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 2023 and 2022 Consolidated Financial Statements and the related Notes to Consolidated Financial Statements included elsewhere in this report. 32 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 September 30, 2023 and October 1, 2022 is set forth in the Consolidated Financial Statements which are attached hereto. General As of September 30, 2023, we (i) operated 31 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. 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----------------------- September 30, 2023 October 1, 2022 Amount Amount (In thousands) Percent (In thousands) Percent Restaurant food sales $ 107,238 62.56 $ 97,429 62.73 Restaurant bar sales 29,000 16.92 26,198 16.87 Package store sales 35,187 20.52 31,692 20.40 Total Sales $ 171,425 100.00 $ 155,319 100.00 Franchise related revenues 1,857 1,826 Rental income 951 814 Other operating income 163 173 Total Revenue $ 174,396 $ 158,132 33 Comparison of Fiscal Years Ended September 30, 2023 and October 1, 2022 Revenues. Total revenue for our fiscal year 2023 increased $16,264,000 or 10.29% to $174,396,000 from $158,132,000 for our fiscal year 2022 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 Miramar, Florida (Store #25) in April 2023, the operation of our limited partnership owned restaurant in Sunrise, Florida (Store #85) and the operation of Brendan’s Sports Pub (Store #30) for our entire fiscal year 2023 as opposed to a part of our fiscal year 2022, the opening of the package liquor store in Hollywood, Florida (Store #19P) in December 2022, the opening of the package liquor store in Miramar, Florida (Store #24) in March, 2023 and the comparatively less adverse effects of COVID-19 on our operations for our current fiscal year. Additionally, effective March 26, 2023 we increased menu prices for our food offerings to target an increase to our food revenues of approximately 2.06% and effective March 19, 2023 we increased menu prices for our bar offerings to target an increase to our bar revenues of approximately 5.65% annually, to offset higher food costs and higher overall expenses (collectively the “Recent Price Increases”). Prior to these increases, we previously raised menu prices in the first quarter of our fiscal year 2022. We note that the Recent Price Increases also contributed to our increased revenues Restaurant Food Sales . Restaurant revenue generated from the sale of food, including non-alcoholic beverages, at restaurants totaled $107,238,000 for our fiscal year 2023 as compared to $97,429,000 for our fiscal year 2022. The increase in restaurant food sales for our fiscal year 2023 as compared to restaurant food sales during our fiscal year 2022 is attributable to the Recent Price Increases, restaurant food sales generated from the opening of our limited partnership owned restaurant in Miramar, Florida (Store #25) in April 2023, and the operation of our limited partnership owned restaurant in Sunrise, Florida (Store #85) and the operation of Brendan’s Sports Pub (Store #30) for our entire fiscal year 2023 as opposed to a part of our fiscal year 2022 and the comparatively greater adverse effects of COVID-19 on our operations during the our fiscal year 2022 as compared with our fiscal year 2023. Comparable weekly restaurant food sales (for restaurants open for all of our fiscal years 2023 and 2022 respectively, which consists of nine restaurants owned by us and nine restaurants owned by affiliated limited partnerships, (excluding our Miramar, Florida location (Store #25), Brendan’s Sports Pub, (Store #30), and Sunrise, Florida location (Store #85), which opened for business during the third quarter of our fiscal year 2023, the third quarter of our fiscal year 2022 and the second quarter of our fiscal year 2022, respectively) was $1,734,000 and $1,798,000 for our fiscal years 2023 and 2022, respectively, a decrease of 3.56%. Comparable weekly restaurant food sales for Company owned restaurants only was $835,000 and $886,000 for our fiscal years 2023 and 2022, respectively, a decrease of 5.76%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only, (excluding Store #25 which opened for business during the third quarter of our fiscal year 2023 and Store #85 which opened for business during the second quarter of our fiscal year 2022), was $898,000 and $912,000 for our fiscal years 2023 and 2022 respectively, a decrease of 1.54%. We expect that restaurant food sales, including non-alcoholic beverages, for our fiscal year 2024 will increase due to increased restaurant traffic, Store #25 being open for business for our entire fiscal year 2024 and the opening of our reconstructed restaurant in Hollywood, Florida (Store #19R) for business during our fiscal year 2024. Restaurant Bar Sales . Restaurant revenue generated from the sale of alcoholic beverages at restaurants totaled $29,000,000 for our fiscal year 2023 as compared to $26,198,000 for our fiscal year 2022. The increase in restaurant bar sales during our fiscal year 2023 is primarily due to the Recent Price Increases, restaurant bar sales generated from the opening of our limited partnership owned restaurant in Miramar, Florida (Store #25) in April 2023, and the operation of our limited partnership owned restaurant in Sunrise, Florida (Store #85) and the operation of Brendan’s Sports Pub (Store #30) for our entire fiscal year 2023 as opposed to a part of our fiscal year 2022 and the comparatively greater adverse effects of COVID-19 on our operations during the our fiscal year 2022 as compared with our fiscal year 2023. Comparable weekly restaurant bar sales (for restaurants open for all of our fiscal years 2023 and 2022 respectively, which consists of nine restaurants owned by us and nine restaurants owned by affiliated limited partnerships, (excluding our Miramar, Florida location (Store #25), Brendan’s Sports Pub (Store #30), and Sunrise, Florida (Store #85), which opened for business during the third quarter of our fiscal year 2023, the third quarter of our fiscal year 2022 and the second quarter of our fiscal year 2022, respectively) was $481,000 for our fiscal year 2023 and $487,000 for our fiscal year 2022, a decrease of 1.23%. Comparable weekly restaurant bar sales for Company owned restaurants only was $196,000 and $211,000 for our fiscal years 2023 and 2022, respectively, a decrease of 7.11%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $286,000 and $276,000 for our fiscal years 2023 and 2022 respectively, an increase of 3.62%. We expect that restaurant bar sales for our fiscal year 2024 will increase due to increased restaurant traffic, Store #25 being open for business for our entire fiscal year 2024 and the opening of our reconstructed restaurant in Hollywood, Florida (Store #19R) for business during our fiscal year 2024. Package Liquor Store Sales . Revenue generated from sales of liquor and related items at package liquor stores totaled $35,187,000 for our fiscal year 2023 as compared to $31,692,000 for our fiscal year 2022, an increase of $3,495,000. 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 and package liquor sales generated from the opening of our package liquor store in Hollywood, Florida (Store #19P) in December 2022 and the opening of our package liquor store in Miramar, Florida (Store #24) in March, 2023. The weekly average of same store package liquor store sales, which includes nine (9) Company-owned package liquor stores, (excluding Store #19P, which was closed for our fiscal year 2022 due to a fire on October 2, 2018 but re-opened for business during the first quarter of our fiscal year 2023 and excluding Store #24 which opened for business during the second quarter of our fiscal year 2023), was $631,000 and $609,000 for our fiscal years 2023 and 2022 respectively, an increase of 3.61%. We expect that package liquor store sales for our fiscal year 2024 will increase due to increased package liquor store traffic and the operation of the package liquor stores located at 7990 Davie Road Extension, Hollywood, Florida (Store #19P) which opened for business during the first quarter of our fiscal year 2023 and located at 11225 Miramar Parkway #245, Miramar, Florida (Store #24), which opened for business during the second quarter of our fiscal year 2023, for the entire fiscal year. 34 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 2023 increased $16,169,000 or 10.69% to $167,372,000 from $151,203,000 for our fiscal year 2022. The increase was primarily due to increased payroll, increased consultant fees to improve our accounting process and an expected general increase in food costs, costs and expenses incurred from the opening of the package liquor stores in Hollywood, Florida (Store #19P) and Miramar, Florida (Store #24), during our fiscal year 2023, the opening of our limited partnership owned restaurant in Miramar, Florida (Store #25) during our fiscal year 2023, and the operation of our Brendan’s Sports Pub (Store #30) and limited partnership owned restaurant in Sunrise, Florida (Store #85) for our entire fiscal year 2023 but only a part of our fiscal year 2022, partially offset by actions taken by management to reduce and/or control costs. We anticipate that our operating costs and expenses will increase through our fiscal year 2024 primarily due to our package liquor stores in Hollywood, Florida (Store #19P) and Miramar, Florida (Store #24) being open for business for our entire fiscal year 2024, our limited partnership owned restaurant in Miramar, Florida (Store #25) being open for business for our entire fiscal year 2024 and the opening of our reconstructed restaurant in Hollywood, Florida (Store #19R) for business during our fiscal year 2024. Operating costs and expenses increased as a percentage of total revenue to approximately 95.97% in our fiscal year 2023 from 95.62% in fiscal year 2022. 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 2023 increased to $90,750,000 from $79,072,000 for our fiscal year 2022. Our gross profit margin for restaurant food and bar sales (calculated as gross profit reflected as a percentage of restaurant food and bar sales), was 66.61% for our fiscal year 2023 and 63.96% for our fiscal year 2022. Gross profit margin for restaurant food and bar sales increased during our fiscal year 2023 when compared to our fiscal year 2022 due to decreases in our cost of ribs and the Recent Price Increases, partially offset by among other things, higher food costs. Package Store Sales . Gross profit for package store sales for our fiscal year 2023 increased to $9,377,000 from $8,382,000 for our fiscal year 2022. Our gross profit margin, (calculated as gross profit reflected as a percentage of package liquor store sales), for package store sales was 26.65% for our fiscal year 2023 and 26.45% for our fiscal year 2022. We anticipate that the gross profit margin for package liquor store merchandise will remain stable during our fiscal year 2024. Payroll and Related Costs . Payroll and related costs for our fiscal year 2023 increased $6,871,000 or 13.81% to $56,607,000 from $49,736,000 for our fiscal year 2022. Payroll and related costs for our fiscal year 2023 were higher due primarily to the operation of our limited partnership owned restaurant in Sunrise, Florida (Store #85), and Brendan’s Sports Pub (Store #30) during our entire fiscal year 2023 as opposed to a part of our fiscal year 2022 and the operation of our limited partnership owned restaurant in Miramar, Florida (Store #25), the retail package liquor store in Hollywood, Florida (Store #19P), and the retail package liquor store in Miramar, Florida (Store #24) for a part of our fiscal year 2023 only and higher salaries to employees to remain competitive with other potential employees in a tight labor market. Payroll and related costs as a percentage of total revenue was 32.46% for our fiscal year 2023 and 31.45% of total revenue for our fiscal year 2022. 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 2023 increased $535,000 or 7.61% to $7,566,000 from $7,031,000 for our fiscal year 2022. The increase in occupancy costs was primarily due to the payment of rent for our retail package liquor store located at 11225 Miramar Parkway, #250, Miramar, Florida (Store #24), our restaurant location located at 11225 Miramar Parkway, #250, Miramar, Florida (Store #25) and Brendan’s Sports Pub (Store #30) during our entire fiscal year 2023 as opposed to a part of our fiscal year 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 2023 increased $5,330,000 or 18.29% to $31,901,000 from $26,571,000 for our fiscal year 2022. Selling, general and administrative expenses increased due primarily to Store #85 and Store #30 being open for our entire fiscal year 2023 as opposed to a part of our fiscal year 2022 and Store #19P, Store #24and Store #25 being open during a part of our fiscal year 2023 only, increased consultant fees to improve our accounting process, inflation and otherwise 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 2024 due primarily to increases across all categories. Selling, general and administrative expenses increased as a percentage of total revenue in our fiscal year 2023 to 18.29% as compared to 16.80% in our fiscal year 2022. 35 Depreciation and Amortization. Depreciation and amortization expense for our fiscal year 2023, which is included in selling, general and administrative expenses, increased $572,000 or 18.99% to $3,584,000 from $3,012,000 from our fiscal year 2022. This increase is driven by the opening of Stores #19P, #24, and #25. As a percentage of total revenue, depreciation and amortization expense was 2.06% of revenue for our fiscal year 2023 and 1.90% of revenue for our fiscal year 2022. Interest Expense, Net . Interest expense, net, for our fiscal year 2023 increased $310,000 to $1,067,000 from $757,000 for our fiscal year 2022. Interest expense, net, increased for our fiscal year 2023 due to the interest on our borrowing of $8,900,000 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) and due to interest on our borrowing of $1,100,000 from a related third party lender to re-finance the mortgage loan on our property located at 2600 West Davie Boulevard, Fort Lauderdale, Florida (Store #22) during our fiscal year 2022. Income Taxes. Income tax for our fiscal year 2023 was an expense of $649,000, as compared to an expense of $763,000 for our fiscal year 2022. Income taxes as a percentage of income before provision for income taxes increased for our fiscal year 2023 (10.70%) as compared to our fiscal year 2022 (7.78%). Net Income. Net income for our fiscal year 2023 decreased $3,633,000 or 40.15% to $5,416,000 from $9,049,000 for our fiscal year 2022 due primarily to the higher income attributable to the forgiveness of debt of certain of our PPP Loans during our fiscal year 2022, higher food costs and overall increased expenses during our fiscal year 2023, partially offset by increased revenue at our retail package liquor stores and restaurants during our fiscal year 2023 and the Recent Price Increases. As a percentage of revenue, net income for our fiscal year 2023 is 3.11%, as compared to 5.72% for our fiscal year 2022. Net Income Attributable to Flanigan’s Enterprise, Inc. Stockholders. Net income attributable to stockholders for our fiscal year 2023 decreased $2,313,000 or 36.64% to $3,999,000 from $6,312,000 for our fiscal year 2022 due primarily to the higher income attributable to the forgiveness of debt of certain of our PPP Loans during our fiscal year 2022, higher food costs and overall increased expenses during our fiscal year 2023, and a higher portion of net income attributable to noncontrolling interests (specifically the operations of our Miramar location), partially offset by increased revenue at our retail package liquor stores and restaurants during our fiscal year 2023 and the Recent Price Increases. As a percentage of revenue, net income attributable to stockholders for our fiscal year 2023 is 2.29%, as compared to 3.99% for our fiscal year 2022. 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 2023, we opened one new restaurant location in Miramar, Florida as a “Flanigan’s”. Menu Price Increases and Trends During the fiscal year 2023, we increased menu prices for our food offerings (effective March 26, 2023) to target an aggregate increase to our food revenues of approximately 2.06% annually and we increased menu prices for our bar offerings (effective March 20, 2023) to target an increase to our bar revenues of approximately 5.65% annually to offset higher food and liquor costs and higher overall expenses. During the 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 the fiscal year 2023 and will, in all likelihood, impact our results of operations, liquidity, and/or financial condition throughout our fiscal year 2024. 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. Based on current COVID-19 trends, the Department of Health and Human Services (HHS) permitted the federal Public Health Emergency for COVID-19 (PHE) declared by the Secretary of the Department of Health and Human Services (Secretary) under Section 319 of the Public Health Service (PHS) Act to expire at the end of the day on May 11, 2023. 36 LIQUIDITY AND CAPITAL RESOURCES We fund our operations through cash from operations and borrowings from third parties. As of September 30, 2023, we had cash and cash equivalents of approximately $25,532,000, a decrease of $16,606,000 from our cash balance of $42,138,000 as of October 1, 2022. This decrease is primarily due to our decision not to finance our insurance premiums for the annual period beginning December 30, 2022 ($3,281,000), the purchase of properties at Hallandale Beach, Florida ($8,500,000), and El Portal, Florida ($3,200,000), and the continued construction of Store #19R ($1,308,000). 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 United States 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 the first quarter of our fiscal year 2022, we applied for forgiveness for all PPP Loans, including the Managed Store, and as of September 30, 2023, the entire amount of principal and accrued interest was forgiven under the 2 nd PPP Loans. Inflation is affecting all aspects of our operations, including but not limited to food, beverage, fuel and labor costs. Supply chain issues also contribute to inflation. Inflation, including supply chain issues are having a material impact on our operating results. 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. CASH FLOWS The following table is a summary of our cash flows for our fiscal years 2023 and 2022. ---------Fiscal Years-------- 2023 2022 (in thousands) Net cash provided by operating activities $ 8,489 $ 10,502 Net cash used in investing activities (18,559 ) (9,542 ) Net cash (used in) provided by financing activities (6,536 ) 8,502 Net (Decrease) Increase in Cash and Cash Equivalents (16,606 ) 9,462 Cash and Cash Equivalents, Beginning 42,138 32,676 Cash and Cash Equivalents, Ending $ 25,532 $ 42,138 Capital Expenditures In addition to using cash for our operating expenses, we use cash generated from operations and borrowings to fund the development and construction of new restaurants and to fund capitalized property improvements for our existing restaurants. During the fiscal year 2023, we acquired property and equipment and construction in progress of $20,574,000, (including non-cash items which include $2,390,000 of purchase deposits transferred to property and equipment and $545,000 of purchase deposits transferred to construction in progress and $931,000 of construction in progress in accounts payable) including $367,000 for renovations to three (3) existing limited partnership owned restaurants and $378,000 for renovations to three (3) Company owned 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. 37 Debt As of September 30, 2023, we had long term debt (including the current portion) of $23,128,000, as compared to $25,389,000 as of October 1, 2022. Our long-term debt decreased as of September 30, 2023 as compared to October 1, 2022 because we satisfied the principal balance and all accrued interest ($367,000) due on our $5.5 million term loan. In addition, we did not finance our insurance premiums for our annual insurance renewal effective December 30, 2022. In February 2023, we determined that as of December 31, 2022, we did not meet the required Post-Distribution Basic Fixed Charge Coverage Ratio (the “Post-Distribution/Fixed Charge Covenant”) contained in each of our six (6) loans (the “Institutional Loans”) with our unrelated third-party institutional lender (the “Institutional Lender’). On February 23, 2023, we received from the Institutional Lender, a written waiver of the non-compliance with the Post-Distribution/Fixed Charge Covenant (the “Covenant Non-Compliance”), pursuant to which, among other things, the Institutional Lender waived (1) the non-compliance as of December 31, 2022 and (2) their right to exercise certain remedies under the Institutional Loans, including the right to accelerate the indebtedness owed by us thereunder, resulting in the indebtedness under the Institutional Loans to be immediately due and payable, which would have a material adverse effect on the Company. The Post-Distribution/Fixed Charge Covenant requires we maintain a ratio of at least 1.15 to 1.00 and for the twelve (12) months ended September 30, 2023 our ratio was calculated to be 1.40 to 1.00. We have prepared projections going forward and expect to be in compliance. As a result, our classification of debt is appropriate as of September 30, 2023. We repaid long term debt, including auto loans, financial insurance premiums, and mortgages in the amount of $2,299,000 and $3,736,000 in our fiscal years 2023 and 2022, respectively. (a) Advance on Existing Mortgage Loan – Fort Lauderdale, Florida 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 September 30, 2023 is $1,049,000. 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 Prior to fiscal year 2023, we financed our annual insurance premiums. Due to higher interest rates, during the first quarter of our fiscal year 2023, for the policy year commencing December 30, 2022, we paid the premiums for property, general liability, excess liability and terrorist policies, totaling approximately $3.281 million, in full, which includes coverage for our franchisees (which is $658,000), which are not included in our consolidated financial statements. Due to continuing higher interest rates for the policy year commencing December 30, 2023, we will pay the premiums for property, general liability, excess liability, crime and terrorism policies in full ($3.932 million), which includes coverage for our franchises (approximately $786,000). We paid the $3.281 million annual premium amounts on January 9, 2023, which includes coverage for our franchisees which are not included in our consolidated financial statements. We secured property insurance for the period commencing after the expiration of the current policy on December 30, 2023. (See Item 2. Subsequent Events for a discussion of property insurance for the period commencing December 30, 2023 on page 31.) Construction Contracts (a) 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 totaling $2,515,000 and during our fiscal year 2023 we agreed to change orders increasing the total contract price by $1,021,000 to $3,536,000, of which $1,534,000 has been paid through September 30, 2023 and $1,090,000 has been paid subsequent to the end of our fiscal year 2023. 38 (b) 14301 W. Sunrise Boulevard, Sunrise, Florida (Store #85- "Flanigan's') 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 the end of our fiscal year 2023 we agreed to change orders to the agreement increasing the total contract price by $327,000 to $670,000, of which the full amount has been paid as of the end of our fiscal year 2023. Purchase Commitments/Supply In order to fix the cost and ensure adequate supply of baby back ribs for our restaurants for calendar years 2023 and 2024, we entered into purchase agreements with our current rib supplier, whereby we agreed to purchase approximately $7.0 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 year 2023, at a prescribed cost, which we believe is competitive. The increase in our cost of baby back ribs for calendar year 2024 compared to calendar year 2023 is due to the increase in volume of our purchase of ribs for Store #25, Miramar, Florida being open for the entire calendar year and Store #19, Hollywood, Florida anticipated to be open for a part of the calendar year, offset by 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 September 30, 2023, 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 2023, we did not purchase any 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). Working Capital The table below summarizes the current assets, current liabilities, and working capital as of the end of our fiscal years 2023 and 2022. Item Sep 30, 2023 Oct. 1, 2022 (in Thousands) Current Assets $ 35,294 $ 50,893 Current Liabilities 22,371 22,176 Working Capital $ 12,923 $ 28,717 Our working capital decreased as of September 30, 2023 from our working capital as of October 1, 2022 primarily due to increases in (i) cash purchases of real property; (ii) cash purchases of property and equipment; and (iii) deposits on property and equipment. Current assets as of October 1, 2022 increased 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 September 30, 2023. Current assets as of September 30, 2023 decreased due to our decision not to finance our insurance premiums for the annual period beginning December 30, 2022, as well as the current year investments in the purchase of property. 39 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, positive cash flow from operations and borrowed funds will adequately fund operations, debt reductions and planned capital expenditures throughout our fiscal year 2024. During our fiscal year 2024, we plan to use certain funds on-hand, borrowed funds, and/or insurance proceeds to complete the construction of our new building on the real property we own located at 2505 N. University Drive Hollywood, Florida (Store #19R) where we plan to operate our “Flanigan’s” restaurant. There can be no assurance as to the timing for us to complete the construction of the restaurant for Store #19R. 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, ASU 2022-06 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 London interbank offered rate (“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 were published until June 30, 2023. All principal and interest of the Term Loan was paid during the first quarter of our fiscal year 2023, so the discontinuance of LIBOR rates will have no impact on us. The FASB issued guidance, ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which provides a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This guidance would be effective for the Company in the first quarter of our fiscal year 2024; however, after performing a thorough analysis the Company concluded there is no material impact. 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. 40 Consolidation of Limited Partnerships As of September 30, 2023, 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 2023. 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. 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.