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 2025 and 2024 Consolidated Financial Statements and the related Notes to Consolidated Financial Statements included elsewhere in this report. 29 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 27, 2025 and September 28, 2024 is set forth in the Consolidated Financial Statements which are attached hereto. General As of September 27, 2025, we (i) operated 32 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 ten of the eleven 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): For the Fiscal Year Ended September 27, 2025 September 28, 2024 Amount Percent Amount Percent (In thousands) (In thousands) Restaurant food sales $ 124,501 61.25 $ 114,795 61.95 Restaurant bar sales 31,764 15.63 30,010 16.20 Package store sales 46,988 23.12 40,497 21.85 Total Sales $ 203,253 100.00 $ 185,302 100.00 Franchise related revenues 1,754 1,693 Other revenues 241 221 Total Revenue $ 205,248 $ 187,216 30 Comparison of Fiscal Years Ended September 27, 2025 and September 28, 2024 Revenues. Total revenue for our fiscal year 2025 increased $18,032,000 or 9.63% to $205,248,000 from $187,216,000 for our fiscal year 2024 due primarily to increased package liquor store and restaurant sales, increased menu prices and revenue generated from our Company-owned restaurant in Hollywood, Florida (Store #19R) for our entire fiscal year 2025 as opposed to a part of our fiscal year 2024. Effective February 23, 2025, we increased our menu prices for our bar offerings to target an increase to our bar revenues of approximately 0.84% annually. Effective December 4, 2024, we increased our menu prices for our bar offerings to target an increase to our bar revenues of approximately 4.90% annually and effective November 17, 2024 we increased our menu prices for our food offerings to target an increase to our food revenues of approximately 4.14% annually. Effective August 25, 2024, we increased menu prices for our bar offerings to target an increase to our bar revenues of approximately 5.63% annually to offset higher food and liquor costs and higher overall expenses (collectively the “Recent Price Increases”). Restaurant Food Sales . Restaurant revenue generated from the sale of food, including non-alcoholic beverages, at restaurants totaled $124,501,000 for our fiscal year 2025 as compared to $114,795,000 for our fiscal year 2024. The increase in restaurant food sales is attributable to the Recent Price Increases and food sales generated from our Company-owned restaurant in Hollywood, Florida (Store #19R) for our entire fiscal year 2025 as opposed to a part of our fiscal year 2024. Comparable weekly restaurant food sales for restaurants open for all of our fiscal years 2025 and 2024, which consists of ten restaurants owned by us (excluding our Hollywood, Florida location Store #19R which opened for business during the second quarter of our fiscal year 2024) and ten restaurants owned by affiliated limited partnerships was $2,245,000 and $2,122,000 for our fiscal years 2025 and 2024 respectively, an increase of 5.80%. Comparable weekly restaurant food sales for Company-owned restaurants only (excluding our Hollywood, Florida location Store #19R which opened for business during the second quarter of our fiscal year 2024) was $997,000 and $938,000 for our fiscal years 2025 and 2024, respectively, an increase of 6.29%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only was $1,248,000 and $1,184,000 for our fiscal years 2025 and 2024 respectively, an increase of 5.41%. We expect that restaurant food sales, including non-alcoholic beverages, for our fiscal year 2026 will increase due to increased restaurant traffic. Restaurant Bar Sales. Restaurant revenue generated from the sale of alcoholic beverages at restaurants totaled $31,764,000 for our fiscal year 2025 as compared to $30,010,000 for our fiscal year 2024. The increase in restaurant bar sales is attributable to the Recent Price Increases and bar sales generated from our Company-owned restaurant in Hollywood, Florida (Store #19R) for our entire fiscal year 2025 as opposed to a part of our fiscal year 2024. Comparable weekly restaurant bar sales for restaurants open for all of our fiscal years 2025 and 2024 respectively, which consists of ten restaurants owned by us (excluding our Hollywood, Florida location Store #19R which opened for business during the second quarter of our fiscal year 2024) and ten restaurants owned by affiliated limited partnerships was $583,000 for our fiscal year 2025 and $562,000 for our fiscal year 2024, an increase of 3.74%. Comparable weekly restaurant bar sales for Company-owned restaurants only (excluding our Hollywood, Florida location Store #19R which opened for business during the second quarter of our fiscal year 2024) was $244,000 and $234,000 for our fiscal years 2025 and 2024 respectively, an increase of 4.27%. Comparable weekly restaurant bar sales affiliated limited partnership owned restaurants only was $339,000 and $328,000 for our fiscal years 2025 and 2024 respectively, an increase of 3.35%. We expect that restaurant bar sales for our fiscal year 2026 will increase due to increased restaurant traffic. Package Liquor Store Sales . Revenue generated from sales of liquor and related items at package liquor stores totaled $46,988,000 for our fiscal year 2025 as compared to $40,497,000 for our fiscal year 2024, an increase of $6,491,000. This increase was primarily due to increased package liquor store traffic. The weekly average of same store package liquor store sales, which includes eleven (11) Company-owned package liquor stores was $904,000 and $779,000 for our fiscal years 2025 and 2024 respectively, an increase of 16.05%. We expect that package liquor store sales for our fiscal year 2026 will increase due to increased package liquor store traffic. Costs and Expenses . Costs and expenses (consisting of cost of merchandise sold, payroll and related costs, operating expenses, occupancy costs, selling, general and administrative expenses and depreciation and amortization) for our fiscal year 2025 increased $15,128,000 or 8.34% to $196,503,000 from $181,375,000 for our fiscal year 2024. The increase was primarily due to increased payroll, an expected general increase in food costs and overall expenses, as well as costs and expenses incurred from our Company-owned restaurant in Hollywood Florida (Store #19R) for our entire fiscal year 2025 as opposed to a part of our fiscal year 2024, 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 2026. Operating costs and expenses decreased as a percentage of total revenue to approximately 95.74% in our fiscal year 2025 from 96.88% in our fiscal year 2024. 31 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 2025 increased to $104,091,000 from $94,943,000 for our fiscal year 2024. Gross profit margin for the restaurant food and bar sales increased during our fiscal year 2025 when compared to our fiscal year 2024 due to the Recent Price Increases, partially offset by higher food costs. 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 2025 and 65.57% for our fiscal year 2024. Package Store Sales . Gross profit for package store sales for our fiscal year 2025 increased to $11,803,000 from $10,369,000 for our fiscal year 2024. Our gross profit margin, (calculated as gross profit reflected as a percentage of package liquor store sales), for package store sales was 25.12% for our fiscal year 2025 and 26.60% for our fiscal year 2024. We anticipate that the gross profit margin for package liquor store merchandise will decrease for our fiscal year 2026 due to higher costs and a reduction in pricing of certain package store merchandise to remain competitive. Payroll and Related Costs . Payroll and related costs for our fiscal year 2025 increased $4,352,000 or 7.33% to $63,701,000 from $59,349,000 for our fiscal year 2024. Payroll and related costs for our fiscal year 2025 are higher due primarily to the operation of our Company-owned restaurant in Hollywood, Florida (Store #19R) for our full fiscal year 2025 as opposed to part of our fiscal year 2024 and the increase to the Florida minimum wage. Payroll and related costs as a percentage of total revenue was 31.04% for our fiscal year 2025 and 31.70% of total revenue for our fiscal year 2024. Operating Expenses . Operating expenses (including but not limited to utilities, insurance, cleaning, credit card fees, supplies, security, and other costs closely related to running restaurant and package operations) for our fiscal year 2025 increased $2,737,000 or 11.08% to $27,438,000 from $24,701,000 for our fiscal year 2024 due primarily to the operation of our Company-owned restaurant in Hollywood, Florida (Store #19R) for our full fiscal year 2025 as opposed to part of our fiscal year 2024, inflation and otherwise due to increases in expenses across all categories. 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 2025 increased $116,000 or 1.50% to $7,870,000 from $7,754,000 for our fiscal year 2024. Selling, General and Administrative Expenses . Selling, general and administrative expenses (consisting of general corporate expenses, including but not limited to advertising, professional costs, clerical and administrative overhead) for our fiscal year 2025 increased $150,000 or 2.82% to $5,463,000 from $5,313,000 for our fiscal year 2024 due primarily to increased television and radio advertising costs. Selling, general and administrative expenses decreased as a percentage of total revenue for our fiscal year 2025 to 2.66% as compared to 2.84% for our fiscal year 2024. Depreciation and Amortization. Depreciation and amortization expense for our fiscal year 2025 increased $404,000 or 9.47% to $4,672,000 from $4,268,000 for our fiscal year 2024. This increase is driven by the operation of our Company-owned restaurant in Hollywood, Florida (Store #19R) for the full fiscal year 2025 as opposed to part of the fiscal year 2024. Depreciation and amortization remained flat as a percentage of total revenue at 2.28% for each of our fiscal years 2025 and 2024. Interest Expense, Net . Interest expense, net, for our fiscal year 2025 decreased $62,000 to $957,000 from $1,019,000 for our fiscal year 2024. Rental Income/ Rental Expense Rental income was $1,077,000 and rental expense was $622,000 for our fiscal year 2025, while rental income was $1,105,000 and rental expense was $550,000 for our fiscal year 2024. Previously, Rental income was presented in Revenues and rental expense was presented in Occupancy costs, Operating expense and Selling, general and administrative expenses, however, both Rental income and Rental expense are now presented in Other Income. Income Taxes. Income tax for our fiscal year 2025 was an expense of $622,000, as compared to an expense of $286,000 for our fiscal year 2024. Income taxes as a percentage of income before provision for income taxes for our fiscal year 2025 is 7.2% as compared to 5.12% in our fiscal year 2024. 32 Net Income. Net income for our fiscal year 2025 increased $2,717,000 or 51.26% to $8,017,000 from $5,300,000 for our fiscal year 2024 due primarily to the Recent Price Increases and the operation of our Company-owned restaurant in Hollywood, Florida (Store #19R) for our full fiscal year 2025 as opposed to part of our fiscal year 2024. As a percentage of total revenue, net income for our fiscal year 2025 is 3.91%, as compared to 2.83% for our fiscal year 2024. Net Income Attributable to Flanigan’s Enterprise, Inc.’s Stockholders. Net income attributable to stockholders for our fiscal year 2025 increased $1,677,000 or 49.97% to $5,033,000 from $3,356,000 for our fiscal year 2024 due primarily to the Recent Price Increases and the operation of our Company-owned restaurant in Hollywood, Florida (Store #19R) for our full fiscal year 2025 as opposed to part of our fiscal year 2024. As a percentage of revenue, net income attributable to stockholders for our fiscal year 2025 is 2.45%, as compared to 1.79% for our fiscal year 2024. New Limited Partnership Restaurants As new limited partnership 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 limited partnership locations. During our fiscal year 2025 we did not open any new limited partnership restaurants, however, we do have one in the development stage in Cutler Bay, Florida. Menu Price Increases During the second quarter of our fiscal year, 2025, we increased our menu prices for our bar offerings (effective February 23, 2025) to target an increase to our bar revenues of approximately 0.84% annually to offset higher food and liquor costs and higher overall expenses. During the first quarter of our fiscal year 2025, we increased our menu prices for our bar offerings (effective December 4, 2024) to target an increase to our bar revenues of approximately 4.90% annually and we increased our menu prices for our food offerings (effective November 17, 2024) to target an increase to our food revenues of approximately 4.14% annually to offset higher food and liquor costs and higher overall expenses. During our fiscal year 2024, we increased menu prices for our bar offerings (effective August 25, 2024) to target an increase to our bar revenues of approximately 5.63% annually to offset higher food and liquor costs and higher overall expenses. Prior to these increases we previously raised menu prices in the second quarter of our fiscal year 2023. LIQUIDITY AND CAPITAL RESOURCES We fund our operations through cash from operations and borrowings from third parties. As of September 27, 2025, we had cash and cash equivalents of approximately $20,094,000, a decrease of $1,308,000 from our cash balance of $21,402,000 as of September 28, 2024. The decrease is primarily due to our purchase of the Cutler Bay property ($2,200,000). Inflation is affecting all aspects of our operations, including but not limited to food, beverage, fuel and labor costs. Inflation is having a material impact on our operating results. We believe that our current cash availability from our cash on hand and positive cash flow from operations 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 2025 and 2024. Fiscal Years 2025 2024 (in thousands) Net cash provided by operating activities $ 10,510 $ 6,630 Net cash used in investing activities (6,117 ) (5,141 ) Net cash used in financing activities (5,701 ) (5,619 ) Net Decrease in Cash and Cash Equivalents (1,308 ) (4,130 ) Cash and Cash Equivalents, Beginning 21,402 25,532 Cash and Cash Equivalents, Ending $ 20,094 $ 21,402 33 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 2025, we acquired property and equipment of $5,844,000, (of which $2.2 million was for the purchase of the Cutler Bay Property and $11,000 was purchase deposits transferred to property and equipment), including $566,000 for renovations to four (4) Company-owned location and $137,000 for renovations to one (1) limited partnership owned restaurant. During the fiscal year 2024, we acquired property and equipment and construction in progress of $6,047,000, (of which $289,000 was purchase deposits transferred to property and equipment, $715,000 was purchase deposits transferred to CIP, and $4,000 was property and equipment in accounts payable), including $528,000 for renovations to three (3) Company-owned restaurants and $135,000 for one (1) limited partnership owned restaurant. Debt As of September 27, 2025, we had long term debt (including the current portion) of $20,618,000, as compared to $21,912,000 as of September 28, 2024. As of September 27, 2025, we are in compliance with the financial covenants contained in our loans with our unrelated third-party institutional lender (the “Institutional Lender”) under which we owe in the aggregate, approximately $19,306,000 of our total loans of approximately $20,618,000. As of September 27, 2025, the year-end fair value of our debt approximates carrying value. We repaid long term debt, including auto loans and mortgages in the amount of $1,330,000 and $1,251,000 in our fiscal years 2025 and 2024, respectively. Commitments Master Service Agreement During the first quarter of our fiscal year 2025, we entered into a new Master Services Agreement with our current major vendor for a period of one (1) year effective January 1, 2025, with Company options for four (4) one (1) year renewal options to extend the term of the same. During the fourth quarter of our fiscal year 2025, we exercised the first (1st) one (1) year renewal option for a period of one (1) year effective January 1, 2026. In this new Master Service Agreement, as in our prior Master Service Agreements, we commit to purchase specific products through our current major vendor but are free to purchase other products through other vendors, provided no less than 80% of our overall product needs are purchased through our current major vendor. During the third quarter of our fiscal year 2025, we exercised the first one (1) year renewal option and extended the term of the Master Services Agreement for a period of one (1) year effective January 1, 2026. ERP Contract In the third quarter of our fiscal year 2024, we entered into an agreement with Oracle, an unrelated third-party vendor for the licensing and support of NetSuite, a cloud-based Oracle ERP solution to replace our general ledger. The agreement is for a period of five years at a fixed rate of approximately $40,000 annually, with a cap on the percentage increase to our fees for our options to extend the term of the agreement for years six and seven. The implementation of NetSuite was complete and functional at the start of the fourth quarter of our fiscal year 2025. Purchase Commitments/Supply In order to fix the cost and ensure adequate supply of baby back ribs for our restaurants for calendar year 2026, we entered into a purchase agreement with our existing rib supplier, whereby we agreed to purchase approximately $9.2 million of “2.5 & Down Baby Back Ribs” (weight range in which baby back ribs are sold) during calendar year 2026, at a prescribed cost, which we believe is competitive. For calendar year 2025, we entered into a purchase agreement with a new rib supplier, whereby we agreed to purchase approximately $7.8 million of “2.5 & Down Baby Back Ribs” during calendar year 2025, at a prescribed cost, which we also believe is competitive. The increase in our cost of baby back ribs for calendar year 2026 compared to calendar year 2025 is due to an increase in market price and quantity ordered. While we anticipate purchasing all of our rib supply from this vendor, we believe there are several other alternative vendors available, if needed. 34 Flanigan’s Fish Company, LLC As of September 27, 2025, Flanigan’s Fish Company, LLC, a Florida limited liability company (“FFC”), supplies certain fish to all of our restaurants. Since we hold the controlling interest in FFC, the balance sheet and operating results of this entity are consolidated into the accompanying consolidated financial statements of the Company. Sales and purchases of fish are recognized in restaurant food sales and restaurant (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. Working Capital The table below summarizes the current assets, current liabilities, and working capital as of the end of our fiscal years 2025 and 2024. Item September 27, 2025 September 28, 2024 (in thousands) Current Assets $ 30,593 $ 31,529 Current Liabilities 18,118 19,924 Working Capital $ 12,475 $ 11,605 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 and positive cash flow from operations will adequately fund operations, debt reductions and planned capital expenditures throughout our fiscal year 2026. Off-Balance Sheet Arrangements We do not have off-balance sheet arrangements. Recently Adopted and Recently Issued Accounting Pronouncements Adopted The FASB issued guidance, Accounting Standards Update (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 was effective for the Company in the first quarter of our fiscal year 2024; however, after performing a thorough analysis the Company concluded there was no material impact from the adoption of this ASU. In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance. We early adopted this ASU in the third quarter of our fiscal year 2024 and this ASU affected the expense presentation of our Consolidated Statements of Income and our Business Segments footnote. For further information regarding the Company’s Business Segments, please refer to our Consolidated Statements of Income and Business Segments footnote. Recently Issued In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires enhanced income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. This ASU will be effective for the Company for our fiscal year 2026 annual reporting period, with the guidance applied either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impact that the adoption of this ASU will have on our tax disclosures. In November 2024, the FASB issued ASU 2024-03, “Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures” which requires disclosure of disaggregated information about certain income statement expense line items in the notes to the financial statements on an interim and annual basis. In January 2025, the FASB issued ASU 2025-01 clarifying the effective date of ASU 2024-03, which will be effective for the Company for our fiscal year 2027 annual reporting period, with guidance applied either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impact that the adoption of this ASU will have on our interim and consolidated financial statements. 35 In September 2025, the FASB issued ASU 2025-06, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)” which eliminates all references to project stages and requires capitalization of software costs when: (i) management authorizes and commits to funding the software project, and (ii) it is probable the software project will be completed and used as intended, known as the “probable-to-completion recognition threshold.” Entities must consider whether there is significant uncertainty associated with the development activities of the software in determining if the threshold is met. In addition, the amendments in the update specify that property, plant and equipment disclosure requirements are required for capitalized internal-use software costs, regardless of financial statement presentation and also incorporate the recognition requirements for website-specific development costs. This ASU will be effective for the Company for our fiscal year fiscal year 2029 annual reporting period with the guidance applied either prospectively, retrospectively, or via a modified prospective transition method. Early adoption is permitted. We are currently evaluating the impact that the adoption of this ASU will have on our interim and consolidated financial statements. There are no other 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. Valuation of Long-Lived Assets We continually evaluate whether events and circumstances have occurred that may warrant revision of the estimated life of our intangible and other long-lived assets and/or whether the remaining balance of our intangible and other long-lived assets should be evaluated for possible impairment. If and when such factors, events or circumstances indicate that intangible and/or other long-lived assets should be evaluated for possible impairment, we will determine the fair value of the asset by making an estimate of expected future cash flows over the remaining lives of the respective assets and compare that fair value with the carrying value of the assets in measuring their recoverability. In determining the expected future cash flows, the assets will be grouped at the lowest level for which there are cash flows, at the individual store level. Leases Under Accounting Standards Codification Topic 842, Leases (“ASC 842”), lease arrangements must 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 currently lease a portion of our restaurant and package locations under various lease agreements. Determining the probable term for each lease requires judgment by management and can impact the classification and accounting for a lease as financing or operating, as well as the period for straight-lined rent expense and the depreciation period for lease hold improvements. Generally, the lease term is a minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 15 years. If the estimate of our reasonably certain lease term was changed, our depreciation and rent expense could differ materially. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates (IBR) corresponding to the reasonably certain lease term. The IBR is an estimate based on several factors, including financial market conditions, comparable company and credit analysis as well as management judgment. If the IBR was changed, our operating lease right-of-use assets and lease liabilities could differ materially. 36 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 10 to the consolidated financial statements for our fiscal year 2025. 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.