Flanigans Enterprises Inc: Form 10-Q for the period ended Jan 1, 2022

CAUTIONARY NOTE REGARDING LOOKING FORWARD STATEMENTS

Reported financial results may not be indicative of the financial results of future periods. All non-historical information contained in the following discussion constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as “anticipates, appears, expects, trends, intends, hopes, plans, believes, seeks, estimates, may, will,” and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and uncertainties, including but not limited to the effect of the novel coronavirus pandemic and related “shelter-in-place” orders and other governmental mandates (“COVID 19”), customer demand and competitive conditions. Factors that could cause actual results to differ materially are included in, but not limited to, those identified in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our periodic reports, including our Annual Report on Form 10-K for the fiscal year ended October 2, 2021. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may reflect events or circumstances after the date of this report.

OVERVIEW

As of January 1, 2022, Flanigan’s Enterprises, Inc., a Florida corporation, together with its subsidiaries (“we”, “our”, “ours” and “us” as the context requires), (i) operates 27 units, consisting of restaurants, package liquor stores and combination restaurants/package liquor stores that we either own or have operational control over and partial ownership in; and (ii) franchises an additional five units, consisting of two restaurants (one of which we operate) and three combination restaurants/package liquor stores. The table below provides information concerning the type (i.e. restaurant, package liquor store or combination restaurant/package liquor store) and ownership of the units (i.e. whether (i) we own 100% of the unit; (ii) the unit is owned by a limited partnership of which we are the sole general partner and/or have invested in; or (iii) the unit is franchised by us), as of January 1, 2022 and as compared to October 2, 2021 and January 2, 2021. With the exception of “The Whale’s Rib”, a restaurant we operate but do not own, all of the restaurants operate under our service marks “Flanigan’s Seafood Bar and Grill” or “Flanigan’s” and all of the package liquor stores operate under our service marks “Big Daddy’s Liquors” or “Big Daddy’s Wine & Liquors”.

Index

Notes:

(1) During the first quarter of our fiscal year 2019, our combination package liquor store and restaurant located at 2505 N. University Drive, Hollywood, Florida (Store #19) was damaged by a fire which has caused it to be closed since the first quarter of our fiscal year 2019. Store #19 remains closed through January 1, 2022.

(2) We operate a restaurant for one (1) franchisee. This unit is included in the table both as a franchised restaurant, as well as a restaurant operated by us.

Franchise Financial Arrangement: 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 store sales and 3% of gross restaurant sales; and (ii) make advertising expenditures equal to between 1.5% to 3% of all gross sales, as defined, based upon our actual advertising costs allocated between stores, pro-rata, based upon gross sales.

Limited Partnership Financial Arrangement: We manage and control the operations of all restaurants owned by limited partnerships, except the Fort Lauderdale, Florida restaurant which is owned by a related franchisee. Accordingly, the results of operations of all limited partnership owned restaurants, except the Fort Lauderdale, Florida restaurant are consolidated into our operations for accounting purposes. The results of operations of the Fort Lauderdale, Florida restaurant are accounted for by us utilizing the equity method of accounting. In general, until the investors’ cash investment in a limited partnership (including any cash invested by us and our affiliates) is returned in full, the limited partnership distributes to the investors annually out of available cash from the operation of the restaurant up to 25% of the cash invested in the limited partnership, with no management fee paid to us. Any available cash in excess of the 25% of the cash invested in the limited partnership distributed to the investors annually, is paid one-half (½) to us as a management fee, with the balance distributed to the investors. Once the investors in the limited partnership have received, in full, amounts equal to their cash invested, an annual management fee is payable to us equal to one-half (½) of cash available to the limited partnership, with the other one half (½) of available cash distributed to the investors (including us and our affiliates). As of January 1, 2022, all limited partnerships have returned all cash invested and we receive an annual management fee equal to one-half (½) of the cash available for distribution by the limited partnership. In addition to receipt of distributable amounts from the limited partnerships, we receive a fee equal to 3% of gross sales for use of the service mark “Flanigan’s Seafood Bar and Grill”.

RESULTS OF OPERATIONS

Comparison of Thirteen Weeks Ended January 1, 2022 and January 2, 2021.

Revenues. Total revenue for the thirteen weeks ended January 1, 2022 increased $6,023,000 or 19.19% to $37,403,000 from $31,380,000 for the thirteen weeks ended January 2, 2021 due primarily to increased package liquor store and restaurant sales, increased menu prices and the comparatively less adverse effects of COVID-19 on our operations during the thirteen weeks ended January 1, 2022 as compared with the thirteen weeks ended January 2, 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. 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. We expect that the new package liquor store located at 7990 Davie Road Extension, Hollywood, Florida will open for business during our fiscal year 2022 and we expect to generate revenue from it. We do not anticipate that the restaurant located at 2505 N. University Drive, Hollywood, Florida, which has been closed since October, 2018 due to a fire (the “Hollywood restaurant”) will open for business during our fiscal year 2022 and accordingly we do not expect to generate any revenue from it.

Restaurant Food Sales. Restaurant revenue generated from the sale of food, including non-alcoholic beverages, at restaurants totaled $22,205,000 for the thirteen weeks ended January 1, 2022 as compared to $18,328,000 for the thirteen weeks ended January 2, 2021. The increase in restaurant food sales for the thirteen weeks ended January 1, 2022 as compared to restaurant food sales during the thirteen weeks ended January 2, 2021 is attributable to menu price increases and the comparatively more adverse effects of COVID-19 on our operations during the thirteen weeks ended January 1, 2021 as compared with the thirteen weeks ended January 1, 2022. Comparable weekly restaurant food sales (for restaurants open for all of the thirteen weeks ended January 1, 2022 and January 2, 2021 respectively, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for the thirteen weeks ended January 1, 2022 and January 1, 2021 due to a fire on October 2, 2018) and eight restaurants owned by affiliated limited partnerships) was $1,748,000 and $1,401,000 for the thirteen weeks ended January 1, 2022 and January 2, 2021, respectively, an increase of 24.77%. Comparable weekly restaurant food sales for Company owned restaurants only was $858,000 and $681,000 for the thirteen weeks ended January 1, 2022 and January 2, 2021, respectively, an increase of 25.99%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only was $890,000 and $720,000 for the thirteen weeks ended January 1, 2022 and January 2, 2021 respectively, an increase of 23.61%.

Restaurant Bar Sales. Restaurant revenue generated from the sale of alcoholic beverages at restaurants totaled $6,007,000 for the thirteen weeks ended January 1, 2022 as compared to $4,443,000 for the thirteen weeks ended January 2, 2021. The increase in restaurant bar sales during the thirteen weeks ended January 1, 2022 is primarily due to the Recent Price Increases and the comparatively more adverse effects of COVID-19 on our operations during the thirteen weeks ended January 2, 2021 as compared with the thirteen weeks ended January 1, 2022, and by the Recent Price Increases. Comparable weekly restaurant bar sales (for restaurants open for all of the thirteen weeks ended January 1, 2022 and January 2. 2021 respectively, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for the thirteen weeks ended January 1. 2022 and January 2, 2021 due to a fire on October 2, 2018), and eight restaurants owned by affiliated limited partnerships) was $462,000 for the thirteen weeks ended January 1, 2022 and $342,000 for the thirteen weeks ended January 2, 2021, an increase of 35.09%. Comparable weekly restaurant bar sales for Company owned restaurants only was $203,000 and $141,000 for the thirteen weeks ended January 1, 2022 and January 2, 2022, respectively, an increase of 43.97%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $259,000 and $201,000 for the thirteen weeks ended January 1, 2022 and January 2, 2021 respectively, an increase of 28.86%.

Package Store Sales. Revenue generated from sales of liquor and related items at package liquor stores totaled $8,511,000 for the thirteen weeks ended January 1, 2022 as compared to $8,011,000 for the thirteen weeks ended January 2, 2021, an increase of $500,000. This increase was primarily due to increased package liquor store traffic due to what appears to be continued increased demand for package liquor store products resulting from COVID-19. 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 the thirteen weeks ended January 1, 2022 and January 2, 2021 due to a fire on October 2, 2018), was $675,000 and $616,000 for the thirteen weeks ended January 1, 2022 and January 2, 2021 respectively, an increase of 9.58 %.

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 the thirteen weeks ended January 1, 2022 increased $6,528,000 or 21.68% to $36,638,000 from $30,110,000 for the thirteen weeks ended January 2, 2021. The increase was primarily due to payroll and an expected general increase in food costs, 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 2022. Operating costs and expenses increased as a percentage of total revenue to approximately 97.95% in the first quarter of our fiscal year 2021 from 95.95% in the first quarter of our fiscal year 2021.

Gross Profit. Gross profit is calculated by subtracting the cost of merchandise sold from sales.

Restaurant Food Sales and Bar Sales. Gross profit for food and bar sales for the thirteen weeks ended January 1, 2022 increased to $17,879,000 from $15,249,000 for the thirteen weeks ended January 2, 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 63.37% for the thirteen weeks ended January 1, 2022 and 66.97% for the thirteen weeks ended January 2, 2021. Gross profit margin for restaurant food and bar sales decreased during the first quarter of our fiscal year 2022 when compared to the first quarter of our fiscal year 2021 due to higher food costs, partially offset by, among other things, by the Recent Price Increases.

Package Store Sales. Gross profit for package store sales for the thirteen weeks ended January 1, 2022 increased to $2,171,000 from $2,160,000 for the thirteen weeks ended January 2, 2021, due primarily to increased package liquor store traffic which we believe is due to what appears to be continued increased demand caused by COVID-19. Our gross profit margin, (calculated as gross profit reflected as a percentage of package liquor store sales), for package store sales was 25.51% for the thirteen weeks ended January 1, 2022 and 26.96% for the thirteen weeks ended January 2, 2021.

Payroll and Related Costs. Payroll and related costs for the thirteen weeks ended January 1, 2022 increased $2,773,000 or 29.30% to $12,236,000 from $9,463,000 for the thirteen weeks ended January 2, 2021. Payroll and related costs for the thirteen weeks ended January 1, 2022 were higher due primarily to increased performance bonuses and higher costs for employees such as cooks. Payroll and related costs as a percentage of total revenue was 32.71% in the thirteen weeks ended January 1, 2022 and 30.16% of total revenue in the thirteen weeks ended January 2, 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 the thirteen weeks ended January 1, 2022 decreased $117,000 or 6.48% to $1,698,000 from $1,806,000 for the thirteen weeks ended January 2, 2021. The decrease in occupancy costs was primarily due to the elimination of rent for our restaurant location which we are developing located at 14301 West Sunrise Boulevard, Sunrise, Florida (Store #85), the real property and improvements of which we purchased on March 2, 2021. We anticipate that our occupancy costs will increase throughout the balance of our fiscal year 2022 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, offset by the termination of rent for our combination retail package liquor store and restaurant located at 5450 N. State Road 7, North Lauderdale, Florida (Store #40), the real property and improvements of which we purchased on December 31, 2020.

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 the thirteen weeks ended January 1, 2022 increased $563,000 or 10.30% to $6,031,000 from $5,468,000 for the thirteen weeks ended January 2, 2021. Selling, general and administrative expenses decreased as a percentage of total revenue in the thirteen weeks ended January 1, 2022 to 16.12% as compared to 17.42% in the thirteen weeks ended January 2, 2021. We anticipate that our selling, general and administrative expenses as a percentage of total revenue will increase throughout the balance of our fiscal year 2022 due primarily to increases across all categories.

Depreciation and Amortization. Depreciation and amortization expense for the thirteen weeks ended January 1, 2022 decreased $75,000 or 9.69% to $699,000 from $774,000 from the thirteen weeks ended January 2, 2021. As a percentage of total revenue, depreciation and amortization expense was 1.83% of revenue in the thirteen weeks ended January 1, 2022 and 2.47% of revenue in the thirteen weeks ended January 2, 2021.

Interest Expense, Net. Interest expense, net, for the thirteen weeks ended January 1, 2022 decreased $86,000 to $193,000 from $279,000 for the thirteen weeks ended January 2. 2021. Interest expense, net, decreased for the thirteen weeks ended January 1, 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 2nd PPP Loans during the first quarter of our fiscal year 2022, offset by interest on (i) our borrowing of $2,200,000 during the second quarter of our fiscal year 2021 from an unrelated third party lender used to finance our purchase of the real property and improvements located at 14301 West Sunrise Boulevard, Sunrise, Florida (Store #85) (the “$2.2 Million Borrowing”) and (ii) 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).

Income Taxes. Income tax for the thirteen weeks ended January 1, 2022 was an expense of $147,000, as compared to a benefit of $4,000 for the thirteen weeks ended January 2, 2021. Income taxes for the thirteen weeks ended January 2, 2021 was a benefit of $4,000 which represents the net difference in the deferred tax assets plus the current state income tax expense.

Net Income. Net income for the thirteen weeks ended January 1, 2022 increased $2,906,000 or 281.59% to $3,938,000 from $1,032,000 for the thirteen weeks ended January 2, 2021 due primarily to the forgiveness of debt of certain of the 2nd PPP Loans, increased revenue at our retail package liquor stores and restaurants and the Recent Price Increases, partially offset by higher food costs and overall expenses. As a percentage of revenue, net income for the thirteen weeks ended January 1, 2022 is 10.53%, as compared to 3.29% in the thirteen weeks ended January 2, 2021.

Net Income Attributable to Flanigan’s Enterprises, Inc. Stockholders. Net income attributable to Flanigan’s Enterprises, Inc. Stockholders for the thirteen weeks ended January 1, 2022 increased $784,000 or 100.51% to $1,564,000 from $780,000 for the thirteen weeks ended January 2, 2021 due primarily to the forgiveness of debt of certain of the PPP Loans, increased revenue at our retail package liquor stores and restaurants and the Recent Price Increases, partially offset by higher food costs and overall expenses. As a percentage of revenue, net income attributable to stockholders for the thirteen weeks ended January 1, 2022 is 4.18%, as compared to 2.49% for the thirteen weeks ended January 2, 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 the first quarter of our fiscal year 2022, we had one new restaurant location in Sunrise, Florida and a second new restaurant location in Miramar, Florida in the development stage, each location to house a new “Flanigan’s”. Rent for the new restaurant location in Miramar, Florida commences during the second quarter of our fiscal year 2022.

Menu Price Increases and Trends

During the first quarter of 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 2021, first quarter of our fiscal year 2022 and will, in all likelihood, impact our results of operations, liquidity and/or financial condition throughout our fiscal year 2022. The extent to which our restaurant business may be adversely impacted and its effect on our operations, liquidity and/or financial condition cannot be accurately predicted.

Liquidity and Capital Resources

We fund our operations through cash from operations and borrowings from third parties. As of January 1, 2022, we had cash of approximately $33,602,000, an increase of $926,000 from our cash balance of $32,676,000 as of October 2, 2021.

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 “2nd 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 January 1, 2022, the entire amount of principal and accrued interest was forgiven under the 2nd 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 second quarter of our fiscal year 2021, we closed on the purchase of the real property and improvements located at 14301 West Sunrise Boulevard, Sunrise, Florida where we are developing a “Flanigan’s Seafood Bar and Grill” restaurant (Store #85) for $4,800,000. We financed this acquisition with a loan from an unrelated third-party lender in the principal amount of $2.2 million and paid cash for the balance. During the first quarter of our fiscal year 2021, we closed on the purchase of the real property and improvements located at 5450 N. State Road 7, North Lauderdale, Florida where we operate a combination “Flanigan’s Seafood Bar and Grill” restaurant and “Big Daddy’s Liquors” package liquor store (Store #40) and paid $1,200,000 cash at closing.

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 the first thirteen weeks of fiscal years 2022 and 2021.

(in thousands)

We did not declare or pay a cash dividend on our capital stock in the first quarter of our fiscal year 2022 or the first quarter of our fiscal year 2021. 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.

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 thirteen weeks ended January 1, 2022, we acquired property and equipment and construction in progress of $2,402,000, (of which $4,000 was deposits recorded in other assets and $140,000 was purchase deposits transferred to construction in process as of October 2, 2021), including $587,000 for renovations to two (2) existing limited partnership owned restaurants and one (1) Company owned restaurants. During the thirteen weeks ended January 2, 2021, we acquired property and equipment and construction in progress of $1,105,000, (of which $11,000 was deposits recorded in other assets and $18,000 was purchase deposits transferred to construction in process as of October 3, 2020), including $89,000 for renovations to three (3) Company owned restaurants.

All of our owned units require periodic refurbishing in order to remain competitive. We anticipate the cost of this refurbishment in our fiscal year 2022 will be approximately $1,000,000, excluding construction/renovations to Store #19 (our combination package liquor store and restaurant which is being rebuilt due to damages caused by a fire), Store #85 (our Sunrise, Florida restaurant location in development), Store #24 (our Miramar, Florida package store location in development) and Store #25 (our Miramar, Florida restaurant location in development), which funds will be provided from operations, subject to reimbursement of all or a part of the cost of construction/renovations through private offerings for the limited partnerships which will own Store #85 and Store #25.

Long Term Debt

As of January 1, 2022, we had long term debt of $19,651,000, as compared to $26,904,000 as of January 2, 2021, and $22,115,000 as of October 2, 2021. Our long term debt decreased as of January 1, 2022 as compared to October 2, 2021 due to the forgiveness of all principal and accrued interest of the 2nd PPP Loans, offset by $1,861,000 for financed insurance premiums, less any payments made on account thereof. As of January 1, 2022, we are in compliance with the covenants of all loans with our lender.

Construction Contracts

(a) 7990 Davie Road Extension, Hollywood, Florida (Store #19 – “Big Daddy’s Wine & Liquors”)

During the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated general contractor for site work at this location totaling $1,618,000, (i) to connect the real property where this restaurant operated (Store #19) to city sewer and (ii) to construct a new building on the adjacent parcel of real property for the operation of a package liquor store. During our fiscal years 2020 and 2021, we agreed to change orders to the agreement for additional construction services increasing the total contract price by $536,000 to $2,156,000, of which $1,427,000 of the total amount obligated has been paid through January 1, 2022 and an additional $255,000 has been paid subsequent to the end of the first quarter our fiscal year 2022.

(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 totaling $2,515,000, of which none has been paid.

(c) 14301 W. Sunrise Boulevard, Sunrise, Florida (Store #85)

During the third quarter of our fiscal year 2019, we also entered into an agreement with an unaffiliated third party design group for design and development services of our new location at 14301 W. Sunrise Boulevard, Sunrise, Florida 33323 (Store #85) for a total contract price of $122,000. During our fiscal year 2020, we agreed upon amendments to the $122,000 Contract for additional design and development services which had the effect of increasing the total contract price by $18,000 to $140,000, of which $131,000 has been paid through January 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 the first quarter our fiscal year 2022 we agreed to change orders to the agreement for additional interior renovations increasing the total contract price by $197,000 to $1,433,000, of which $1,268,000 has been paid through January 1, 2022 and none has been paid subsequent to the end of the first quarter of our fiscal year 2022.

(d) 11225 Miramar Parkway, #250, Miramar, Florida (“Flanigan’s”)

During the fourth quarter of our fiscal year 2019, we entered into a Lease Agreement with a non-affiliated third party, (the “Landlord”) to rent approximately 6,000 square feet of commercial space for a restaurant location in a shopping center at 11225 Miramar Parkway, #250, Miramar, Florida (Store #25), which shopping center was under construction. During the second quarter of our fiscal year 2021, we entered into an Architectural Professional Services Agreement with a third-party unaffiliated architect for design and development services for this, new location (Store #25) for a total contract price of $73,850, which contract price has been paid in full through January 1, 2022. During the fourth quarter of our fiscal year 2021, we received notification from the Landlord that it had completed substantially all of the Landlord’s work under the Lease Agreement and was delivering possession of the leased premises to us. 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 $1,421,000, of which none has been paid.

(e) 11225 Miramar Parkway, #245, Miramar, Florida (“Big Daddy’s Wine and Liquors”)

During the fourth quarter of our fiscal year 2019, we entered into a Lease Agreement with a non-affiliated third party, (the “Landlord”) to rent approximately 2,000 square feet of commercial space for a retail package liquor store location in a shopping center at 11225 Miramar Parkway, #245, Miramar, Florida (Store #24), which shopping center was under construction. During the second quarter of our fiscal year 2021, we entered into an Architectural Professional Services Agreement with a third-party unaffiliated architect for design and development services for this, new location (Store #24) for a total contract price of $18,650, which contract price has been paid in full through January 1, 2022. During the fourth quarter of our fiscal year 2021, we received notification from the Landlord that it had completed substantially all of the Landlord’s work under the Lease Agreement and was delivering possession of the leased premises to us. 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, of which none has been paid.

Purchase Commitments

In order to ensure adequate supply of baby back ribs for our restaurants for calendar year 2022, on October 4, 2021, we entered into a purchase agreement with our current rib supplier, whereby we agreed to purchase approximately $10,414,000 of baby back ribs during calendar year 2022 from this vendor at market cost. Our purchase agreement provides for the purchase of 2.25 & Down Baby Back Ribs, at a monthly cost of the average market price per pound of the prior 4 weeks.

While we anticipate purchasing all of our rib supply from this vendor, we believe there are several other alternative vendors available, if needed.

Working Capital

The table below summarizes the current assets, current liabilities, and working capital for our fiscal quarters ended January 1, 2022, January 2, 2021 and our fiscal year ended October 2, 2021.

(in Thousands)

23

Our working capital increased during our fiscal quarter ended January 1, 2022 from our working capital for our fiscal quarter ended January 2, 2021primarily due to (i) our receipt of $3.35 million from the 2nd PPP Loans during the second quarter of our fiscal year 2021 and (ii) our receipt of $2.8 million from our re-financing of our mortgage loan encumbering the real property and improvements located at 13105 – 13205 Biscayne Boulevard, North Miami, Florida where our Flanigan’s Seafood Bar and Grill restaurant and Big Daddy’s Liquors retail package liquor store operate (Store #20), increasing the principal amount borrowed from $1.5 million to $4.3 million during the third quarter of our fiscal year 2021. Our working capital decreased during our fiscal quarter ended January 1, 2022 from our working capital of our fiscal year ended October 2, 2021 due to expenditures related to construction in progress for the development of our new restaurant location in Sunrise, Florida (Store # 85) and for the development of our new package store location in Hollywood, Florida (Store #19 - package).

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 2022.

Off-Balance Sheet Arrangements

The Company does not have off-balance sheet arrangements.

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. We have endeavored to offset the adverse effects of cost increases by increasing our menu prices.

We do not ordinarily hold market risk sensitive instruments for trading purposes and as of January 1, 2022 held no equity securities.

Interest Rate Risk

As part of our ongoing operations, we are exposed to interest rate fluctuations on our borrowings. As more fully described in Note 12, “Fair Value Measurements of Financial Instruments” to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for our fiscal year ended October 2, 2021, we use interest rate swap agreements to manage these risks. These instruments are not used for speculative purposes but are used to modify variable rate obligations into fixed rate obligations.

At January 2, 2022, we had two variable rate debt instruments outstanding that are impacted by changes in interest rates. The interest rate of both variable rate debt instruments is equal to the lender’s LIBOR Rate plus two and one-quarter percent (2.25%) per annum. The debt instruments further provide that the “LIBOR Rate” is a rate of interest equal to the British Bankers Association LIBOR Rate or successor thereto approved by the lender if the British Bankers Association is no longer making a LIBOR rate available. In January 2013, we refinanced the mortgage loan encumbering the property where our combination package liquor store and restaurant located at 4 N. Federal Highway, Hallandale, Florida, (Store #31) operates, which mortgage loan is held by an unaffiliated third party lender (the “$1.405M Loan”). In December 2016, we closed on a secured revolving line of credit which entitled us to borrow, from time to time through December 28, 2017, up to $5,500,000 (the “Credit Line”), which on December 28, 2017 converted to a term loan (the “Term Loan”).

As a means of managing our interest rate risk on these debt instruments, we entered into interest rate swap agreements with our unrelated third-party lender to convert these variable rate debt obligations to fixed rates. We are currently party to the following two (2) interest rate swap agreements:

(i) The first interest rate swap agreement entered into in January 2013 relates to the $1.405M Loan (the “$1.405M Term Loan Swap”). The $1.405M Term Loan Swap requires us to pay interest for a twenty (20) year period at a fixed rate of 4.35% on an initial amortizing notional principal amount of $1,405,000, while receiving interest for the same period at LIBOR – 1 Month, plus 2.25%, on the same amortizing notional principal amount. We determined that at January 1, 2022, the interest rate swap agreement is an effective hedging agreement and the fair value was not material; and

(ii) The second interest rate swap agreement entered into in December 2016 and became effective December 28, 2017, relates to the Term Loan (the “Term Loan Swap”). The Term Loan Swap requires us to pay interest for a five (5) year period at a fixed rate of 4.61% on an initial amortizing notional principal amount of $5,500,000, while receiving interest for the same period at LIBOR – 1 Month, plus 2.25%, on the same amortizing notional principal amount. We determined that at January 1, 2022, the interest rate swap agreement is an effective hedging agreement and the fair value was not material.

Our institutional lender has informed us that beginning January 1, 2022 despite it no longer using LIBOR to originate, renew or modify loans, LIBOR will continue to be used until June 30, 2023 in connection with our two interest rate swap agreements. Since all amounts due under the $1.405M Loan and the Term Loan are due and payable on January 23, 2023 and December 28, 2022, respectively. the discontinuance of LIBOR should have no no impact on us.

At January 1, 2022, our cash resources earn interest at variable rates. Accordingly, our return on these funds is affected by fluctuations in interest rates.

There is no assurance that interest rates will increase or decrease over our next fiscal year or that an increase will not have a material adverse effect on our operations.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the U.S. Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of January 1, 2022, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the Securities Exchange Act of 1934). Based on that evaluation, management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of January 1, 2022.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, we have not made any change to our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.