings (effective April 11, 2021) to target an increase to our food revenues of approximately 4.60% annually to offset higher food costs and higher overall expenses. During the first quarter of our fiscal year 2021, we increased menu prices for our bar offerings (effective November 29, 2020) to target an increase to 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. Prior to these increases, we previously raised menu prices in the third quarter of our fiscal year 2019. 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, COVID-19 has materially adversely affected our results of operations for our fiscal year 2021 and will, in all likelihood, impact our results of operations, liquidity and/or financial condition throughout our fiscal year 2022. 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. 45 Table of Contents LIQUIDITY AND CAPITAL RESOURCES We fund our operations through cash from operations and borrowings from third parties. As of October 2, 2021, we had cash of approximately $32,676,000, an increase of $2,754,000 from our cash balance of $29,922,000 as of October 3, 2020. During the third quarter of our fiscal year 2021, we generated net proceeds of $2.8 million from the re-finance of our mortgage loan encumbering the real property and improvements located at 13105 – 13205 Biscayne Boulevard, North Miami, Florida where our Flanigan’s Seafood Bar and Grill restaurant and Big Daddy’s Liquors retail package liquor store operate (Store #20) with an unrelated third-party lender, increasing the principal amount borrowed from $1.5 million to $4.3 million. During the second quarter of our fiscal year 2021, we closed on the purchase of the real property and improvements located at 14301 West Sunrise Boulevard, Sunrise, Florida where we are developing a “Flanigan’s Seafood Bar and Grill” restaurant (Store #85) for $4,800,000. We financed this acquisition with a loan from an unrelated third-party lender in the principal amount of $2.2 million and paid cash for the balance. During the first quarter of our fiscal year 2021, we closed on the purchase of the real property and improvements located at 5450 N. State Road 7, North Lauderdale, Florida where we operate a combination “Flanigan’s Seafood Bar and Grill” restaurant and “Big Daddy’s Liquors” package liquor store (Store #40) and paid $1,200,000 cash at closing. During the second quarter of our fiscal year 2021, six of the entities owning limited partnership stores (the “LP’s”) and the store we manage but do not own (the “Managed Store”) (collectively, the “Borrowers”), applied for and received net amounts of approximately $3.98 million from the 2 nd PPP Loans, of which approximately: (i) $3.46 million was loaned to six of the LP’s ; and (ii) $0.52 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. 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. 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 The following table is a summary of our cash flows for our fiscal years 2021 and 2020. ---------Fiscal Years -------- 2021 2020 (in thousands) Net cash and cash equivalents provided by operating activities $ 14,361 $ 8,785 Net cash used in investing activities (11,901 ) (3,271 ) Net cash provided by financing activities 294 10,736 Net Increase in Cash and Cash Equivalents 2,754 16,250 Cash and Cash Equivalents, Beginning 29,922 13,672 Cash and Cash Equivalents, Ending $ 32,676 $ 29,922 46 Table of Contents 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 2021, we acquired property and equipment of $13,255,000, (of which $58,000 was for the purchase of a motor vehicle; $3,229,000 was for the purchase of real property; $4,416,000 was for construction in progress; $14,000 was deposits recorded in other assets; and $48,000 was deposits transferred to construction in progress as of October 3, 2020), which amount included $464,000 for renovations to two (2) existing limited partnership restaurant and $440,000 for renovations to five(5) Company-owned 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. We anticipate the cost of this refurbishment in our fiscal year 2022 will be approximately $1,000,000, excluding construction/renovations to Store #19 (our combination package liquor store and restaurant which is being rebuilt due to damages caused by a fire), Store #85 (our Sunrise, Florida restaurant location in development), Store #24 (our Miramar, Florida package store location in development) and Store #25 (our Miramar, Florida restaurant location in development), which funds will be provided from operations, subject to reimbursement of all or a part of the cost of construction/renovations through private offerings for the limited partnerships which will own Store #85 and Store #25. Debt As of October 2, 2021, we had long-term debt of $22,115,000, as compared to $26,323,000 as of October 3, 2020. Our long-term debt decreased as of October 2, 2021 as compared to October 3, 2020 due to the forgiveness of our PPP Loan and the PPP Loans of our limited partnerships, offset by (i) our re-financing of our mortgage loan encumbering the real property and improvements located at 13105 – 13205 Biscayne Boulevard, North Miami, Florida where our Flanigan’s Seafood Bar and Grill restaurant and Big Daddy’s Liquors retail package liquor store operate (Store #20), increasing the principal amount borrowed from $1.5 million to $4.3 million; (ii) our purchase of the real property and improvements located at 14301 West Sunrise Boulevard, Sunrise, Florida where we are developing a “Flanigan’s” restaurant (Store #85) for $4,800,000 with a loan in the principal amount of $2.2 million; (iii), the 2 nd PPP Loans received by six of our limited partnerships in the approximate of $3,500,000; and $1,429,000 for financed insurance premiums, less any payments made on account thereof. As of October 2, 2021, we are in compliance with the covenants of all loans with our lenders. We repaid long term debt, including auto loans, financed insurance premiums and mortgages in the amount of $4,100,000 and $2,540,000 in our fiscal years 2021 and 2020, respectively. (a) Mortgage on Real Property - Sunrise, Florida During the first quarter of our fiscal year 2021, we exercised the Option to Purchase and during the second quarter of our fiscal year 2021 we closed on the acquisition of the real property located at 14301 W. Sunrise Boulevard, Sunrise, Florida. We financed this acquisition with a loan from an unrelated third party lender in the principal amount of $2.2 million. The mortgage loan accrues interest at the fixed annual rate of 3.65%, is amortized over fifteen (15) years, and requires us to pay monthly payments of principal and interest in the amount of $15,900 with the entire principal balance and all accrued but unpaid interest due in March, 2036. (b) Mortgage on Real Property – North Miami, Florida During the third quarter of our fiscal year 2021, we re-financed with an unrelated third party lender, our mortgage loan encumbering the real property and improvements located at 13105 – 13205 Biscayne Boulevard, North Miami, Florida where our Flanigan’s Seafood Bar and Grill restaurant and Big Daddy’s Liquors retail package liquor store operate (Store #20), increasing the principal amount borrowed from $1.5 million to $4.3 million. We received the net cash proceeds from the refinancing transaction ($2.8 million) shortly after the end of the third quarter of our fiscal year 2021. The re-financed mortgage loan earns interest at the fixed annual rate of 3.63%, is amortized over fifteen (15) years, requires us to pay monthly payments of principal and interest in the amount of $31,129 with the entire principal balance and all accrued interest due in July 2036. We intend to use the excess funds we received from the re-financing of this mortgage loan for working capital purposes. 47 Table of Contents (c ) Financed Insurance Premiums During our fiscal year 2021, we financed the premiums on the following property, general liability, excess liability and terrorist policies, totaling approximately $1.94 million, which property, general liability, excess liability and terrorist insurance includes coverage for our franchises which are not included in our consolidated financial statements: (i) For the policy year beginning December 30, 2020, our general liability insurance, excluding limited partnerships, is a one (1) year policy with our insurance carriers. The one (1) year general liability insurance premium is in the amount of $340,000; (ii) For the policy year beginning December 30, 2020, our general liability insurance for our limited partnerships is a one (1) year policy with our insurance carriers. The one (1) year general liability insurance premium is in the amount of $426,000; (iii) For the policy year beginning December 30, 2020, our automobile insurance is a one (1) year policy. The one (1) year automobile insurance premium is in the amount of $93,000; (iv) For the policy year beginning December 30, 2020, our property insurance is a one (1) year policy. The one (1) year property insurance premium is in the amount of $627,000; (v) For the policy year beginning December 30, 2020, our excess liability insurance is a one (1) year policy. The one (1) year excess liability insurance premium is in the amount of $443,000; (vi) For the policy year beginning December 30, 2020, our terrorist insurance is a one (1) year policy. The one (1) year terrorist insurance premium is in the amount of $5,000; and (vii) For the policy year beginning December 30, 2020, our equipment breakdown insurance is a one (1) year policy. The one (1) year equipment breakdown insurance premium is in the amount of $6,000. Of the $1,940,000 annual premium amounts, which includes coverage for our franchises which are not included in our consolidated financial statements, we financed $1,776,000 through an unaffiliated third party lender. The finance agreement obligates us to repay the amounts financed together with interest at the rate of 2.45% per annum, over 11 months, with monthly payments of principal and interest of $164,000. 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. During the third quarter of our fiscal year 2021, we financed the premium of our directors and officers liability insurance policy for the one (1) year period commencing April 15, 2021. The one (1) year directors and officers liability insurance policy premium is in the amount of $55,000. Of the $55,000 annual premium amount, we financed $50,000 through an unaffiliated third party lender. The finance agreement obligates us to repay the amount financed together with interest at the rate of 4.00% per annum, over 11 months, with monthly payments of principal and interest of $4,700. 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. 48 Table of Contents As of October 2, 2021, the aggregate principal balance owed from the financing of our property and general liability insurance policies, including the financing of our directors and officers liability insurance policy, but excluding coverage for our franchises, (of approximately $113,000), which are not included in our consolidated financial statements is $408,000. (d) Second Paycheck Protection Loans During the second quarter of our fiscal year 2021, certain of the LPs, as well as the Managed Store, applied for and received 2 nd PPP loans, in the aggregate principal amount of approximately $3.98 million (the “2 nd PPP Loans”), of which approximately: (i) $3.46 million was loaned to six (6) of the LP’s; and (iv) $0.52 million was loaned to the Managed Store. The 2 nd PPP Loans, which are in the form of notes issued by each of the Borrowers, mature five (5) years from the date of funding (March 23, 2021) and bear interest at a rate of 1.00% per annum, payable monthly commencing after the U.S. Small Business Administration makes a determination of the forgiveness of the 2 nd PPP Loans. The notes may be prepaid by the applicable Borrower at any time prior to maturity with no prepayment penalties. Proceeds from the PPP Loans have been 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 2 nd 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. Subsequent to the end of our fiscal year 2021, we applied for and received forgiveness of the entire principal amount and all accrued interest of the 2 nd PPP Loans. Construction Contracts (a) 7990 Davie Road Extension, Hollywood, Florida (Store #19 – “Big Daddy’s Wine & Liquors”) 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 years 2020 and 2021, we agreed to change orders to the agreement for additional construction services increasing the total contract price by $536,000 to $2,156,000, of which $1,092,000 of the total amount obligated has been paid through October 2, 2021 and an additional $335,000 has been paid subsequent to the end of our fiscal year 2021. 49 Table of Contents (b) 2505 N. University Drive, Hollywood, Florida (Store #19 – “Flanigan’s”) During the third quarter of our fiscal year 2019, we entered into an agreement with an unaffiliated third party 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 2, 2018 due to damages caused by a fire, of which $62,000 has been paid. Subsequent to the end of our fiscal year 2021, we entered into an agreement with a third party unaffiliated general contractor to re-build our restaurant at this location totaling $2,515,000, of which none has been paid. (c) 14301 W. Sunrise Boulevard, Sunrise, Florida (Store #85 – “Flanigan’s”) During the third quarter of our fiscal year 2019, we also entered into an agreement with an unaffiliated third party 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 $131,000 has been paid through October 2, 2021. 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 and during our fiscal year 2021 we agreed to change orders to the agreement for additional interior renovations increasing the total contract price by $197,000 to $1,433,000, of which $1,081,000 has been paid through October 2, 2021 and an additional $187,000 has been paid subsequent to the end of our fiscal year 2021. (d) 11225 Miramar Parkway, #250, Miramar, Florida (“Flanigan’s”) During the fourth quarter of our fiscal year 2019, we entered into a Lease Agreement with a non-affiliated third party, (the “Landlord”) to rent approximately 6,000 square feet of commercial space for a restaurant location in a shopping center at 11225 Miramar Parkway, #250, Miramar, Florida (Store #25), which shopping center was under construction. During the second quarter of our fiscal year 2021, we entered into an Architectural Professional Services Agreement with a third-party unaffiliated architect for design and development services for this, new location (Store #25) for a total contract price of $73,850, which contract price has been paid in full through October 2, 2021. During the fourth quarter of our fiscal year 2021, we received notification from the Landlord that it had completed substantially all of the Landlord’s work under the Lease Agreement and was delivering possession of the leased premises to us. Subsequent to the end of our fiscal year 2021, we entered into an agreement with a third party unaffiliated general contractor for interior renovations at this location totaling $1,421,000, of which none has been paid. (e) 11225 Miramar Parkway, #245, Miramar, Florida (“Big Daddy’s Wine and Liquors”) During the fourth quarter of our fiscal year 2019, we entered into a Lease Agreement with a non-affiliated third party, (the “Landlord”) to rent approximately 2,000 square feet of commercial space for a retail package liquor store location in a shopping center at 11225 Miramar Parkway, #245, Miramar, Florida (Store #24), which shopping center was under construction. During the second quarter of our fiscal year 2021, we entered into an Architectural Professional Services Agreement with a third-party unaffiliated architect for design and development services for this, new location (Store #24) for a total contract price of $18,650, which contract price has been paid in full through October 2, 2021. During the fourth quarter of our fiscal year 2021, we received notification from the Landlord that it had completed substantially all of the Landlord’s work under the Lease Agreement and was delivering possession of the leased premises to us. Subsequent to the end of our fiscal year 2021, we entered into an agreement with a third party unaffiliated general contractor for interior renovations at this location totaling $317,000, of which none has been paid. 50 Table of Contents 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. During the third quarter of our fiscal year 2021, we agreed to increase the fixed cost of the remaining baby back ribs for our calendar year 2021 by approximately $408,000 to ensure adequate supply for our restaurants during calendar year 2022. In order to ensure adequate supply of baby back ribs for our restaurants for calendar year 2022, on October 4, 2021, we entered into a purchase agreement with our current rib supplier, whereby we agreed to purchase approximately $10,414,000 of baby back ribs during calendar year 2022 from this vendor at market cost. Our purchase agreement provides for the purchase of 2.25 & Down Baby Back Ribs, at a monthly cost of the average market price per pound of the prior 4 weeks. 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 As of October 2, 2021, Flanigan’s Fish Company, LLC, a Florida limited liability company (“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. Purchase of Limited Partnership Interests During our fiscal years 2020 and 2021, we did not purchase any limited partnership interests. Working Capital The table below summarizes the current assets, current liabilities, and working capital as of the end of our fiscal years 2021 and 2020. Item Oct. 2, 2021 Oct. 3, 2020 (in Thousands) Current Assets $ 39,790 $ 36,508 Current Liabilities 20,223 25,362 Working Capital $ 19,567 $ 11,146 Our working capital increased as of October 2, 2021 from our working capital as of October 3, 2020 due to (i) our receipt of $3.46 million from the 2 nd PPP Loans and (ii) our receipt of $2.8 million from our re-financing of our mortgage loan encumbering the real property and improvements located at 13105 – 13205 Biscayne Boulevard, North Miami, Florida where our Flanigan’s Seafood Bar and Grill restaurant and Big Daddy’s Liquors retail package liquor store operate (Store #20), increasing the principal amount borrowed from $1.5 million to $4.3 million. 51 Table of Contents 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 2022. During our fiscal year 2022, we plan to use certain funds on-hand, borrowed funds and/or insurance proceeds (i) to construct a new building on the real property we own located at 7990 Davie Road Extension, Hollywood, Florida, (Store #19 package), to develop the “Big Daddy’s Wine & Liquors” retail package liquor store location; (ii) to construct a new building on the real property we own located at 2505 N. University Drive, Hollywood, Florida (Store #19 restaurant) where we plan to re-build our “Flanigan’s” restaurant; (iii) advance the cost of renovations to develop the “Flanigan’s” restaurant which we are currently developing at 14301 West Sunrise Boulevard, Sunrise, Florida (Store #85); (iv) advance the cost of renovations to develop the “Flanigan’s” restaurant which we are currently developing at 12215 Miramar Parkway, #250, Miramar, Florida (Store #25); and (v) advance the cost of renovations to develop the “Big Daddy’s Wine & Liquors” which we are currently developing at 12215 Miramar Parkway, #245, Miramar, Florida (Store #24). 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 retail package liquor store for our Store #24 or to complete the renovations for the restaurants for Store #25 and Store #85. Off-Balance Sheet Arrangements We do not have off-balance sheet arrangements. Recently Adopted and Recently Issued Accounting Pronouncements Recently 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 modified retrospective approach. We elected the transition package of practical expedients, under which we are not required 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 twelve (12) months or less from the balance sheet. This standard had a material impact on the Consolidated Balance Sheets due to the recording of a right-of-use asset and lease liability and on the Consolidated Statements of Income due to the escalations of rent in the extensions but did not have a material impact on the Consolidated Statement of Cash Flows. 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. 52 Table of Contents 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. Consolidation of Limited Partnerships As of October 2, 2021, 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 9 to the consolidated financial statements for our fiscal year 2021. 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. Although inflation has had a material impact on our operating results, we have offset increased costs by increasing our menu prices. 53 Table of Contents