FLANIGANS ENTERPRISES INC - Quarter Report: 2019 December (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended December 28, 2019

OR

For the transition period from            to

Commission File Number 1-6836

FLANIGAN'S ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

(954) 377-1961

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

On February 11, 2020, 1,858,647 shares of Common Stock, $0.10 par value per share, were outstanding.

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

LIST XBRL DOCUMENTS

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” the “Company” and “Flanigan’s” mean Flanigan's Enterprises, Inc. and its subsidiaries (unless the context indicates a different meaning).

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

See accompanying notes to unaudited condensed consolidated financial statements.

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(Continued)

See accompanying notes to unaudited condensed consolidated financial statements.

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

DECEMBER 28, 2019 (UNAUDITED) AND SEPTEMBER 28, 2019

(in thousands)

ASSETS

See accompanying notes to unaudited condensed consolidated financial statements.

FLANIGAN'S ENTERPRISES, INC, AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

DECEMBER 28, 2019 (UNAUDITED) AND SEPTEMBER 28, 2019

(in thousands)

(Continued)

LIABILITIES AND EQUITY

See accompanying notes to unaudited condensed consolidated financial statements.

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE THIRTEEN WEEKS ENDED DECEMBER 28, 2019 AND DECEMBER 29, 2018

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THIRTEEN WEEKS ENDED DECEMBER 28, 2019 AND DECEMBER 29, 2018

(in thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THIRTEEN WEEKS ENDED DECEMBER 28, 2019 AND DECEMBER 29, 2018

(in thousands)

(Continued)

See accompanying notes to unaudited condensed consolidated financial statements

FLANIGAN’S ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 28, 2019

(1) BASIS OF PRESENTATION:

The accompanying condensed consolidated financial information for the thirteen weeks ended December 28, 2019 and December 29, 2018 are unaudited. Financial information as of September 28, 2019 has been derived from the audited financial statements of the Company, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods indicated have been included. For further information regarding the Company's accounting policies, refer to the Consolidated Financial Statements and related notes included in the Company's Annual Report on Form 10-K for the year ended September 28, 2019. Operating results for interim periods are not necessarily indicative of results to be expected for a full year.

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the accounts of the eight limited partnerships in which we act as general partner and have controlling interests. All intercompany balances and transactions have been eliminated. Non-controlling interest represents the limited partners’ proportionate share of the net assets and results of operations of the eight limited partnerships.

These condensed consolidated financial statements include estimates relating to performance based officers’ bonuses. The estimates are reviewed periodically and the effects of any revisions are reflected in the financial statements in the period they are determined to be necessary. Although these estimates are based on management’s knowledge of current events and actions it may take in the future, they may ultimately differ from actual results.

The condensed consolidated financial statements include estimates relating to the calculation of incremental borrowing rates and length of leases associated with right-of-use assets and corresponding liabilities.

(2) EARNINGS PER SHARE:

We follow Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Section 260 - “Earnings per Share”. This section provides for the calculation of basic and diluted earnings per share. The data on Page 2 shows the amounts used in computing earnings per share and the effects on income and the weighted average number of shares of potentially dilutive common stock equivalents. As of December 28, 2019 and December 29, 2018, no stock options were outstanding.

(3) RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

Adopted

Effective October 1, 2019, we adopted Accounting Standards Codification 842, Leases (“ASC 842”). The new guidance requires that lease arrangements be presented on the lessee’s balance sheet by recording a right-of-use asset and a lease liability equal to the present value of the related future minimum lease payments. We adopted the standard in the first quarter of fiscal 2020, using the modified retrospective approach. Upon adoption, the Company recorded a right-of-use asset of $27.8 million and a lease liability of $27.8 million.

(3) RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: (Continued)

Adopted (Continued)

We elected the transition package of practical expedients, under which the Company does not have to reassess (1) whether any expired or existing contracts are leases, or contain leases, (2) the lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. In addition, we made an accounting policy election to exclude leases with an initial term of 12 months or less from the balance sheet. This standard had a material impact on the Condensed Consolidated Statements of Income due to the escalations of rent in the extensions but did not have a material impact on the Condensed Consolidated Statement of Cash Flows. See Note 6 for further disclosures resulting from the adoption of this new standard.

Recently Issued

There are no recently issued accounting pronouncements that we have not yet adopted.

(4) INCOME TAXES:

We account for our income taxes using FASB ASC Topic 740, “Income Taxes”, which requires among other things, recognition of future tax benefits measured at enacted rates attributable to deductible temporary differences between financial statement and income tax basis of assets and liabilities and to tax net operating loss carryforwards and tax credits to the extent that realization of said tax benefits is more likely than not.

(5) DEBT:

(a) Mortgage on Real Property

During the thirteen weeks ended December 28, 2019, our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, re-financed its mortgage loan with an unrelated third party lender, increasing the principal amount borrowed from $2.72 million to $7.21 million. The principal balance and all accrued interest of the mortgage loan that had been outstanding matured November 30, 2019. The re-financed mortgage loan earns interest at the fixed annual rate of 3.86%, is amortized over twenty (20) years, requires us to pay monthly payments of principal and interest in the amount of $43,373 with the entire principal balance and all accrued interest due in November 2026. We intend to use the excess funds we received from the re-financing of this mortgage loan (approximately $4.4 million) for working capital.

The interest rate swap agreement entered into in November, 2011 by our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, relating to the prior mortgage loan also matured November 30, 2019 and was not renewed as a part of the re-financing.

(b) Financed Insurance Premiums

During the thirteen weeks ended December 28, 2019, we bound the following property, general liability, excess liability and terrorist policies:

(i)       For the policy year beginning December 30, 2019, our general liability insurance, excluding limited partnerships, is a one (1) year policy with our insurance carriers, including automobile and excess liability coverage. The one (1) year general liability insurance premiums, including automobile insurance coverage, total, in the aggregate $418,000;

(ii)        For the policy year beginning December 30, 2019, our general liability insurance for our limited partnerships is a one (1) year policy with our insurance carriers, including excess liability coverage. The one (1) year general liability insurance premium is in the amount of $459,000;

(iii)       For the policy year beginning December 30, 2019, our property insurance is a one (1) year policy. The one (1) year property insurance premium is in the amount of $561,000; and

(iv)       For the policy year beginning December 30, 2019, our excess liability insurance is a one (1) year policy. The one (1) year excess liability insurance premium is in the amount of $360,000.

(v)       For the policy year beginning December 30, 2019, our terrorist insurance is a one (1) year policy. The one (1) year terrorist insurance premium is in the amount of $12,000.

We financed the premiums on the above five (5) property, general liability, excess insurance and terrorist policies, totaling approximately $1.81 million, which property, general liability, excess liability and terrorist insurance includes coverage for our franchises which are not included in our consolidated financial statements. The one (1) year insurance premiums, total, in the aggregate $1,810,000, of which $1,656,000 is financed through an unaffiliated third party lender. The finance agreement obligates us to repay the amounts financed together with interest at the rate of 2.55% per annum, over 11 months, with monthly payments of principal and interest, each in the amount of $153,000. The finance agreement is secured by a first priority security interest in all insurance policies, all unearned premium, return premiums, dividend payments and loss payments thereof.

As of December 28, 2019, the aggregate principal balance owed from the financing of our property and general liability insurance policies is $1,281,000, excluding coverage for our franchises which are not included in our consolidated financial statements.

(6) COMMITMENTS AND CONTINGENCIES:

Construction Contracts

a. 2505 N. University Drive, Hollywood, Florida (Store #19)

During our fiscal year 2018 and prior to it being closed in the first quarter of our fiscal year 2019 due to damages caused by a fire, we entered into an agreement with a third party unaffiliated general contractor for design and development services for the construction of a new building (the “New Building”) on a parcel of real property which we own and which is adjacent to the real property where our combination package liquor store and restaurant located at 2505 N. University Drive, Hollywood, Florida, (Store #19) operated until it was closed in October, 2018 due to damages caused by a fire for a total contract price of for a total contract price of $127,000 (the “$127,000 Contract”). We plan to re-locate our package liquor store at the property to the New Building. During the term of the $127,000 Contract, we agreed to change orders which had the effect of increasing the total contract price of the same to $138,000, and during the second quarter of our fiscal year 2019, we paid the balance of the total contract price of the $127,000 Contract, in the amount of $25,000. During the first quarter of our fiscal year 2020, we agreed upon changes to the $127,000 Contract for additional design and development services for the construction of the New Building which had the effect of increasing the total contract price of the same by $10,000 to $148,000, of which $6,000 has been paid.

During the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated architect for design and development services totaling $77,000 for the re-build of our

(6) COMMITMENTS AND CONTINGENCIES (Continued)

Construction Contracts (Continued)

a. 2505 N. University Drive, Hollywood, Florida (Store #19) (Continued)

restaurant located at 2505 N. University Drive, Hollywood, Florida (Store #19) which has been closed since October 2018 due to damages caused by a fire, of which $27,000 has been paid. Additionally, during the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated general contractor for site work 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, of which $-0- has been paid.

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

During the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated design group for design and development services of our new restaurant in development to be located at 14301 W. Sunrise Boulevard, Sunrise, Florida 33323 (Store #85) for a total contract price of $122,000, (the $122,000 Contract”). During the first quarter of 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 of the same by $18,000 to $140,000, of which $97,000 has been paid.

Leases

We lease restaurant and package liquor store space in South Florida for our business operations. Our leases have remaining lease terms of up to 10 years, some of which include options to extend the leases for up to 30 years. We intend to renew some of the extension options available to us and they are included in the computations of the right-of-use assets and lease liabilities. Following adoption of ASC 842, common area maintenance and property taxes are not considered to be lease components.

The components of lease expense were as follows:

Supplemental balance sheet information related to leases as follows:

The following table outlines the minimum future lease payments for the next five years and thereafter:

Litigation

Our sale of alcoholic beverages subjects us to “dram shop” statutes, which allow an injured person to recover damages from an establishment that served alcoholic beverages to an intoxicated person. If we receive a judgment substantially in excess of our insurance coverage or if we fail to maintain our insurance coverage, our business, financial condition, operating results or cash flows could be materially and adversely affected. We currently have no “dram shop” claims.

We are a party to various other claims, legal actions and complaints arising in the ordinary course of our business. It is our opinion, after consulting with legal counsel, that all such matters are without merit or involve such amounts that an unfavorable disposition would not have a material adverse effect on our financial position or results of operations.

(7) BUSINESS SEGMENTS:

We operate principally in two reportable segments – package stores and restaurants. The operation of package stores consists of retail liquor sales and related items. Information concerning the revenues and operating income for the thirteen weeks ended December 28, 2019 and December 29, 2018, and identifiable assets for the two reportable segments in which we operate, are shown in the following table. Operating income is total revenue less cost of merchandise sold and operating expenses relative to each segment. In computing operating income, none of the following items have been included: interest expense, other non-operating income and expenses and income taxes. Identifiable assets by segment are those assets that are used in our operations in each segment. Corporate assets are principally cash and real property, improvements, furniture, equipment and vehicles used at our corporate headquarters. We do not have any operations outside of the United States and transactions between restaurants and package liquor stores are not material.

(8) SUBSEQUENT EVENTS:

Subsequent events have been evaluated through the date these consolidated financial statements were issued and except as disclosed herein, no other events required disclosure.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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 the Annual Report on our Form 10-K for the fiscal year ended September 28, 2019 and in this Quarterly Report on Form 10-Q. 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 December 28, 2019, Flanigan’s Enterprises, Inc., a Florida corporation, together with its subsidiaries, (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 December 28, 2019 and as compared to December 29, 2018. With the exception of “The Whale’s Rib”, a restaurant we operate but do not own, all of the restaurants operate under our service mark “Flanigan’s Seafood Bar and Grill” and all of the package liquor stores operate under our service marks “Big Daddy’s Liquors” or “Big Daddy’s Wine & Liquors”.

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. Revenues and expenses from Store #19 for the time Store #19 was open during the first quarter of our fiscal year 2019 (two (2) days) are immaterial, with the exception of payroll. Store #19 remains closed through December 28, 2019.

(2) During the first quarter of our fiscal year 2020, our new package liquor store located at 12776 N. Kendal Drive, Miami, Florida (Store #45) opened for business.

(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” 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 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 December 28, 2019, 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 December 28, 2019 and December 29, 2018.

Revenues. Total revenue for the thirteen weeks ended December 28, 2019 increased $3,047,000 or 10.92% to $30,941,000 from $27,894,000 for the thirteen weeks ended December 29, 2018 due primarily to increased restaurant traffic and increased menu prices. Effective June 16, 2019 we increased certain menu prices for our bar offerings to target an increase to our total bar revenues of approximately 6.2% annually and effective June 23, 2019 we increased certain menu prices for our food offerings to target an increase to our total food revenues of approximately 3.4% annually, (the “2019 Price Increases”). We anticipate that total revenue for the balance of our fiscal year 2020 will increase due to increased restaurant traffic and the 2019 Price Increases. We expect that Store #19 will remain closed during the balance of our fiscal year 2020 and accordingly 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 $18,742,000 for the thirteen weeks ended December 28, 2019 as compared to $16,828,000 for the thirteen weeks ended December 29, 2018. The increase in restaurant revenue for the thirteen weeks ended December 28, 2019 as compared to restaurant revenue during the thirteen weeks ended December 29, 2018 is primarily due to increased restaurant traffic and the 2019 Price Increases. Comparable weekly restaurant food sales (for restaurants open for all of the first quarter of our fiscal year 2020 and the first quarter of our fiscal year 2019, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for the thirteen weeks ended December 28, 2019 and December 29, 2018 due to a fire on October 2, 2018) and eight restaurants owned by affiliated limited partnerships) was $1,432,000 and $1,295,000 for the thirteen weeks ended December 28, 2019 and December 29, 2018, respectively, an increase of 10.58%. Comparable weekly restaurant food sales for Company owned restaurants only was $721,000 and $642,000 for the first quarter of our fiscal year 2020 and the first quarter of our fiscal year 2019, respectively, an increase of 12.31%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only was $711,000 and $653,000 for the first quarter of our fiscal year 2020 and the first quarter of our fiscal year 2019, respectively, an increase of 8.88%. We expect restaurant revenue generated from the sale of food, including non-alcoholic beverages, at restaurants to increase throughout the balance of our fiscal year 2020 due to increased restaurant traffic and the 2019 Price Increases.

Restaurant Bar Sales. Restaurant revenue generated from the sale of alcoholic beverages at restaurants totaled $5,891,000 for the thirteen weeks ended December 28, 2019 as compared to $5,323,000 for the thirteen weeks ended December 29, 2018. The increase in restaurant revenue from the sale of alcoholic beverages at restaurants during the thirteen weeks ended December 28, 2019 is primarily due to increased restaurant traffic and the 2019 Price Increases. Comparable weekly restaurant bar sales (for restaurants open for all of the first quarter of our fiscal year 2020 and the first quarter of our fiscal year 2019, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for the thirteen weeks ended December 28, 2019 and December 29, 2018 due to a fire on October 2, 2018), and eight restaurants owned by affiliated limited partnerships) was $453,000 for the thirteen weeks ended December 28, 2019 and $410,000 for the thirteen weeks ended December 29, 2018, an increase of 10.49%. Comparable weekly restaurant bar sales for Company owned restaurants only was $207,000 and $183,000 for the first quarter of our fiscal year 2020 and the first quarter of our fiscal year 2019, respectively, an increase of 13.11%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $246,000 and $227,000 for the first quarter of our fiscal year 2020 and the first quarter of our fiscal year 2019, respectively, an increase of 8.37%. We expect restaurant revenue generated from the sale of alcoholic beverages at restaurants to increase throughout the balance of our fiscal year 2020 due to increased restaurant traffic and the 2019 Price Increases.

Package Store Sales. Revenue generated from sales of liquor and related items at package liquor stores totaled $5,707,000 for the thirteen weeks ended December 28, 2019 as compared to $5,135,000 for the thirteen weeks ended December 29, 2018, an increase of $572,000. This increase was primarily due to increased package liquor store traffic and the opening of our new Store #45 during the first quarter of our fiscal year 2020. The weekly average of same store package liquor store sales, which includes eight (8) Company owned package liquor stores, (excluding Store #19, which was closed for the thirteen weeks ended December 28, 2019 and December 29, 2018 due to a fire on October 2, 2018 and also excluding Store #45, which opened for business on October 10, 2019), was $416,000 for the thirteen weeks ended December 28, 2019 as compared to $395,000 for the thirteen weeks ended December 29, 2018, an increase of 5.31%. We expect package liquor store sales to increase throughout the balance of our fiscal year 2020 due to the opening of a new package liquor store located in Kendall, Florida during the first quarter of our fiscal year 2020.

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 December 28, 2019 increased $2,471,000 or 9.07% to $29,710,000 from $27,239,000 for the thirteen weeks ended December 29, 2018. The increase was primarily due to an expected general increase in food costs, 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 2020 for the same reasons. Operating costs and expenses decreased as a percentage of total sales to approximately 96.02% in the first quarter of our fiscal year 2020 from 97.65% in the first quarter of our fiscal year 2019.

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

Restaurant Food and Bar Sales. Gross profit for food and bar sales for the thirteen weeks ended December 28, 2019 increased to $16,209,000 from $14,427,000 for the thirteen weeks ended December 29, 2018 due primarily to the 2019 Price Increases. 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 65.80% for the thirteen weeks ended December 28, 2019 and 65.13% for the thirteen weeks ended December 29, 2018. We anticipate that our gross profit for restaurant food and bar sales will increase during our fiscal year 2020 due primarily to the 2019 Price Increases, offset by higher food costs.

Package Store Sales. Gross profit for package store sales for the thirteen weeks ended December 28, 2019 increased to $1,568,000 from $1,367,000 for the thirteen weeks ended December 29, 2018, due primarily to the opening of a new package liquor store located at 12776 N. Kendall Drive, Miami, Florida, during the thirteen weeks ended December 28, 2019. Our gross profit margin, (calculated as gross profit reflected as a percentage of package liquor store sales), for package store sales was 27.48% for the thirteen weeks ended December 28, 2019 and 26.62% for the thirteen weeks ended December 29, 2018. We anticipate that the gross profit margin for package store merchandise will decrease during our fiscal year 2020 due to higher costs and a reduction in pricing of certain package store merchandise to be more competitive.

Payroll and Related Costs. Payroll and related costs for the thirteen weeks ended December 28, 2019 increased $919,000 or 10.69% to $9,517,000 from $8,598,000 for the thirteen weeks ended December 29, 2018. Higher payroll and related costs for the thirteen weeks ended December 28, 2019 were primarily due to higher restaurant sales, which require additional payroll and related costs for employees such as cooks, bartenders and servers, and payroll for our new package liquor store in Kendall, Florida. Payroll and related costs as a percentage of total sales was 30.76% in the first quarter of our fiscal year 2020 and 30.82% of total sales in the first quarter of our fiscal year 2019.

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 December 28, 2019 increased $347,000 or 22.98% to $1,857,000 from $1,510,000 for the thirteen weeks ended December 29, 2018 due primarily to our adoption of ASC 842. We anticipate that our occupancy costs will increase throughout our fiscal year 2020 due primarily to the rent we are required to pay pursuant to the newly acquired lease agreement for our new restaurant in development to be located in Sunrise, Florida, and our adoption of ASC 842.

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 December 28, 2019 increased $134,000 or 2.38% to $5,773,000 from $5,639,000 for the thirteen weeks ended December 29, 2018. Selling, general and administrative expenses decreased as a percentage of total sales in the first quarter of our fiscal year 2020 to 18.66% as compared to 20.21% in the first quarter of our fiscal year 2019. We anticipate that our selling, general and administrative expenses will increase throughout the balance of our fiscal year 2020 due primarily to increases across all categories.

Depreciation and Amortization. Depreciation and amortization for the thirteen weeks ended December 28, 2019 increased $97,000 or 13.47% to $817,000 from $720,000 for the thirteen weeks ended December 29, 2018. As a percentage of total revenue, depreciation expense was 2.64% of revenue for the thirteen weeks ended December 28, 2019 and 2.58% of revenue in the thirteen weeks ended December 29, 2018.

Interest Expense, Net. Interest expense, net, for the thirteen weeks ended December 28, 2019 increased $19,000 to $204,000 from $185,000 for the thirteen weeks ended December 29, 2018. Interest expense, net, will increase for the balance of our fiscal year 2020 due to our borrowing of an additional $4.5 million during the first quarter of our fiscal year 2020 on the re-financing by our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, of its mortgage loan with an unrelated third party lender, increasing the principal amount borrowed from $2.72 million to $7.21 million.

Income Taxes. Income taxes for the thirteen weeks ended December 28, 2019 was $118,000 and $87,000 for the thirteen weeks ended December 29, 2018.

Net Income. Net income for the thirteen weeks ended December 28, 2019 decreased $77,000 or 7.72% to $921,000 from $998,000 for the thirteen weeks ended December 29, 2018. Net income for the thirteen weeks ended December 28, 2019 decreased when compared to the thirteen weeks ended December 29, 2018 primarily due to higher food costs and overall expenses and our adoption of ASC 842, offset by higher restaurant traffic and the 2019 Price Increases. As a percentage of sales, net income for the first quarter of our fiscal year 2020 is 2.98%, as compared to 3.58% in the first quarter of our fiscal year 2019.

Net Income Attributable to Stockholders. Net income for the thirteen weeks ended December 28, 2019 decreased $249,000 or 33.51% to $494,000 from $743,000 for the thirteen weeks ended December 29, 2018. Net income attributable to stockholders for the thirteen weeks ended December 28, 2019 decreased when compared to the thirteen weeks ended December 29, 2018 primarily due to higher food costs and overall expenses and our adoption of ASC 842, offset by higher restaurant traffic and the 2019 Price Increases. As a percentage of sales, net income for the first quarter of our fiscal year 2020 is 1.60%, as compared to 2.66% in the first quarter of our fiscal year 2019.

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 2020, we had one new restaurant location in Sunrise, Florida in the development stage and have advanced $480,000 through December 28, 2019. During the fourth quarter of our fiscal year 2019, we entered leases for two spaces adjacent to each other, to house a new “Flanigan’s Seafood Bar and Grill” as well as a “Big Daddy’s Wine and Liquors” in a shopping center in Miramar, Florida, which shopping center is currently under construction as well as lease.

Menu Price Increases and Trends

Effective June 16, 2019 we increased menu prices for our bar offerings to target an increase to our bar revenues of approximately 6.2% annually and effective June 23, 2019 we increased menu prices for our food offerings to target an increase to our food revenues of approximately 3.4% annually to offset higher food costs and higher overall expenses. Prior to these increases, we previously raised menu prices in the fourth quarter of our fiscal year 2017. During the next twelve months, if demand for our restaurant and bar offerings remain substantially similar to the demand during our fiscal year 2019, (including a lack of restaurant and bar sales from Store #19 which we expect will be closed for our entire fiscal year 2020), of which there can be no assurance, we expect that restaurant and bar sales in our restaurants as well as gross profit for food and bar operations (including a lack of restaurant and bar sales from Store #19 which we expect will be closed for our entire fiscal year 2020) should increase as a result of the 2019 Price Increases, offset partially by higher food costs. We anticipate that our package liquor store sales will continue to increase, primarily due to our recently opened (October, 2019) package liquor store in Kendall, Florida, (excluding package liquor store sales from Store #19, which we expect will be closed for our entire fiscal year 2020 due to the Store #19 Closure), while gross profit margin for package liquor store sales will, in all likelihood, decrease.

In addition to the rebuilding of Store #19, which was closed in October 2018 due to a fire, we have a new “Flanigan’s Seafood Bar and Grill” restaurant in Sunrise, Florida in the development stage. During the fourth quarter of our fiscal year 2019, we entered a lease for space to house a new “Flanigan’s Seafood Bar and Grill” in a shopping center in Miramar, Florida, which shopping center is currently under construction. We continue to search for new locations to open additional restaurants.

We are not actively searching for locations for the operation of new package liquor stores, but when our attempt to expand “The Whale’s Rib” restaurant concept in Miami, Florida was abandoned, we decided that the space we had targeted for the “The Whales Rib” would be ideal for the operation of a package liquor store and during the fourth quarter of our fiscal year 2018, we received governmental approval to operate a package liquor store at that location. The new package liquor store (Store #45) opened for business in October, 2019. During the fourth quarter of our fiscal year 2019, we entered a lease to house a new “Big Daddy’s Wine & Liquors” package liquor store in space adjacent to where we are planning a new “Flanigan’s Seafood Bar and Grill”, restaurant in a to be constructed shopping center in Miramar, Florida.

Liquidity and Capital Resources

We fund our operations through cash from operations. As of December 28, 2019, we had cash of approximately $19,122,000, an increase of $5,450,000 from our cash balance of $13,672,000 as of September 28, 2019. During the first quarter of our fiscal year 2020, our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, re-financed its mortgage loan with an unrelated third party lender, increasing the principal amount borrowed from $2.72 million to $7.21 million. 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 2020 and 2019.

We did not declare or pay a cash dividend on our capital stock in the first quarter of our fiscal year 2020 or the first quarter of our fiscal year 2019. 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 December 28, 2019, we acquired property and equipment and construction in progress of $933,000, (of which $29,000 was deposits recorded in other assets and $2,000 was purchase deposits transferred to construction in progess as of September 28, 2019), including $295,000 for renovations to two (2) limited partnership owned restaurants and three (3) Company owned restaurants. During the thirteen weeks ended December 29, 2018, we acquired property and equipment and construction in progress of $1,641,000, (of which $231,000 was deposits recorded in other assets and $213,000 was purchase deposits transferred to construction in progress as of September 29, 2018), including $100,000 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 2020 to be approximately $750,000, excluding construction/renovations to Store #19 (our combination package liquor store and restaurant which is being rebuilt due to damages caused by a fire) and Store #85 (our Sunrise, Florida restaurant location in development), $295,000 of which has been spent through December 28, 2019.

Long Term Debt

As of December 28, 2019, we had long term debt of $18,120,000, as compared to $15,220,000 as of December 29, 2018, and $13,080,000 as of September 28, 2019. Our long term debt increased as of December 28, 2019 as compared to September 28, 2019 due to the re-financing of its mortgage loan by our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, increasing the principal amount borrowed from $2.72 million to $7.21 million and $1,281,000 for financed insurance premiums, less any payments made on account thereof. As of December 28, 2019, we are in compliance with the covenants of all loans with our lender.

Construction Contracts

a. 2505 N. University Drive, Hollywood, Florida (Store #19)

During our fiscal year 2018 and prior to its being closed in the first quarter of our fiscal year 2019 due to damages caused by a fire, we entered into an agreement with a third party unaffiliated general contractor for design and development services for the construction of a new building (the “New Building”) on a parcel of real property which we own and which is adjacent to the real property where our combination package liquor store and restaurant located at 2505 N. University Drive, Hollywood, Florida, (Store #19) operated until it was closed in October, 2018 due to damages caused by a fire for a total contract price of for a total contract price of $127,000 (the “$127,000 Contract”). We plan to re-locate our package liquor store at the property to the New Building. During the term of the $127,000 Contract, we agreed to change orders which had the effect of increasing the total contract price of the same to $138,000, and during the second quarter of our fiscal year 2019, we paid the balance of the total contract price of the $127,000 Contract, in the amount of $25,000. During the first quarter of our fiscal year 2020, we agreed upon changes to the $127,000 Contract for additional design and development services for the construction of the New Building which had the effect of increasing the total contract price of the same by $10,000 to $148,000, of which $6,000 has been paid.

During the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated 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 2018 due to damages caused by a fire, of which $27,000 has been paid. Additionally, during the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated general contractor for site work 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, of which $-0- has been paid.

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

During the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated 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, (the $122,000 Contract”). During the first quarter of our fiscal year 2020, we agreed upon changes to the $122,000 Contract for additional design and development services which had the effect of increasing the total contract price of the same by $18,000 to $140,000, of which $97,000 has been paid.

Purchase Commitments

In order to fix the cost and ensure adequate supply of baby back ribs for our restaurants, on November 5, 2019, we entered into a purchase agreement with our current rib supplier, whereby we agreed to purchase approximately $5,314,000 of baby back ribs during calendar year 2020 from this vendor at a fixed cost.

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

Purchase of Limited Partnership Interest

During the thirteen weeks ended December 28, 2019 and the thirteen weeks ended December 29, 2018, we did not purchase any limited partnership interests.

Working Capital

The table below summarizes the current assets, current liabilities, and working capital for our fiscal quarters ended December 28, 2019, December 29, 2018 and our fiscal year ended September 28, 2019.

Our working capital increased during our fiscal quarter ended December 28, 2019 from our working capital for our fiscal quarter ended December 29, 2018 and our fiscal year ended September 28, 2019 due to the cash received from the re-financing by our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, of a mortgage loan, increasing the principal amount from $2.72 million to $7.21 million, offset by $327,000 due to our adoption of ASC 842.

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 funds borrowed on our term loan will adequately fund operations, debt reductions and planned capital expenditures throughout our fiscal year 2020.

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. To date, inflation has not had a material impact on our operating results, but this circumstance may change in the future if food and fuel costs continue to rise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We do not ordinarily hold market risk sensitive instruments for trading purposes and as of December 28, 2019 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 14 “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 September 28, 2019, 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 December 28, 2019, we had two variable rate debt instruments outstanding that are impacted by changes in interest rates. 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 December 28, 2019, 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 December 28, 2019, the interest rate swap agreement is an effective hedging agreement and the fair value was not material

At December 28, 2019, 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.

ITEM 4. CONTROLS AND PROCEDURES

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 December 28, 2019, 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 December 28, 2019.

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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See “Litigation” on page 12 of this Report and Item 1 and Item 3 to Part 1 of the Annual Report on Form 10-K for the fiscal year ended September 28, 2019 for a discussion of other legal proceedings resolved in prior years.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchase of Company Common Stock

During the thirteen weeks ended December 28, 2019 and December 29, 2018, we did not purchase any shares of our common stock. As of December 28, 2019, we still have authority to purchase 65,414 shares of our common stock under the discretionary plan approved by the Board of Directors at its meeting on May 17, 2007.

ITEM 6. EXHIBITS

The following exhibits are filed with this Report:

List of XBRL documents as exhibits 101

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.