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 2022 and 2021 Consolidated Financial Statements and the related Notes to Consolidated Financial Statements included elsewhere in this report. 39 Table of Contents 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 1, 2022 and October 2, 2021 is set forth in the Consolidated Financial Statements which are attached hereto. General As of October 1, 2022, we (i) operated 30 units, consisting of restaurants, sports bar, 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. An additional limited partnership owned restaurant located at 11225 Miramar Parkway #250, Miramar, Florida (Store #25) is expected to open for business in February, 2023. 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 ten 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. RESULTS OF OPERATIONS REVENUES (in thousands): 52 Weeks Ended 52 Weeks Ended October 1, 2022 October 2, 2021 Amount (In thousands) Percent Amount (In thousands) Percent Restaurant food sales $ 97,429 62.7 % $ 84,466 62.7 % Restaurant bar sales 26,198 16.9 % 20,832 15.5 % Package store sales 31,692 20.4 % 29,304 21.8 % Total Sales $ 155,319 100.00 % $ 134,602 100.00 % Franchise related revenues 1,826 1,673 Rental income 814 770 Other operating income 173 262 Total Revenue $ 158,132 $ 137,307 40 Table of Contents Comparison of Fiscal Years Ended October 1, 2022 and October 2, 2021 Revenues. Total revenue for our fiscal year 2022 increased $20,825,000 or 15.17% to $158,132,000 from $137,307,000 for our fiscal year 2021 due primarily to increased package liquor store and restaurant sales, increased menu prices, revenue generated from the opening of our limited partnership owned restaurant in Sunrise, Florida, (Store #85) in March 2022 and the comparatively less adverse effects of COVID-19 on our operations during our fiscal year 2022 as compared with our fiscal year 2021. Effective October 3, 2021 and then effective December 19, 2021 we increased menu prices for our food offerings to target an increase to our food revenues of approximately 2.38% and 3.34% annually, respectively, to offset higher food costs and higher overall expenses and effective December 12, 2021 we increased menu prices for our bar offerings to target an increase to our bar revenues of approximately 7.80% annually, (collectively the “Recent Price Increases”). Prior to these increases, we previously raised menu prices in the third quarter of our fiscal year 2021. Restaurant Food Sales . Restaurant revenue generated from the sale of food, including non-alcoholic beverages, at restaurants totaled $97,429,000 for our fiscal year 2022 as compared to $84,466,000 for our fiscal year 2021. The increase in restaurant food sales for our fiscal year 2022 as compared to restaurant food sales during our fiscal year 2021 is attributable to the Recent Price Increases, restaurant food sales generated from the opening of our limited partnership owned restaurant in Sunrise, Florida, (Store #85) in March 2022, the opening of Brendan’s Sports Pub (Store #30) in June, 2022 and the comparatively greater adverse effects of COVID-19 on our operations during our fiscal year 2021 as compared with our fiscal year 2022. Comparable weekly restaurant food sales (for restaurants open for all of our fiscal years 2022 and 2021 respectively, which consists of nine restaurants owned by us and eight restaurants owned by affiliated limited partnerships, (excluding our Sunrise, Florida location, (Store #85), and Brendan’s Sports Pub, (Store #30), both of which opened for business during the second quarter of our fiscal year 2022) was $1,798,000 and $1,610,000 for our fiscal years 2022 and 2021, respectively, an increase of 11.68%. Comparable weekly restaurant food sales for Company owned restaurants only was $886,000 and $797,000 for our fiscal years 2022 and 2021, respectively, an increase of 11.17%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only, (excluding Store #85 which opened for business during the second quarter of our fiscal year 2022), was $912,000 and $813,000 for our fiscal years 2022 and 2021 respectively, an increase of 12.18%. We expect that restaurant food sales, including non-alcoholic beverages, for our fiscal year 2023 will increase due to increased restaurant traffic and the opening for business of the 2023 Miramar Restaurant during our fiscal year 2023. Restaurant Bar Sales . Restaurant revenue generated from the sale of alcoholic beverages at restaurants totaled $26,198,000 for our fiscal year 2022 as compared to $20,832,000 for our fiscal year 2021. The increase in restaurant bar sales during our fiscal year 2022 is primarily due to the Recent Price Increases, restaurant bar sales generated from the opening of our limited partnership owned restaurant in Sunrise, Florida, (Store #85) in March 2022, the opening of Brendan’s Sports Pub (Store #30) in June, 2022 and the comparatively more adverse effects of COVID-19 on our operations during our fiscal year 2021 as compared with our fiscal year 2022. Comparable weekly restaurant bar sales (for restaurants open for all of our fiscal years 2022 and 2021 respectively, which consists of nine restaurants owned by us and eight restaurants owned by affiliated limited partnerships, (excluding our Sunrise, Florida location (Store #85) and Brendan’s Sports Pub (Store #30) both of which opened for business during the second quarter of our fiscal year 2022) was $487,000 for our fiscal year 2022 and $401,000 for our fiscal year 2021, an increase of 21.45%. Comparable weekly restaurant bar sales for Company owned restaurants only was $211,000 and $172,000 for our fiscal years 2022 and 2021, respectively, an increase of 22.67%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $276,000 and $229,000 for our fiscal years 2022 and 2021 respectively, an increase of 20.05%. We expect that restaurant bar sales for our fiscal year 2023 will increase due to increased restaurant traffic and the opening for business of the 2023 Miramar Restaurant during our fiscal year 2023. 41 Table of Contents Package Liquor Store Sales . Revenue generated from sales of liquor and related items at package liquor stores totaled $31,692,000 for our fiscal year 2022 as compared to $29,304,000 for our fiscal year 2021, an increase of $2,388,000. 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 the COVID-19 pandemic. The weekly average of same store package liquor store sales, which includes nine (9) Company-owned package liquor stores, (excluding Store #19, which was closed for our fiscal years 2022 and 2021 due to a fire on October 2, 2018 but re-opened subsequent to our fiscal year ended October 1, 2022 ), was $609,000 and $564,000 for our fiscal years 2022 and 2021 respectively, an increase of 7.98%. We expect that package liquor store sales for our fiscal year 2023 will increase due to increased package liquor store traffic and the opening of the package liquor stores located at 7990 Davie Road Extension, Hollywood, Florida (Store #19P) which opened for business subsequent to our fiscal year end 2023 and 11225 Miramar Parkway, Miramar, Florida (Store #24) which we anticipate will open for business during our fiscal year 2023. 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 2022 increased $22,546,000 or 17.52% to $151,202,000 from $128,657,000 for our fiscal year 2021. The increase was primarily due to increased payroll and an expected general increase in food costs, costs and expenses incurred from the opening of our limited partnership owned restaurant in Sunrise, Florida, (Store #85) in March 2022, Brendan’s Sports Pub (Store #30) in June, 2022, pre-opening expenses from our limited partnership owned restaurant in Miramar, Florida (Store # 25) and pre-opening expenses from our package liquor store in Miramar, Florida, (Store #24), partially 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 2023. Operating costs and expenses increased as a percentage of total revenue to approximately 95.62% in our fiscal year 2022 from 93.70% in fiscal year 2021. 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 2022 increased to $79,072,000 from $69,325,000 for our fiscal year 2021. 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 63.96% for our fiscal year 2022 and 65.84% for our fiscal year 2021. Gross profit margin for restaurant food and bar sales decreased during our fiscal year 2022 when compared to our fiscal year 2021 due to higher food costs, partially offset by, among other things, the Recent Price Increases which did not fully absorb increased costs of restaurant food and bar sales. Package Liquor Store Sales . Gross profit for package store sales for our fiscal year 2022 increased to $8,382,000 from $6,956,000 for our fiscal year 2021. Our gross profit margin, (calculated as gross profit reflected as a percentage of package liquor store sales), for package store sales was 26.45% for our fiscal year 2022 and 23.74% for our fiscal year 2021. We anticipate that the gross profit margin for package liquor store merchandise will decrease during our fiscal year 2023 due to higher costs and a reduction in pricing of certain package store merchandise to be more competitive. 42 Table of Contents Payroll and Related Costs . Payroll and related costs for our fiscal year 2022 increased $6,271,000 or 14.43% to $49,736,000 from $43,465,000 for our fiscal year 2021. Payroll and related costs for our fiscal year 2022 were higher due primarily to the opening of our limited partnership owned restaurant in Sunrise, Florida, (Store #85) in March 2022, Brendan’s Sports Pub (Store #30) in June, 2022 and higher costs for employees such as cooks. Payroll and related costs as a percentage of total revenue was 31.45% for our fiscal year 2022 and 31.66% of total revenue for our fiscal year 2021. 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 2022 increased $436,000 or 6.61% to $7,031,000 from $6,595,000 for our fiscal year 2021. The increase in occupancy costs was primarily due to the commencement of rent for our retail package liquor store which we are developing located at 11225 Miramar Parkway, #245, Miramar, Florida (Store #24) and our restaurant location which we are developing located at 11225 Miramar Parkway, #250, Miramar, Florida (Store #25) during the second quarter of our fiscal year 2022, both of which we anticipate will open during our fiscal year 2023 and Brendan’s Sports Pub (Store #30) which we acquired and opened for business in June, 2022. 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 2022 increased $6,296,000 or 31.05% to $26,571,000 from $20,275,000 for our fiscal year 2021. Selling, general and administrative expenses increased as a percentage of total revenue in our fiscal year 2022 to 16.80% as compared to 14.77% in our fiscal year 2021, due primarily to increases in expenses across all categories. We anticipate that our selling, general and administrative expenses as a percentage of total revenue will increase during our fiscal year 2023 due primarily to increases across all categories. Depreciation and Amortization. Depreciation and amortization expense for our fiscal year 2022, which is included in selling, general and administrative expenses, decreased $51,000 or 1.67% to $3,012,000 from $3,063,000 from our fiscal year 2021. As a percentage of total revenue, depreciation and amortization expense was 1.90% of revenue for our fiscal year 2022 and 2.23% of revenue for our fiscal year 2021. Interest Expense, Net . Interest expense, net, for our fiscal year 2022 decreased $181,000 to $757,000 from $938,000 for our fiscal year 2021. Interest expense, net, decreased for our fiscal year 2022 due to the forgiveness of principal and all accrued interest on the borrowing by certain of our limited partnerships of an additional $3.35 million of 2 nd PPP Loans during the first quarter of our fiscal year 2022, partially offset by 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 (Store #20). Interest expense, net, will increase for our fiscal year 2023 due to interest on our borrowing of $8,900,000 during the fourth quarter of our fiscal year 2022 from an unrelated third party lender to re-finance the mortgage loan on our property located at 4 N. Federal Highway, Hallandale Beach, Florida (Store #31). Income Taxes. Income tax for our fiscal year 2022 was an expense of $763,000, as compared to an expense of $1,185,000 for our fiscal year 2021. Income taxes as a percentage of income before provision for income taxes increased for our fiscal year 2022 (7.78%) as compared to our fiscal year 2021 (6.60%) due primarily to the higher income attributable to the forgiveness of debt of certain of our PPP Loans during our fiscal year 2021. Net Income. Net income for our fiscal year 2022 decreased $7,716,000 or 46.02% to $9,049,000 from $16,765,000 for our fiscal year 2021 due primarily to the higher income attributable to the forgiveness of debt of certain of our PPP Loans during our fiscal year 2021 and higher food costs and overall increased expenses during our fiscal year 2022, partially offset by increased revenue at our restaurants during our fiscal year 2022 and the Recent Price Increases. As a percentage of revenue, net income for our fiscal year 2022 is 5.72%, as compared to 12.21% for our fiscal year 2021. 43 Table of Contents Net Income Attributable to Flanigan’s Enterprise, Inc. Stockholders. Net income attributable to stockholders for our fiscal year 2022 decreased $5,472,000 or 46.44% to $6,312,000 from $11,784,000 for our fiscal year 2021 due primarily to the higher income attributable to noncontrolling interests as all income attributable to the forgiveness of debt of certain of our PPP Loans during our fiscal year 2021, higher net income attributable to noncontrolling interests as all income attributable to the forgiveness of debt of certain of our PPP Loans was attributed to our limited partnerships and higher food costs and overall increased expenses during our fiscal year 2022, partially offset by increased revenue at our restaurants during our fiscal year 2022 and the Recent Price Increases. As a percentage of revenue, net income attributable to stockholders for our fiscal year 2022 is 3.99%, as compared to 8.58% for our fiscal year 2021. 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 2022, we opened one new restaurant location in Sunrise, Florida for business as a new “Flanigan’s” and had a second new restaurant location in Miramar, Florida in the development stage, to house a new “Flanigan’s”. Rent for the new restaurant location in Miramar, Florida commenced during our fiscal year 2022. Menu Price Increases and Trends During our fiscal year 2022, we increased menu prices for our food offerings (effective October 3, 2021 and December 19, 2021, respectively) to target an aggregate increase to our food revenues of approximately 8.83% annually and we increased menu prices for our bar offerings (effective December 12, 2021) to target an increase to our bar revenues of approximately 7.80% annually to offset higher food and liquor costs and higher overall expenses. Prior to these increases, we previously raised menu prices in the third quarter of our fiscal year 2021. 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 2022 and will, in all likelihood, impact our results of operations, liquidity and/or financial condition throughout our fiscal year 2023. 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. LIQUIDITY AND CAPITAL RESOURCES We fund our operations through cash from operations and borrowings from third parties. As of October 1, 2022, we had cash of approximately $42,138,000, an increase of $9,462,000 from our cash balance of $32,676,000 as of October 2, 2021. During our fiscal year 2022, we generated proceeds from the closing of the sale, in a private offering of limited partnership interests in (i) CIC Investors #85, Ltd., the limited partnership which owns and operates the 2022 Sunrise Restaurant, of $5,000,000, of which we purchased $370,000 of limited partnership interests; and (ii) CIC Investors #25, Ltd., the limited partnership which owns and is developing the “Flanigan’s” restaurant located at 11225 Miramar Parkway, Suite 250, Miramar, Florida 33025 of $4,000,000. We also generated net proceeds of $7.88 million from the re-finance of our mortgage loan encumbering the real property and improvements located at 4 N. Federal Highway, Hallandale Beach, Florida where our Flanigan’s Seafood Bar and Grill restaurant and Big Daddy’s Liquors retail package liquor store operate (Store #31) with an unrelated third-party lender, increasing the principal amount we borrowed to $8.90 million (the “Hallandale Mortgage Debt”). During our fiscal year 2022, we requested and received a loan advance of $697,000 from an entity managed by a member of our Board of Directors and who is also our Chief Financial Officer, which entity currently holds a first priority mortgage note on our real property and improvements where our restaurant located at 2600 West Davie Boulevard, Fort Lauderdale, Florida operates (the “West Davie Mortgage Note”), which loan advance increased the principal amount we borrowed to $1.1 million (the “West Davie Mortgage Debt”). 44 Table of Contents During the second quarter of our fiscal year 2021, certain of the entities owning the limited partnership stores (the “LP’s”), 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 $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 (ii) $0.52 million was loaned to the Managed Store. During first quarter of our fiscal year 2022, we applied for forgiveness for all PPP Loans, including the Managed Store, and as of October 1, 2022, the entire amount of principal and accrued interest was forgiven under the 2 nd PPP Loans. 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 fourth quarter of our fiscal year 2022 we closed on the purchase of a 4 COP Quota Liquor License for Broward County for $446,000. This 4 COP Quota Liquor license will be used at our package liquor store located at 11225 Miramar Parkway #245, Miramar, Florida (Store #24), which is currently under development. During the third quarter of our fiscal year 2022, we closed on the purchase of the assets of the business known as “Brendan’s Sports Pub” located at 868 South Federal Highway, Pompano Beach, Florida for a purchase price of $75,000. 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 for $4,800,000 where our “Flanigan’s Seafood Bar and Grill” restaurant (Store #85) operates. 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. The primary inflationary factors affecting our operations are food, beverage and labor costs. Supply chain issues also contribute to inflation. Inflation, including supply chain issues are having a material impact on our operating results, especially rising food, fuel and labor costs. Notwithstanding the negative effects of COVID 19 and inflation, including supply chain issues 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 2022 and 2021. 45 Table of Contents ---------Fiscal Years -------- 2022 2021 (in thousands) Net cash and cash equivalents provided by operating activities $ 10,502 $ 14,016 Net cash used in investing activities (9,542 ) (11,556 ) Net cash provided by financing activities 8,502 294 Net Increase in Cash and Cash Equivalents 9,462 2,754 Cash and Cash Equivalents, Beginning 32,676 29,922 Cash and Cash Equivalents, Ending $ 42,138 $ 32,676 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 2022, we acquired property and equipment of $12,655,000, (of which $3,849,000 was for construction in progress; $3,258,000 construction in progress transferred to property and equipment; $969,000 construction in progress in accounts payable; $50,000 was deposits recorded in other assets; and $512,000 was deposits transferred to construction in progress as of October 2, 2021), which amount included $937,000 for renovations to three (3) existing limited partnership restaurants and $159,000 for renovations to two (2) Company-owned 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 restaurants and $440,000 for renovations to five (5) Company-owned restaurants. We anticipate the cost of this refurbishment in our fiscal year 2023 will be approximately $650,000, excluding construction/renovations to Store #19R (our restaurant which is being rebuilt due to damages caused by a fire) and Store #24 (our Miramar, Florida package store location in development), although capital expenditures for our refurbishing program for our fiscal year 2023 may be significantly higher. Debt As of October 1, 2022, we had long term debt of $25,389,000, as compared to $22,115,000 as of October 2, 2021. Our long term debt increased as of October 1, 2022 as compared to October 2, 2021 due (i) to an approximately $8.0 million increase in the amount we borrowed under the Hallandale Mortgage Debt; (ii) to a $403,000 increase in the amounts we borrowed to finance certain insurance premiums; and (iii) to a $697,000 increase in the amount we borrowed under the West Davie Mortgage Debt less any payments on account thereof, partially offset by the forgiveness of all principal and accrued interest of the 2 nd PPP Loans. As of October 1, 2022, we are in compliance with the covenants of all loans with our lender. (See Item 7A. Quantitative and Qualitative Disclosures About Market Risk for a discussion of interest rate swap agreements that we used to fix interest rate fluctuations on certain of our borrowings on page 52.) We repaid long term debt, including auto loans, financed insurance premiums and mortgages in the amount of $3,736,000 and $4,100,000 in our fiscal years 2022 and 2021, respectively. (a) Advance on Existing Mortgage Loan – Fort Lauderdale, Florida 46 Table of Contents During our fiscal year 2022, we requested and received a loan advance of $697,000 from an entity controlled by a member of our Board of Directors, which entity currently holds a first priority mortgage note on our real property and improvements where our restaurant located at 2600 West Davie Boulevard, Fort Lauderdale, Florida operates (the “West Davie Mortgage Note”). Including the $697,000 advance, the principal amount outstanding amount owed under the West Davie Mortgage Note as of October 1, 2022 is $1,100,000. The West Davie Mortgage Note accrues interest at 6% annually, (increased from 5% annually), is amortizable over 15 years with monthly installments of principal and interest of approximately $9,300 required to be made and a final balloon payment of approximately $487,000 required to be made August 1, 2032. (b) Re-Finance of Mortgage on Real Property – Hallandale Beach, Florida During our fiscal year 2022, we re-financed our mortgage debt with our non-affiliated third-party lender secured by our real property located at 4 N. Federal Highway, Hallandale, Florida where our combination package liquor store and restaurant (Store #31) operates and borrowed an additional $8,012,000 raising the principal balance to $8,900,000, (the “$8.90M Mortgage”). The $8.90M Mortgage bears interest at a variable rate equal to the BSBY Screen Rate – 1 Month plus 1.50%. We entered into an interest rate swap agreement to hedge the interest rate risk, which fixed the interest rate on the $8.90M Mortgage at 4.90% per annum throughout its term. The $8.90M Mortgage is fully amortized over fifteen (15) years, with our monthly payment of principal and interest totaling $33,000. (c ) Financed Insurance Premiums During our fiscal year 2022, we financed the premiums on the following property, general liability, excess liability and terrorist policies, totaling approximately $2.54 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, 2021, 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 $467,000; (ii) For the policy year beginning December 30, 2021, 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 $589,000; (iii) For the policy year beginning December 30, 2021, our automobile insurance is a one (1) year policy. The one (1) year automobile insurance premium is in the amount of $194,000; (iv) For the policy year beginning December 30, 2021, our property insurance is a one (1) year policy. The one (1) year property insurance premium is in the amount of $700,000; (v) For the policy year beginning December 30, 2021, our excess liability insurance are two (2) one (1) year policies. The aggregate one (1) year excess liability insurance premiums are in the amount of $576,000; (vi) For the policy year beginning December 30, 2021, our terrorist insurance is a one (1) year policy. The one (1) year terrorist insurance premium is in the amount of $8,900; and (vii) For the policy year beginning December 30, 2021, our equipment breakdown insurance is a one (1) year policy. The one (1) year equipment breakdown insurance premium is in the amount of $6,800. 47 Table of Contents Of the $2,542,000 annual premium amounts, which includes coverage for our franchises which are not included in our consolidated financial statements, we financed $2,328,000 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 of $215,000. 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 1, 2022, the aggregate principal balance owed from the financing of our property and general liability insurance policies, excluding coverage for our franchises, (of approximately $136,000), which are not included in our consolidated financial statements is $507,000. 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, 2021 and 2022, we agreed to change orders to the agreement for additional construction services increasing the total contract price by $624,000 to $2,242,000, of which $1,951,000 has been paid through October 1, 2022 and $-0- has been paid subsequent to the end of our fiscal year 2022 through the date of filing of this annual report. (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. During the first quarter of our fiscal year 2022, we entered into an agreement with a third party unaffiliated general contractor to re-build our restaurant at this location for $2,515,000, of which $226,000 has been paid through October 1, 2022 and $75,000 has been paid subsequent to the end of our fiscal year 2022 through the date of filing of this annual report. (c) 14301 W. Sunrise Boulevard, Sunrise, Florida (Store #85 – “Flanigan’s”) During the third quarter of our fiscal year 2019, we 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 1, 2022. 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 through our fiscal year 2022 we agreed to change orders to the agreement for additional interior renovations increasing the total contract price by $215,000 to $1,451,000, which has been paid in full by the end of our fiscal year 2022. During the second quarter of our fiscal year 2022, we entered into an agreement with a third party unaffiliated general contractor for exterior renovations at this location totaling $343,000 and through our fiscal year 2022 we agreed to change orders to the agreement for additional interior renovations increasing the total contract price by $61,000 to $404,000, of which $353,000 has been paid through October 1, 2022 and $-0- has been paid subsequent to the end of our fiscal year 2022 through the date of filing of this annual report. 48 Table of Contents (d) 11225 Miramar Parkway, #250, Miramar, Florida (Store #25 - “Flanigan’s”) During the second quarter of our fiscal year 2022, we entered into an agreement with a third party unaffiliated general contractor for interior renovations at this location totaling $1,421,000, and through our fiscal year 2022 we agreed to change orders to the agreement increasing the total contract price by $128,000 to $1,549,000 of which $932,000 has been paid through October 1, 2022 and $226,000, has been paid subsequent to the end of our fiscal year 2022 through the date of filing of this annual report. (e) 11225 Miramar Parkway, #245, Miramar, Florida (“Big Daddy’s Wine and Liquors”) During the first quarter of our fiscal year 2022, we entered into an agreement with a third party unaffiliated general contractor for interior renovations at this location totaling $317,000, and through our fiscal year 2022 we agreed to change orders to the agreement increasing the total contract price by $45,000 to $362,000 of which $316,000 has been paid through October 1, 2022 and $-0- has been paid subsequent to the end of our fiscal year 2022 through the date of filing of this annual report. Purchase Commitments/Supply In order to fix the cost and ensure adequate supply of baby back ribs for our restaurants for calendar years 2022 and 2023, we entered into purchase agreements with our current rib supplier, whereby we agreed to purchase approximately $10.4 million and $ 6.8 million of “2.25 & Down Baby Back Ribs” (industry jargon for the weight range in which slabs of baby back ribs are sold) from this vendor during calendar years 2022 and 2023, at prescribed costs, which we believe are competitive. The decrease in our cost of baby back ribs for calendar year 2023 as compared to calendar year 2022 is due to a decrease in market price. 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 1, 2022, 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 a noncontrolling interest in our consolidated financial statements. Purchase of Limited Partnership Interests During our fiscal year 2022 we purchased 74 limited partnership units (7.4% limited partnership interest) in CIC Investors #85, Ltd. (Store #85). During our fiscal year 2021, we did not purchase any limited partnership interests. 49 Table of Contents Working Capital The table below summarizes the current assets, current liabilities, and working capital as of the end of our fiscal years 2022 and 2021. Item Oct. 1, 2022 Oct. 2, 2021 (in Thousands) Current Assets $ 50,893 $ 39,790 Current Liabilities 22,176 20,223 Working Capital $ 28,717 $ 19,567 Our working capital increased as of October 1, 2022 from our working capital as of October 2, 2021 due to our increased borrowings resulting from the Hallandale Mortgage Debt and the West Davie Mortgage Debt, significant portions of which we classified as long term liabilities as of October 1, 2022. While there can be no assurance due to, among other things, unanticipated expenses or unanticipated decline in revenues, or both, especially in the current economic conditions, 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 2023. During our fiscal year 2023, we plan to use certain funds on-hand, funds raised through our private offerings, borrowed funds and/or insurance proceeds 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; and (ii) for the cost of renovations to develop the “Big Daddy’s Wine & Liquors” which we are currently developing at 11225 Miramar Parkway, #245, Miramar, Florida (Store #24). There can be no assurances as to the timing for us to re-build the restaurant for Store #19 or to complete the renovations for the retail package liquor store for our Store #24. Off-Balance Sheet Arrangements We do not have off-balance sheet arrangements. Recently Adopted and Recently Issued Accounting Pronouncements Recently Adopted There are no accounting pronouncements that we have recently adopted. Issued The FASB issued guidance, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates (“IBORs”) and, particularly, the risk of cessation of the LIBOR, regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. This accounting standards update provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. LIBOR rates will be published until June 30, 2023. All principal and interest of the Term Loan was paid in full as of December 28, 2022, so the discontinuance of LIBOR rates will have no impact on us. 50 Table of Contents 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. Consolidation of Limited Partnerships As of October 1, 2022, we operate ten (10) 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 0% 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 tax credits to the extent that realization of said tax benefits is more likely than not. For discussion regarding our carryforwards refer to Note 12 to the consolidated financial statements for our fiscal year 2022. Leases Effective September 29, 2019, we adopted Accounting Standards Codification Topic 842, Leases (“ASC 842”), which 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. This standard had a material impact on our 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. Estimates associated with leases include lease classification, discount rate and lease term. Loyalty Programs We offer loyalty programs to customers of our restaurants and package liquor stores. The gift cards distributed as a part of our loyalty programs have expiration dates and we estimate breakage for such gift cards. 51 Table of Contents 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. Inflation is having a material impact on our operating results, especially rising food, fuel and labor costs.