Flanigans Enterprises Inc: Form 10-Q for the period ended Apr 2, 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 April 2, 2022, Flanigan’s Enterprises, Inc., a Florida corporation, together with its subsidiaries (“we”, “our”, “ours” and “us” as the context requires), (i) operates 28 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 April 2, 2022 and as compared to October 2, 2021 and April 3, 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 April 2, 2022.

(2) During the second quarter of our fiscal year 2022, our limited partnership owned restaurant located at 14301 West Sunrise Boulevard, Sunrise, Florida (Store #85) opened for business (the “2022 Sunrise Restaurant”). Our limited partnership owned restaurant located at 11225 Miramar Parkway #250, Miramar, Florida (Store #25) is expected to open for business in October, 2022 (the “2022 Miramar Restuarant”).

(3) 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” or “Flanigan’s” and “Big Daddy’s Liquors” or “Big Daddy’s Wine & 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 April 2, 2022, all limited partnerships, with the exception of the 2022 Sunrise Restaurant and the 2022 Miramar Restaurant, 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” or “Flanigan’s”.

RESULTS OF OPERATIONS (1)

(1) While included in the figures presented for the thirteen and twenty six weeks ended April 2, 2022, the results of operations for the 2022 Sunrise Restaurant which opened for business on March 22, 2022 did not have a material effect on our results for these periods. The 2022 Miramar Restaurant is expected to open for business in October, 2022.

Comparison of Thirteen Weeks Ended April 2, 2022 and April 3, 2021.

Revenues. Total revenue for the thirteen weeks ended April 2, 2022 increased $5,973,000 or 17.39% to $40,330,000 from $34,357,000 for the thirteen weeks ended April 3, 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 April 2, 2022 as compared with the thirteen weeks ended April 3, 2021. Effective October 3, 2021 and then effective December 19, 2021 we increased menu prices for our food offerings to target an increase to our food revenues of approximately 2.38% and 3.34% annually, respectively, to offset higher food costs and higher overall expenses and effective December 12, 2021 we increased menu prices for our bar offerings to target an increase to our bar revenues of approximately 7.80% annually, (collectively the “Recent Price Increases”). Prior to these increases, we previously raised menu prices in the third quarter of our fiscal year 2021. 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”) or the 2022 Miramar Restaurant will open for business during our fiscal year 2022 and accordingly we do not expect to generate any revenue from them.

Restaurant Food Sales. Restaurant revenue generated from the sale of food, including non-alcoholic beverages, at restaurants totaled $24,775,000 for the thirteen weeks ended April 2, 2022 as compared to $20,689,000 for the thirteen weeks ended April 3, 2021. The increase in restaurant food sales for the thirteen weeks ended April 2, 2022 as compared to restaurant food sales during the thirteen weeks ended April 3, 2021 is attributable to menu price increases and the comparatively greater adverse effects of COVID-19 on our operations during the thirteen weeks ended April 3, 2021 as compared with the thirteen weeks ended April 2, 2022. Comparable weekly restaurant food sales (for restaurants open for all of the thirteen weeks ended April 2, 2022 and April 3, 2021 respectively, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for the thirteen weeks ended April 2, 2022 and April 3, 2021 due to a fire on October 2, 2018) and eight restaurants owned by affiliated limited partnerships, (excluding Store #85 which opened for business during the second quarter of our fiscal year 2022)) was $1,802,000 and $1,578,000 for the thirteen weeks ended April 2, 2022 and April 3, 2021, respectively, an increase of 14.20%. Comparable weekly restaurant food sales for Company owned restaurants only was $887,000 and $786,000 for the thirteen weeks ended April 2, 2022 and April 3, 2021, respectively, an increase of 12.85%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only, (excluding Store #85 which opened for business during the second quarter of our fiscal year 2022), was $915,000 and $792,000 for the thirteen weeks ended April 2, 2022 and April 3, 2021 respectively, an increase of 15.53%.

Restaurant Bar Sales. Restaurant revenue generated from the sale of alcoholic beverages at restaurants totaled $6,669,000 for the thirteen weeks ended April 2, 2022 as compared to $5,050,000 for the thirteen weeks ended April 3, 2021. The increase in restaurant bar sales during the thirteen weeks ended April 2, 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 April 3, 2021 as compared with the thirteen weeks ended April 2, 2022. Comparable weekly restaurant bar sales (for restaurants open for all of the thirteen weeks ended April 2, 2022 and April 3. 2021 respectively, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for the thirteen weeks ended April 2. 2022 and April 3, 2021 due to a fire on October 2, 2018), and eight restaurants owned by affiliated limited partnerships, (excluding Store #85 which opened for business during the second quarter of our fiscal year 2022)) was $509,000 for the thirteen weeks ended April 2, 2022 and $389,000 for the thirteen weeks ended April, an increase of 30.85%. Comparable weekly restaurant bar sales for Company owned restaurants only was $225,000 and $166,000 for the thirteen weeks ended April 2, 2022 and April 3, 2021, respectively, an increase of 35.54%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $284,000 and $223,000 for the thirteen weeks ended April 2, 2022 and April 3, 2021 respectively, an increase of 27.35%.

Package Store Sales. Revenue generated from sales of liquor and related items at package liquor stores totaled $8,148,000 for the thirteen weeks ended April 2, 2022 as compared to $7,830,000 for the thirteen weeks ended April 3, 2021, an increase of $318,000. 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 April 2, 2022 and April 3, 2021 due to a fire on October 2, 2018), was $644,000 and $602,000 for the thirteen weeks ended April 2, 2022 and April 3, 2021 respectively, an increase of 6.98 %.

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 April 2, 2022 increased $6,916,000 or 21.91% to $38,480,000 from $31,564,000 for the thirteen weeks ended April 3, 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 95.41% in the second quarter of our fiscal year 2022 from 91.87% in the second 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 April 2, 2022 increased to $20,070,000 from $17,277,000 for the thirteen weeks ended April 2, 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 63.83% for the thirteen weeks ended April 2, 2022 and 67.12% for the thirteen weeks ended April 3, 2021. Gross profit margin for restaurant food and bar sales decreased during the second quarter of our fiscal year 2022 when compared to the second quarter of our fiscal year 2021 due to higher food costs, partially offset by, among other things, the Recent Price Increases.

Package Store Sales. Gross profit for package store sales for the thirteen weeks ended April 2, 2022 increased to $2,279,000 from $2,162,000 for the thirteen weeks ended April 3, 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 27.97% for the thirteen weeks ended April 2, 2022 and 27.61% for the thirteen weeks ended April 3, 2021.

Payroll and Related Costs. Payroll and related costs for the thirteen weeks ended April 2, 2022 increased $1,567,000 or 14.98% to $12,031,000 from $10,464,000 for the thirteen weeks ended April 3, 2021. Payroll and related costs for the thirteen weeks ended April 2, 2022 were higher due primarily to higher costs for employees such as cooks. Payroll and related costs as a percentage of total revenue was 29.83% in the thirteen weeks ended April 2, 2022 and 30.46% of total revenue in the thirteen weeks ended April 3, 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 April 2, 2022 increased $113,000 or 7.05% to $1,715,000 from $1,602,000 for the thirteen weeks ended April 3, 2021. The increase in occupancy costs was primarily due to the commencement of rent for our retail package liquor store which we are developing located at 11225 Miramar Parkway, #245, Miramar, Florida (Store #24) and our restaurant location which we are developing located at 11225 Miramar parkway, #250, Miramar, Florida (Store #25) during the second quarter of our fiscal year 2022, partially offset by the elimination of rent for our restaurant location located at 14301 West Sunrise Boulevard, Sunrise, Florida (Store #85), the real property and improvements of which we purchased on March 2, 2021.

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 April 2, 2022 increased $2,123,000 or 39.55% to $7,491,000 from $5,368,000 for the thirteen weeks ended April 3, 2021. Selling, general and administrative expenses increased as a percentage of total revenue in the thirteen weeks ended April 2, 2022 to 18.57% as compared to 15.62% in the thirteen weeks ended April 3, 2021, due primarily to the payment by the Company of pre-opening expenses in the amount of $856,000 for its limited partnership owning the new restaurant in Sunrise, Florida (Store #85) due to delays in the development of the new restaurant, including delays caused by COVID-19 and increases in expenses across all categories.. 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 April 2, 2022 decreased $45,000 or 5.91% to $717,000 from $762,000 from the thirteen weeks ended April 3, 2021. As a percentage of total revenue, depreciation and amortization expense was 1.78% of revenue in the thirteen weeks ended April 2, 2022 and 2.22% of revenue in the thirteen weeks ended April 3, 2021.

Interest Expense, Net. Interest expense, net, for the thirteen weeks ended April 2, 2022 decreased $71,000 to $177,000 from $248,000 for the thirteen weeks ended April 3. 2021. Interest expense, net, decreased for the thirteen weeks ended April 2, 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, partially 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 April 2, 2022 was an expense of $353,000, as compared to an expense of $533,000 for the thirteen weeks ended April 3, 2021.

Net Income. Net income for the thirteen weeks ended April 2, 2022 decreased $4,349,000 or 76.41% to $1,343,000 from $5,692,000 for the thirteen weeks ended April 3, 2021 due primarily to the relatively greater income attributable to the forgiveness of debt of certain of our PPP Loans during the thirteen weeks ended April 3, 2021, as compared to the income attributable to the forgiveness of debt of certain of our other PPP Loans during the thirteen weeks ended April 2, 2022 and higher food costs and overall increased expenses during the thirteen weeks ended April 2, 2022, partially offset by increased revenue at our retail package liquor stores and restaurants during the thirteen weeks ended April 2, 2022 and the Recent Price Increases. As a percentage of revenue, net income for the thirteen weeks ended April 2, 2022 is 3.33%, as compared to 16.57% in the thirteen weeks ended April 3, 2021.

Net Income Attributable to Flanigan’s Enterprises, Inc. Stockholders. Net income attributable to stockholders for the thirteen weeks ended April 2, 2022 decreased $791,000 or 32.27% to $1,660,000 from $2,451,000 for the thirteen weeks ended April 3, 2021 due primarily to the relatively greater income attributable to the forgiveness of debt of certain of our PPP Loans during the thirteen weeks ended April 3, 2021, as compared to the income attributable to the forgiveness of debt of certain of our other PPP Loans during the thirteen weeks ended April 2, 2022 and higher food costs and overall increased expenses during the thirteen weeks ended April 2, 2022, partially offset by increased revenue at our retail package liquor stores and restaurants during the thirteen weeks ended April 2, 2022 and the Recent Price Increases. During the thirteen weeks ended April 2, 2022, due to losses attributable to the 2022 Sunrise Restaurant and a lesser extent the 2022 Miramar Restaurant, there was a loss attributable to the noncontrolling interests as compared to a gain for the thirteen weeks ended April 3, 2021 which contributes to the net income attributable to Flanigan’s Enterprises, Inc. Stockholders for the thirteen weeks ended April 2, 2022. As a percentage of revenue, net income attributable to stockholders for the thirteen weeks ended April 2, 2022 is 4.12%, as compared to 7.13% for the thirteen weeks ended April 3, 2021.

Comparison of Twenty-Six Weeks Ended April 2, 2022 and April 3, 2021.

Revenues. Total revenue for the twenty-six weeks ended April 2, 2022 increased $11,996,000 or 18.25% to $77,733,000 from $65,737,000 for the twenty-six weeks ended April 3, 2021 due primarily to increased package liquor store and restaurant sales, the Recent Price Increases and the comparatively less adverse effects of COVID-19 on our operations during the twenty-six weeks ended April 2, 2022 as compared with the twenty-six weeks ended April 3, 2021.

Restaurant Food Sales. Restaurant revenue generated from the sale of food, including non-alcoholic beverages, at restaurants totaled $46,980,000 for the twenty-six weeks ended April 2, 2022 as compared to $39,017,000 for the twenty-six weeks ended April 3, 2021. The increase in restaurant food sales for the twenty-six weeks ended April 2, 2022 as compared to restaurant food sales during the twenty-six weeks ended April 3, 2021 is attributable to the Recent Price Increases and the comparatively more adverse effects of COVID-19 on our operations during the twenty-six weeks ended April 3, 2021 as compared with the twenty-six weeks ended April 2, 2022. Comparable weekly restaurant food sales (for restaurants open for all of the twenty-six weeks ended April 2, 2022 and April 3, 2021 respectively, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for the twenty-six weeks ended April 2, 2022 and April 3, 2021 due to a fire on October 2, 2018) and eight restaurants owned by affiliated limited partnerships, (excluding Store #85 which opened for business during the second quarter of our fiscal year 2022)) was $1,775,000 and $1,489,000 for the twenty-six weeks ended April 2, 2022 and April 3, 2021, respectively, an increase of 19.21%. Comparable weekly restaurant food sales for Company owned restaurants only was $872,000 and $733,000 for the twenty-six weeks ended April 2, 2022 and April 3, 2021, respectively, an increase of 18.96%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only, (excluding Store #85 which opened for business during the second quarter of our fiscal year 2022), was $903,000 and $756,000 for the twenty-six weeks ended April 2, 2022 and April 3, 2021 respectively, an increase of 19.44%.

Restaurant Bar Sales. Restaurant revenue generated from the sale of alcoholic beverages at restaurants totaled $12,676,000 for the twenty-six weeks ended April 2, 2022 as compared to $9,493,000 for the twenty-six weeks ended April 3, 2021. The increase in restaurant bar sales during the twenty-six weeks ended April 2, 2022 is primarily due to the Recent Price Increases and the comparatively greater adverse effects of COVID-19 on our operations during the twenty-six weeks ended April 3, 2021 as compared with the twenty-six weeks ended April 2, 2022. Comparable weekly restaurant bar sales (for restaurants open for all of the thirteen weeks ended April 2, 2022 and April 3. 2021 respectively, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for the thirteen weeks ended April 2. 2022 and April 3, 2021 due to a fire on October 2, 2018), and eight restaurants owned by affiliated limited partnerships, (excluding Store #85 which opened for business during the second quarter of our fiscal year 2022)) was $485,000 for the thirteen weeks ended April 2, 2022 and $365,000 for the thirteen weeks ended April, an increase of 32.88%. Comparable weekly restaurant bar sales for Company owned restaurants only was $214,000 and $153,000 for the twenty-six weeks ended April 2, 2022 and April 3, 2021, respectively, an increase of 39.87%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $271,000 and $212,000 for the twenty-six weeks ended April 2, 2022 and April 3, 2021 respectively, an increase of 27.83%.

Package Store Sales. Revenue generated from sales of liquor and related items at package liquor stores totaled $16,658,000 for the twenty-six weeks ended April 2, 2022 as compared to $15,841,000 for the twenty-six weeks ended April 3, 2021, an increase of $818,000. 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 twenty-six weeks ended April 2, 2022 and April 3, 2021 due to a fire on October 2, 2018), was $649,000 and $609,000 for the twenty-six weeks ended April 2, 2022 and April 3, 2021 respectively, an increase of 6.57 %.

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 twenty-six weeks ended April 2, 2022 increased $13,444,000 or 21.80% to $75,118,000 from $61,674,000 for the twenty-six weeks ended April 3, 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 96.64% in the twenty-six weeks ended April 2, 2022 from 93.82% in the twenty-six weeks ended April 3, 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 twenty-six weeks ended April 2, 2022 increased to $37,949,000 from $32,526,000 for the twenty-six weeks ended April 3, 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 63.61% for the twenty-six weeks ended April 2, 2022 and 67.05% for the twenty-six weeks ended April 3, 2021. Gross profit margin for restaurant food and bar sales decreased during the twenty-six weeks ended April 2, 2022 when compared to the twenty-six weeks ended April 3, 2021 due to higher food costs, partially offset by, among other things, the Recent Price Increases.

Package Store Sales. Gross profit for package store sales for the twenty-six weeks ended April 2, 2022 increased to $4,450,000 from $4,322,000 for the twenty-six weeks ended April 3, 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 26.71% for the twenty-six weeks ended April 2, 2022 and 27.28% for the twenty-six weeks ended April 3, 2021.

Payroll and Related Costs. Payroll and related costs for the twenty-six weeks ended April 2, 2022 increased $4,340,000 or 21.78% to $24,267,000 from $19,927,000 for the twenty-six weeks ended April 3, 2021. Payroll and related costs for the twenty-six weeks ended April 2, 2022 were higher due primarily higher costs for employees such as cooks. Payroll and related costs as a percentage of total revenue was 31.22% in the twenty-six weeks ended April 2, 2022 and 30.31% of total revenue in the twenty-six weeks ended April 3, 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 twenty-six weeks ended April 2, 2022 increased $5,000 or 0.15% to $3,413,000 from $3,408,000 for the twenty-six weeks ended April 3, 2021. The increase in occupancy costs was primarily due to the commencement of rent for our retail package liquor store which we are developing located at 11225 Miramar Parkway, #245, Miramar, Florida (Store #24) and our restaurant location which we are developing located at 11225 Miramar parkway, #250, Miramar, Florida (Store #25) during the second quarter of our fiscal year 2022, partially offset by the elimination of rent for our restaurant location located at 14301 West Sunrise Boulevard, Sunrise, Florida (Store #85), the real property and improvements of which we purchased on March 2, 2021.

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 twenty-six weeks ended April 2, 2022 increased $2,686,000 or 24.79% to $13,522,000 from $10,836,000 for the twenty-six weeks ended April 3, 2021 due primarily to the payment by the Company of pre-opening expenses in the amount of $856,000 for its limited partnership owning the new restaurant in Sunrise, Florida (Store #85) due to delays in the development of the new restaurant, including delays caused by COVID-19 and increases in expenses across all categories. Selling, general and administrative expenses increased as a percentage of total revenue in the twenty-six weeks ended April 2, 2022 to 17.40% as compared to 16.48% in the twenty-six weeks ended April 3, 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 twenty-six weeks ended April 2, 2022 decreased $136,000 or 8.85% to $1,400,000 from $1,536,000 from the twenty-six weeks ended April 3, 2021. As a percentage of total revenue, depreciation and amortization expense was 1.80% of revenue in the twenty-six weeks ended April 2, 2022 and 2.34% of revenue in the twenty-six weeks ended April 3, 2021.

Interest Expense, Net. Interest expense, net, for the twenty-six weeks ended April 2, 2022 decreased $157,000 to $370,000 from $527,000 for the twenty-six weeks ended April 3, 2021. Interest expense, net, decreased for the twenty-six weeks ended April 2, 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 related to the 2nd PPP Loans during the first quarter of our fiscal year 2022, partially 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 twenty-six weeks ended April 2, 2022 was an expense of $500,000, as compared to an expense of $529,000 for the twenty-six weeks ended April 3, 2021.

Net Income. Net income for the twenty-six weeks ended April 2, 2022 decreased $1,443,000 or 21.46% to $5,281,000 from $6,724,000 for the twenty-six weeks ended April 3, 2021 due primarily to the relatively greater income attributable to the forgiveness of debt of certain of our PPP Loans during the twenty-six weeks ended April 3, 2021 as compared to the income attributable to the forgiveness of debt of certain of our 2nd PPP Loans during the twenty-six weeks ended April 2, 2022 and higher food costs and overall increased expenses during the twenty-six weeks ended April 2, 2022, partially offset by increased revenue at our retail package liquor stores and restaurants during the twenty-six weeks ended April 2, 2022 and the Recent Price Increases. As a percentage of revenue, net income for the twenty-six weeks ended April 2, 2022 is 6.79%, as compared to 10.23% in the twenty-six weeks ended April 3, 2021.

Net Income Attributable to Flanigan’s Enterprises, Inc. Stockholders. Net income attributable to stockholders for the twenty-six weeks ended April 2, 2022 decreased $7,000 or 0.22% to $3,224,000 from $3,231,000 for the twenty-six weeks ended April 3, 2021 due primarily to increased revenue at our retail package liquor stores and restaurants during the twenty-six weeks ended April 2, 2022 and the Recent Price Increases, partially offset by higher food costs and overall expenses. During the twenty-six weeks ended April 2, 2022, due to losses attributable to the 2022 Sunrise Restaurant and a lesser extent the 2022 Miramar Restaurant, there was less of a gain attributable to the noncontrolling interests as compared to a gain for the twenty-six weeks ended April 3, 2021 which contributes to the net income attributable to Flanigan’s Enterprises, Inc. Stockholders for the twenty-six weeks ended April 2, 2022. As a percentage of revenue, net income attributable to stockholders for the thirteen weeks ended April 2, 2022 is 4.15%, as compared to 4.92% for the twenty-six weeks ended April 3, 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 twenty-six weeks ended April 2, 2022, we opened one new restaurant location in Sunrise, Florida for business as a new “Flanigan’s” and a second new restaurant location in Miramar, Florida in the development stage, to house a new “Flanigan’s”. Rent for the new restaurant location in Miramar, Florida commenced during the second quarter of our fiscal year 2022.

Menu Price Increases and Trends

During the twenty-six weeks ended April 2, 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, as well as the twenty-six weeks ended April 2, 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 April 2, 2022, we had cash of approximately $40,666,000, an increase of $7,990,000 from our cash balance of $32,676,000 as of October 2, 2021. During the twenty-six weeks ended April 2, 2022, we generated proceeds from the closing of the sale, in a private offering, of limited partnership interests in (i) CIC Investors #85, Ltd., the limited partnership which owns and operates the 2022 Sunrise Restaurant, of $5,000,000, of which we invested $370,000 and (ii) CIC Investors #25, Ltd., the limited partnership which owns and is developing the “Flanigan’s” restaurant located at 11225 Miramar Parkway, Suite 250, Miramar, Florida 33025 of $4,000,000. Capital raised from private investors in the private offerings is credited to sale of noncontrolling interests in our Statements of Stockholders’ Equity.

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 April 2, 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 twenty-six weeks ended April 2, 2022 and April 3, 2021.

(in Thousands)

During the twenty-six weeks ended April 2, 2022, our Board of Directors declared a cash dividend of $1.00 per share to shareholders of record on March 31, 2022 and payable on April 19, 2022. During the twenty-six weeks ended April 3, 2021, we did not declare or pay a cash dividend on our capital stock. 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 to fund the development and construction of new restaurants and to fund capitalized property improvements for our existing restaurants. During the twenty-six weeks ended April 2, 2022, we acquired property and equipment and construction in progress of $4,111,000, (of which $353,000 was deposits recorded in other assets as of October 2, 2021 and $331,000 was construction in progress in accounts payable), including $717,000 for renovations to three (3) existing limited partnership owned restaurants and $82,000 (1) Company owned restaurants. During the twenty-six weeks ended April 3, 2021, we acquired property, plant and equipment and construction in progress of $7,251,000, (of which $58,000 was for the purchase of a vehicle for debt; of which $2,200,000 was for the purchase of real property for debt; $14,000 was deposits recorded in other assets and $18,000 was purchase deposits transferred to construction in process as of October 3, 2020), which amount included $23,000 for the renovation to one (1) existing limited partnership restaurants and $364,000 for renovations to five (5) 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 opened for business during the twenty-six weeks ended April 2, 2022), 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 the proceeds generated from the closing of the private offerings for the limited partnerships which own Store #85 and Store #25.

Long Term Debt

As of April 2, 2022, we had long term debt of $18,787,000, as compared to $22,115,000 as of October 2, 2021. Our long term debt decreased as of April 2, 2022 as compared to October 2, 2021 due to the forgiveness of all principal and accrued interest of the 2nd PPP Loans, partially offset by $1,861,000 for financed insurance premiums, less any payments made on account thereof. As of April 2, 2022, we are in compliance with the covenants of all loans with our lender.

As of April 2, 2022, the aggregate principal balance owed from the financing of our property and general liability insurance policies is $1,527,000, excluding coverage for our franchises, (of approximately $408,000), which are not included in our consolidated financial statements.

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. Through the twenty-six weeks ended April 2, 2022, we agreed to change orders to the agreement for additional construction services increasing the total contract price by $624,000 to $2,242,000, of which $1,951,000 of the total amount obligated has been paid through April 2, 2022 and an additional $-0- has been paid subsequent to the end of the twenty-six weeks of ended April 2, 2022 through the date of filing this quarterly report.

(b) 2505 N. University Drive, Hollywood, Florida (Store #19 – “Flanigan’s”)

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 $226,000 has been paid subsequent to the end of the second quarter of our fiscal year 2022 through the date of filing of this quarterly report.

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

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 second quarter our fiscal year 2022 we agreed to change orders to the agreement for additional interior renovations increasing the total contract price by $215,000 to $1,451,000, which has been paid in full by the end of the second quarter of our fiscal year 2022.

(d) 11225 Miramar Parkway, #250, Miramar, Florida

(“Flanigan’s”)

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 $-0- has been paid through April 2, 2022 and $180,000 has been paid subsequent to the end of the twenty-six weeks ended April 2, 2022 through the date of filing of this quarterly report.

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

During the first quarter of our fiscal year 2022, we entered into an agreement with a third party unaffiliated general contractor for interior renovations at this location totaling $317,000, of which $93,000 has been paid through April 2, 2022 and $-0- has been paid subsequent to the end of the twenty-six weeks ended April 2, 2022 through the date of filing of this quarterly report.

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 as of our fiscal quarter ended April 2, 2022 and our fiscal year ended October 2, 2021.

(in Thousands)

Our working capital increased during our fiscal quarter ended April 2, 2022 from our working capital as of October 2, 2021 primarily due to capital raises of two (2) limited partnership offerings totaling $8,595,000.

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

We do 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. Inflation is having a material impact on our operating results, especially rising food, fuel and labor costs.

We do not ordinarily hold market risk sensitive instruments for trading purposes and as of April 2, 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 April 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 April 2, 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 April 2, 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 April 2, 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 is not expected to have any impact on us.

At April 2, 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 April 2, 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 April 2, 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.