FLANIGANS ENTERPRISES INC - Quarter Report: 2020 June (Form 10-Q)

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

FORM 10-Q

For the quarterly period ended June 27, 2020

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 August 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 OPERATIONS

(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 OPERATIONS

(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

JUNE 27, 2020 (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

JUNE 27, 2020 (UNAUDITED) AND SEPTEMBER 28, 2019

(in thousands)

(Continued)

LIABILITIES AND STOCKHOLDERS’ EQUITY

See accompanying notes to unaudited condensed consolidated financial statements.

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE THIRTEEN WEEKS ENDED JUNE 27, 2020 AND JUNE 29, 2019

See accompanying notes to unaudited condensed consolidated financial statements.

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THIRTY NINE WEEKS ENDED JUNE 27, 2020 AND JUNE 29, 2019

(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 THIRTY-NINE WEEKS ENDED JUNE 27, 2020 AND JUNE 29, 2019

(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

JUNE 27, 2020

(1) BASIS OF PRESENTATION:

The accompanying condensed consolidated financial information for the periods ended June 27, 2020 and June 29, 2019 are unaudited. Financial information as of September 28, 2019 has been derived from the audited financial statements of Flanigan’s Enterprises Inc., a Florida corporation, together with its subsidiaries, (the “Company”, “we”, “our”, “ours”, and “us” as the context requires), 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. As of June 27, 2020 and June 29, 2019, no stock options were outstanding.

(3) RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

Adopted

Effective September 29, 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.

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 that we believe will have a material effect on our financial statements.

(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

On November 27, 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.

(b) Financed Insurance Premiums

During the thirty-nine weeks ended June 27, 2020, we bound and financed through an unrelated third party lender the premiums on the following property, general liability, excess liability and terrorism insurance policies:

(i)       For the policy year beginning December 30, 2019, our general liability insurance, excluding limited partnerships, is a one (1) year policy, including automobile and excess liability coverage. The annual premium for this insurance coverage is $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, including excess liability coverage. The annual premium for this insurance coverage is $459,000;

(iii)       For the policy year beginning December 30, 2019, our property insurance is a one (1) year policy and the annual premium for this insurance coverage is $561,000; and

(iv)       For the policy year beginning December 30, 2019, our excess liability insurance is a one (1) year policy and the annual premium for this insurance coverage is $360,000.

(v)       For the policy year beginning December 30, 2019, our terrorism insurance is a one (1) year policy and the annual premium for this insurance coverage is $12,000.

Of the $1,810,000 annual premium amounts, which includes coverage for our franchises which are not included in our consolidated financial statements, we financed $1,656,000 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 June 27, 2020, the aggregate principal balance owed to the third party lender from the financing of our insurance policies is $729,000, excluding amounts which are reimbursed by our franchises for insurances covering their operations, but including the annual premiums for boiler insurance ($2,000) and directors and officers liability insurance ($34,000), which were added to the finance agreement during the third quarter of our fiscal year 2020 and are financed over the balance of the term of the same.

(c) Paycheck Protection Loans

During the third quarter of our fiscal year 2020, we, certain of the entities owning the limited partnership stores (the “LP’s”), franchised stores (the “Franchisees”), 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 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 $13.1 million, (the “PPP Loans”), of which approximately: (i) $5.9 million was loaned to us ; (ii) $4.1 million was loaned to 8 of the LP’s ; (iii) $2.6 million was loaned to 5 of the Franchisees; and (iv) $0.5 million was loaned to the Managed Store. The PPP Loans to the Franchisees and the Managed Store are not included in our consolidated financial statements.

The PPP Loans, which are in the form of Notes issued by each of the Borrowers, mature five years from the date of funding (dates ranging from May 5, 2025 to May 11, 2025) and bear interest at a rate of 1.00% per annum, payable monthly commencing approximately six months from the date of issuance of the Notes (issuance dates ranging from April 30, 2020 to May 6, 2020). The Notes may be prepaid by the applicable Borrower at any time prior to maturity with no prepayment penalties. Proceeds from the PPP Loans will be available to the respective Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, including rent and interest on mortgages and other debt obligations incurred before February 15, 2020. Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent the proceeds of the PPP Loans are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. No assurance can be given that the Borrowers will obtain forgiveness of the PPP Loans in whole or in part.

With respect to any portion of any of the PPP Loans that is not forgiven under the terms of the PPP, such amounts will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the applicable PPP Note and cross-defaults on any other loan with the Lender or other creditors.

(6) COMMITMENTS AND CONTINGENCIES:

Construction Contracts

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

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 $62,000 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 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, of which $-0- has been paid through June 27, 2020.

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

During the third quarter of our fiscal year 2019, we also 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. 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 by $18,000 to $140,000, of which $97,000 has been paid through June 27, 2020.

Leases

To conduct certain of our operations, we lease restaurant and package liquor store space in South Florida from unrelated third parties. Our leases have remaining lease terms of up to 10 years and, some of which include options to renew and extend the lease terms for up to an additional 30 years. We presently intend to renew some of the extension options available to us and for purposes of computing the right-of-use assets and lease liabilities required by ASC 842, we have incorporated into all lease terms which may be extended, an additional term of the lesser of (i) the amount of years the lease may be extended; or (ii) 15 years.

Following adoption of ASC 842, common area maintenance and property taxes are not considered to be lease components.

The components of lease expense are as follows:

Total loan costs recorded as rent and other occupancy costs include fixed operating lease costs and variable lease costs. Variable lease costs include certain expenses, such as CAM costs and real estate taxes. In addition to the above costs, variable lease costs also include amounts based on a percentage of gross sales in excess of specified levels and are recognized when probable and are not included in determining the present value of our lease liability.

The components of lease costs:

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) CORONAVIRUS PANDEMIC

The novel coronavirus pandemic and related “shelter-in-place” orders and other governmental mandates (“COVID 19”) adversely affected our restaurant operations and financial results through June 27, 2020 and will, in all likelihood continue to adversely affect our restaurant operations and financial results for the foreseeable future. Due to COVID-19, from mid-March 2020 through mid-May 2020, we ceased dine-in service at all of our restaurants, limiting service to take-out and delivery only, ceased the sale of alcoholic beverages at our restaurants and implemented reduced hours at our retail package liquor stores. From mid-May 2020 through the beginning of July, 2020, there was a gradual elimination of restrictions on our restaurant operations, permitting us to, among other things, operate at up to 50% capacity (depending on the location of the restaurant), but with no bar service and increased operating hours at our package liquor stores. Since the beginning of July, 2020, we ceased dine-in service at all of our Miami-Dade County, Florida restaurants, except for outdoor seating (2 Company owned and 6 limited partnership owned restaurants), and continue to operate at up to 50% capacity at all other of our restaurants, but with no bar service. Due to COVID 19, we implemented (i) certain cost cutting measures including material layoffs at our restaurants and reduced corporate personnel salaries; and (ii) a number of changes to our operations such as the establishment of an in-house delivery service and an adjustment to our traditional staffing model to meet customer demand.

From the end of March, 2020 through mid-May, 2020, 525 restaurant personnel were laid off, representing total annualized salary savings of approximately $1.04 million. In addition, the salaries of all our non-executive corporate office personnel were reduced by 20%, the base salaries of our Chief Operating Officer and Chief Financial Officer were each reduced by 50% and our Chief Executive Officer has waived his base salary. During the third quarter of our fiscal year 2020, we, certain of the entities owning the limited partnership stores (the “LP’s”), franchised stores (the “Franchisees”) 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 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 $13.1 million, (the “PPP Loans”), of which approximately: (i) $5.9 million was loaned to us ; (ii) $4.1 million was loaned to 8 of the LP’s ; (iii) $2.6 million was loaned to 5 of the Franchisees; and (iv) $0.5 million was loaned to the Managed Store. The PPP Loans to the Franchisees and the Managed Store are not included in our consolidated financial statements. Due to our receipt of the PPP Loans, we reversed certain cost cutting measures, including reinstating employees laid off at our restaurants in anticipation of resuming dine-in service and restoring corporate personnel salaries.

The PPP Loans, which are in the form of Notes issued by each of the Borrowers, mature five years from the date of funding (dates ranging from May 5, 2025 to May 11, 2025), and bear interest at a rate of 1.00% per annum, payable monthly commencing approximately six months from the date of issuance of the Notes (issuance dates ranging from April 30, 2020 to May 6, 2020). The Notes may be prepaid by the applicable Borrower at any time prior to maturity with no prepayment penalties. Proceeds from the PPP Loans will be available to the respective Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, including rent and interest on mortgages and other debt obligations incurred before February 15, 2020. Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent the proceeds of the PPP Loans are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. No assurance can be given that the Borrowers will obtain forgiveness of the PPP Loan in whole or in part.

With respect to any portion of any of the PPP Loans that is not forgiven under the terms of the PPP, such amounts will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the applicable PPP Note and cross-defaults on any other loan with the Lender or other creditors.

We do not believe COVID-19 has had a material adverse effect on our access to supplies or labor, although there can be no assurance that there will not be a significant adverse impact on our supply chain or access to labor in the future. We are actively monitoring our food suppliers to determine how they are managing their operations to mitigate supply flow and food safety risks. To ensure we mitigate potential supply availability risk, we are building additional inventory back stock levels when appropriate and we have also identified alternative supply sources in key product categories including but not limited to food, sanitation and safety supplies.

Prior to obtaining the PPP Loans, we were in compliance with the financial covenants contained in our five (5) loans with our unrelated third party institutional lender (the “Institutional Lender”) under which as of June 27, 2020, we owe in the aggregate approximately $12,600,000 (the “Institutional Loans”). We have determined that as of June 27, 2020, we are not in compliance with our financial covenants contained in each of the Institutional Loans related to the Rent Adjusted Funded Debt to EBITDA Ratio because our consolidated debt as of June 27, 2020 increased due to the repayment obligations caused by our repayment obligations under the PPP Loans (the “Covenant Breach’). The Institutional Loans each contain a cross-default provision. Under these cross-default provisions, a default under an Institutional Loan may constitute a ‘default’ under all Institutional Loans. Pursuant to the terms of the Institutional Loans, a default, including but not limited to the Covenant Breach, grants the Institutional Lender the right to exercise certain remedies under the Institutional Loans, including the right to accelerate the indebtedness owed by us to the Institutional Lender thereunder. On August 10, 2020, we received a written waiver of the Covenant Breach from the Institutional Lender, which, among other things, waives the Covenant Breach through June 30, 2021.

There can be no assurances that we will be in compliance with our financial covenants thereafter due to, among other things, that our results of operations will likely continue to be materially impacted by the COVID-19 pandemic. Absent a waiver, failure to be in compliance with our financial covenants would constitute a default under the Institutional Loans with our Institutional Lender when reported. Such a default, if not cured or waived, would allow the Institutional Lender to accelerate the maturity of the indebtedness we owe under the Institutional Loans, making it due and payable at the time. If maturity of the Institutional Loans were accelerated, it would have a material adverse impact on our consolidated financial statements and results of operations.

(8)        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 and thirty nine weeks ended June 27, 2020 and June 29, 2019, 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 has 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.

(9)       SUBSEQUENT EVENTS:

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

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

CAUTIONARY NOTE REGARDING FORWARD LOOKING 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 September 28, 2019. 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 June 27, 2020, Flanigan’s Enterprises, Inc., a Florida corporation, together with its subsidiaries (“we”, “our”, “ours” and “us” as the context requires), (i) operates 27 units, consisting of restaurants, package liquor stores and combination restaurants/package liquor stores that we either own or have operational control over and partial ownership in; and (ii) franchises an additional five units, consisting of two restaurants (one of which we operate) and three combination restaurants/package liquor stores. The table below provides information concerning the type (i.e. restaurant, package liquor store or combination restaurant/package liquor store) and ownership of the units (i.e. whether (i) we own 100% of the unit; (ii) the unit is owned by a limited partnership of which we are the sole general partner and/or have invested in; or (iii) the unit is franchised by us), as of June 27, 2020 and as compared to June 29, 2019. 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.

(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.

The novel coronavirus pandemic and related “shelter-in-place” orders and other governmental mandates (“COVID 19”) has adversely affected and will, in all likelihood continue to adversely affect our restaurant operations and financial results for the foreseeable future. Due to COVID-19, from mid-March 2020 through mid-May 2020, we ceased dine-in service at all of our restaurants, limiting service to take-out and delivery only, ceased the sale of alcoholic beverages at our restaurants and implemented reduced hours at our retail package liquor stores. From mid-May 2020 through the beginning of July, 2020, there was a gradual elimination of restrictions on our restaurant operations, permitting us to, among other things, operate at up to 50% capacity (depending on the location of the restaurant), but with no bar service and increased operating hours at our package liquor stores. Since the beginning of July, 2020, we ceased dine-in service at all of our Miami-Dade County, Florida restaurants, except for outdoor seating, (2 Company owned and 6 limited partnership owned restaurants), and continue to operate at up to 50% capacity at all other of our restaurants, but with no bar service.

Due to COVID 19, we implemented (i) certain cost cutting measures including material layoffs at our restaurants and reduced corporate personnel salaries; and (ii) a number of changes to our operations such as the establishment of an in-house delivery service and an adjustment to our traditional staffing model to meet customer demand. We have been in regular contact with our suppliers and while to date we have not experienced significant disruptions in our supply chain, we could see future disruptions should the impacts of COVID 19 extend for a considerable amount of time. To support our employees, we have implemented work from home support, increased sanitization of high touch, high traffic areas in our restaurants, retail package liquor stores and corporate offices, provided personal protective equipment for our employees and increased the frequency of personal hygiene practices. From the end of March, 2020 through mid-May, 2020, 525 restaurant personnel were laid off, representing total annualized salary savings of approximately $1.04 million. In addition, the salaries of all our non-executive corporate office personnel were reduced by 20%, the base salaries of our Chief Operating Officer and Chief Financial Officer were each reduced by 50% and our Chief Executive Officer has waived his base salary. During the third quarter of our fiscal year 2020 and due to our receipt of the PPP Loans, we reversed most cost cutting measures, including reinstating employees laid off at our restaurants in anticipation of resuming dine-in service and restoring corporate personnel and executive salaries.

We do not believe COVID-19 has had a material adverse effect on our access to supplies or labor, although there can be no assurance that there will not be a significant adverse impact on our supply chain or access to labor in the future. We are actively monitoring our food suppliers to determine how they are managing their operations to mitigate supply flow and food safety risks. To ensure we mitigate potential supply availability risk, we are building additional inventory back stock levels when appropriate and we have also identified alternative supply sources in key product categories including but not limited to food, sanitation and safety supplies.

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 June 27, 2020, 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 June 27, 2020 and June 29, 2019.

Revenues. Total revenue for the thirteen weeks ended June 27, 2020 decreased $5,849,000 or 19.82% to $23,663,000 from $29,512,000 for the thirteen weeks ended June 29, 2019. The decrease in total revenue was due primarily to the negative impact of COVID 19 on operations. Due to COVID-19, from mid-March 2020 through mid-May 2020, we ceased dine-in service at all of our restaurants, limiting service to take-out and delivery only, ceased the sale of alcoholic beverages at our restaurants and implemented reduced hours at our retail package liquor stores. From mid-May 2020 through the beginning of July, 2020, there was a gradual elimination of restrictions on our restaurant operations, permitting us to, among other things, operate at up to 50% capacity (depending on the location of the restaurant), but with no bar service and increased operating hours at our package liquor stores. Since the beginning of July, 2020, we ceased dine-in service at all of our Miami-Dade County, Florida restaurants, except for outdoor seating and continue to operate at up to 50% capacity at all other of our restaurants, but with no bar service. The negative effects of COVID 19 on our operations was partially offset by the 2019 Price Increases (defined below) and increased package liquor store sales. 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 expect that total revenue for the balance of our fiscal year 2020 will decrease due to our operations being adversely impacted by COVID 19. 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 (food sales) totaled $14,514,000 for the thirteen weeks ended June 27, 2020 as compared to $18,447,000 for the thirteen weeks ended June 29, 2019. The decrease in restaurant food sales for the thirteen weeks ended June 27, 2020 as compared to restaurant food sales during the thirteen weeks ended June 29, 2019 is attributable to the negative effects of COVID 19 on our operations. Comparable weekly restaurant food sales (for restaurants open for all of the third quarter of our fiscal year 2020 and the third 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 June 27, 2020 and June 29, 2019 due to a fire on October 2, 2018) and eight restaurants owned by affiliated limited partnerships) was $1,112,000 and $1,415,000 for the thirteen weeks ended June 27, 2020 and June 29, 2019, respectively, a decrease of 21.41%. Comparable weekly restaurant food sales for Company owned restaurants only was $547,000 and $717,000 for the third quarter of our fiscal year 2020 and the third quarter of our fiscal year 2019, respectively, a decrease of 23.71%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only was $565,000 and $698,000 for the third quarter of our fiscal year 2020 and the third quarter of our fiscal year 2019, respectively, a decrease of 19.05%. We expect that restaurant food sales, including non-alcoholic beverages, for the balance of our fiscal year 2020 will decrease due to the negative effects of COVID 19 on our operations.

Restaurant Bar Sales. Restaurant revenue generated from the sale of alcoholic beverages, (bar sales), at restaurants totaled $1,630,000 for the thirteen weeks ended June 27, 2020 as compared to $5,652,000 for the thirteen weeks ended June 29, 2019. The decrease in restaurant bar sales during the thirteen weeks ended June 27, 2020 as compared to restaurant bar sales during the thirteen weeks ended June 29, 2019 is attributable to the negative effects of COVID 19 on our operations. Comparable weekly restaurant bar sales (for restaurants open for all of the third quarter of our fiscal year 2020 and the third 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 June 27, 2020 and June 29, 2019 due to a fire on October 2, 2018), and eight restaurants owned by affiliated limited partnerships) was $125,000 for the thirteen weeks ended June 27, 2020 and $435,000 for the thirteen weeks ended June 29, 2019, a decrease of 71.26%. Comparable weekly restaurant bar sales for Company owned restaurants only was $50,000 and $200,000 for the third quarter of our fiscal year 2020 and the third quarter of our fiscal year 2019, respectively, a decrease of 75.00%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $75,000 and $235,000 for the third quarter of our fiscal year 2020 and the third quarter of our fiscal year 2019, respectively, a decrease of 68.09%. We expect that restaurant bar sales for the balance of our fiscal year 2020 will decrease due to the negative effects of COVID 19 on our operations, including temporary closure of restaurant bars, except for dine-in service and minimal sales with take-out service.

Package Store Sales. Revenue generated from sales of liquor and related items at package liquor stores totaled $7,099,000 for the thirteen weeks ended June 27, 2020 as compared to $4,752,000 for the thirteen weeks ended June 29, 2019, an increase of $2,347,000. This increase was primarily due to increased package liquor store traffic despite COVID-19 and because of the opening of our new retail package liquor store (Store #45) located in Kendall, Florida 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 June 27, 2020 and June 29, 2019 due to a fire on October 2, 2018 and also excluding Store #45, which opened for business on October 10, 2019), was $504,000 for the thirteen weeks ended June 27, 2020 as compared to $366,000 for the thirteen weeks ended June 29, 2019, an increase of 37.70%. We expect package liquor store sales to continue to increase throughout the balance of our fiscal year 2020 as compared to 2019 due to what appears to be an increased demand for package liquor store products resulting from COVID 19 and the opening of our 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 June 27, 2020 decreased $3,173,000 or 11.51% to $24,395,000 from $27,568,000 for the thirteen weeks ended June 29, 2019. The decrease was primarily due to cost cutting measures we have implemented since mid-March 2020 to reduce and/or control costs because of the negative effects of COVID 19 on our operations. We expect our operating costs and expenses will decrease for the balance of our fiscal year 2020 due to the cost cutting measures. Operating costs and expenses increased as a percentage of total sales to approximately 103.09% in the third quarter of our fiscal year 2020 from 93.41% in the third quarter of our fiscal year 2019.

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 June 27, 2020 decreased to $10,756,000 from $15,718,000 for the thirteen weeks ended June 29, 2019. Our gross profit margin for restaurant food and bar sales (calculated as gross profit reflected as a percentage of restaurant food and bar sales), was 66.63% for the thirteen weeks ended June 27, 2020 and 65.22% for the thirteen weeks ended June 29, 2019. Gross profit margin for restaurant food and bar sales increased during the thirteen weeks ended June 27, 2020 when compared to the thirteen weeks ended June 29, 2019 due to the inclusion of a 10% take-out charge in restaurant food sales, offset by the negative effects of COVID 19 on our restaurant bar operations, the higher gross profit margin item and higher food costs. We expect that our gross profit margin for restaurant food and bar sales will increase during the balance of our fiscal year 2020 for the same reasons.

Package Store Sales. Gross profit for package liquor store sales for the thirteen weeks ended June 27, 2020 increased to $1,856,000 from $1,333,000 for the thirteen weeks ended June 29, 2019, due primarily to increased package liquor store traffic which we believe has been caused by COVID-19, as well as the opening of our new Store #45 during the first quarter of our fiscal year 2020. Our gross profit margin, (calculated as gross profit reflected as a percentage of package liquor store sales), for package store sales was 26.14% for the thirteen weeks ended June 27, 2020 and 28.05% for the thirteen weeks ended June 29, 2019. We anticipate that the gross profit margin for package liquor 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 June 27, 2020 decreased $1,192,000 or 13.09% to $7,913,000 from $9,105,000 for the thirteen weeks ended June 29, 2019. Lower payroll and related costs for the thirteen weeks ended June 27, 2020 were due to certain cost cutting measures including material layoffs at our restaurants and reduced corporate personnel salaries from mid-March 2020 through mid-May, 2020 and thereafter due to an adjustment to our traditional staffing model to meet customer demand, increased by payroll for our package liquor store in Kendall, Florida which opened for business during the first quarter of our fiscal year 2020. We anticipate that until our restaurant operations are restored to pre-COVID 19 levels, of which there can be no assurance, payroll and related costs will be less than our costs from 2019. Payroll and related costs as a percentage of total sales was 33.44% in the third quarter of our fiscal year 2020 and 30.85% of total sales in the third 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 June 27, 2020 increased $112,000 or 7.31% to $1,645,000 from $1,533,000 for the thirteen weeks ended June 29, 2019 due primarily to our adoption of ASC 842. We anticipate that our occupancy costs will increase throughout our fiscal year 2020 as compared to 2019 due primarily to 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 June 27, 2020 decreased $924,000 or 18.01% to $4,206,000 from $5,130,000 for the thirteen weeks ended June 29, 2019. Selling, general and administrative expenses increased as a percentage of total sales in the third quarter of our fiscal year 2020 to 17.77% as compared to 17.38% in the third quarter of our fiscal year 2019. We anticipate that until our operations are restored to pre-COVID 19 levels, of which there can be no assurance, our selling, general and administrative expenses will be less than our expenses from 2019, offset by increases in expenses across all categories.

Depreciation and Amortization. Depreciation and amortization expense for the thirteen weeks ended June 27, 2020 increased $27,000 or 3.46% to $808,000 from $781,000 from the thirteen weeks ended June 29, 2019. As a percentage of total revenue, depreciation and amortization expense was 3.41% of revenue in the thirteen weeks ended June 27, 2020 and 2.65% of revenue in the thirteen weeks ended June 29, 2019.

Interest Expense, Net. Interest expense, net, for the thirteen weeks ended June 27, 2020 increased $21,000 to $196,000 from $175,000 for the thirteen weeks ended June 29, 2019. 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 and our borrowing of an additional $10.0 million during the third quarter of our fiscal year 2020 on the PPP Loans.

Income Taxes. Income tax expense for the thirteen weeks ended June 27, 2020 was a benefit of $53,000, as compared to an expense of $309,000 for the thirteen weeks ended June 29, 2019. The income tax expense for the thirteen weeks ended June 27, 2020 is based upon a revised COVID-19 estimated annual net income for our fiscal year 2020.

Net Income (Loss). Net income for the thirteen weeks ended June 27, 2020 decreased to a loss of $863,000 from net income of $1,476,000 for the thirteen weeks ended June 29, 2019. Net income for the thirteen weeks ended June 27, 2020 decreased when compared to the thirteen weeks ended June 29, 2019 due to the negative effects of COVID 19 on our operations, our adoption of ASC 842, higher food costs and overall expenses, offset by our implementation of the cost cutting measures and the 2019 Price Increases. As a percentage of sales, net income for the third quarter of our fiscal year 2020 is (3.65%), as compared to 5.00% in the third quarter of our fiscal year 2019.

Net Income (Loss) Attributable to Stockholders. Net income attributable to stockholders for the thirteen weeks ended June 27, 2020 decreased to a loss of $455,000 from net income of $968,000 for the thirteen weeks ended June 29, 2019. Net income attributable to stockholders for the thirteen weeks ended June 27, 2020 decreased when compared to the thirteen weeks ended June 29, 2019 primarily due to the negative effects of COVID 19 on our operations, our adoption of ASC 842, higher food costs and overall expenses, offset by our implementation of the cost cutting measures and the 2019 Price Increases. As a percentage of sales, net income for the third quarter of our fiscal year 2020 is (1.92%), as compared to 3.28% in the third quarter of our fiscal year 2019.

Comparison of Thirty Nine Weeks Ended June 27, 2020 and June 29, 2019.

Revenues. Total revenue for the thirty-nine weeks ended June 27, 2020 decreased $2,410,000 or 2.77% to $84,732,000 from $87,142,000 for the thirty-nine weeks ended June 29, 2019. The decrease in total revenue for the thirty-nine weeks ended June 27, 2020 as compared to the thirty-nine weeks ended June 29, 2019 was primarily due to the negative effects of COVID-19 on our operations, offset by increased restaurant traffic prior to mid-March, 2020 and the 2019 Price Increases. From mid-March 2020 through mid-May 2020, we ceased dine-in service at all of our restaurants, limiting service to take-out and delivery only, ceased the sale of alcoholic beverages at our restaurants and implemented reduced hours at our retail package liquor stores. From mid-May 2020 through the beginning of July, 2020, there was a gradual elimination of restrictions on our restaurant operations, permitting us to, among other things, operate at up to 50% capacity (depending on the location of the restaurant), but with no bar service and increased operating hours at our package liquor stores. Since the beginning of July, 2020, we ceased dine-in service at all of our Miami-Dade County, Florida restaurants, except for outdoor seating and continue to operate at up to 50% capacity at all other of our restaurants, but with no bar service. We expect that total revenue for the balance of our fiscal year 2020 will decrease due to the negative effects of COVID 19 on our operations. 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 (food sales) totaled $51,469,000 for the thirty-nine weeks ended June 27, 2020 as compared to $53,494,000 for the thirty-nine weeks ended June 29, 2019. The decrease in restaurant food sales for the thirty-nine weeks ended June 29, 2020 as compared to restaurant food sales during the thirty-nine weeks ended June 29, 2019 is primarily due the negative effects of COVID 19 on our operations, offset by increased restaurant traffic prior to mid-March 2020 and the 2019 Price Increases. Comparable weekly restaurant food sales (for restaurants open for all thirty-nine weeks of our fiscal years 2020 and 2019, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for the thirty-nine weeks ended June 27, 2020 and June 29, 2019 due to a fire on October 2, 2018) and eight restaurants owned by affiliated limited partnerships) was $1,310,000 and $1,370,000 for the thirty-nine weeks ended June 27, 2020 and June 30, 2019, respectively, a decrease of 4.38%. Comparable weekly restaurant food sales for Company owned restaurants only was $660,000 and $693,000 for the thirty-nine weeks of our fiscal years 2020 and 2019, respectively, a decrease of 4.76%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only was $650,000 and $677,000 for the thirty-nine weeks of our fiscal years 2020 and 2019, respectively, a decrease of 3.40%. We expect that restaurant food sales, including non-alcoholic beverages, for the balance of our fiscal year 2020 will decrease when compared to our fiscal year 2019 due to the negative effects of COVID 19 on our operations.

Restaurant Bar Sales. Restaurant revenue generated from the sale of alcoholic beverages, (bar sales), at restaurants totaled $12,836,000 for the thirty-nine weeks ended June 27, 2020 as compared to $16,720,000 for the thirty-nine weeks ended June 29, 2019. The decrease in restaurant bar sales for the thirty-nine weeks ended June 29, 2020 as compared to restaurant bar sales during the thirty-nine weeks ended June 29, 2019 is primarily due the negative effects of COVID 19 on our operations, offset by increased restaurant traffic prior to mid-March 2020 and the 2019 Price Increases. Comparable weekly restaurant bar sales (for restaurants open for all thirty-nine weeks of our fiscal years 2020 and 2019, which consists of nine restaurants owned by us, (excluding Store #19 which was closed for the thirty-nine weeks ended June 27, 2020 and June 29, 2019 due to a fire on October 2, 2018) and eight restaurants owned by affiliated limited partnerships) was $329,000 and $429,000 for the thirty-nine weeks ended June 27, 2020 and June 30, 2019, respectively, a decrease of 23.31%. Comparable weekly restaurant bar sales for Company owned restaurants only was $149,000 and $196,000 for the thirty-nine weeks of our fiscal years 2020 and 2019, respectively, a decrease of 23.98%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $180,000 and $233,000 for the thirty-nine weeks of our fiscal years 2020 and 2019, respectively, a decrease of 22.75%. We expect that restaurant bar sales for the balance of our fiscal year 2020 will decrease significantly due to the negative effects of COVID 19 on our operations.

Package Store Sales. Revenue generated from sales of liquor and related items at package liquor stores totaled $18,833,000 for the thirty-nine weeks ended June 27, 2020 as compared to $14,979,000 for the thirty-nine weeks ended June 29, 2019, an increase of $3,854,000. This increase was primarily due to increased package liquor store traffic despite COVID-19 and because of the opening of our new retail package liquor store (Store #45) located in Kendall, Florida 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 thirty-nine weeks ended June 27, 2020 and June 29, 2019 due to a fire on October 2, 2018 and also excluding Store #45, which opened for business on October 10, 2019), was $452,000 for the thirty-nine weeks ended June 27, 2020 as compared to $384,000 for the thirty-nine weeks ended June 29, 2019, an increase of 17.71%. We expect package liquor store sales to continue to increase throughout the balance of our fiscal year 2020 as compared to 2019 due to what appears to be an increased demand for package liquor store products resulting from COVID 19 and the opening of our 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 thirty-nine weeks ended June 27, 2020 increased $63,000 or 0.08% to $82,716,000 from $82,653,000 for the thirty-nine weeks ended June 29, 2019. The minimal increase was primarily due to cost cutting measures we have implemented since mid-March 2020 to reduce and/or control costs because of the negative effects of COVID 19 on our operations. We expect our operating costs and expenses will decrease for the balance of our fiscal year 2020 due to the cost cutting measures. Operating costs and expenses increased as a percentage of total sales to approximately 97.62% in the thirty-nine weeks of our fiscal year 2020 from 94.85% for the thirty-nine weeks of our fiscal year 2019.

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 thirty-nine weeks ended June 27, 2020 decreased to $42,593,000 from $45,791,000 for the thirty-nine weeks ended June 29, 2019. Our gross profit margin for restaurant food and bar sales (calculated as gross profit reflected as a percentage of restaurant food and bar sales), was 66.24% for the thirty-nine weeks ended June 27, 2020 and 65.22% for the thirty-nine weeks ended June 29, 2019. Gross profit margin for restaurant food and bar sales increased during the thirty-nine weeks ended June 27, 2020 when compared to the thirty-nine weeks ended June 29, 2019 due to the inclusion of a 10% take-out charge in restaurant food sales, offset by the negative effects of COVID 19 on our restaurant bar operations, the higher gross profit margin item and higher food costs. We expect that our gross profit margin for restaurant food and bar sales will increase during the balance of our fiscal year 2020 for the same reasons.

Package Store Sales. Gross profit for package liquor store sales for the thirty-nine weeks ended June 27, 2020 increased to $5,125,000 from $4,073,000 for the thirty-nine weeks ended June 29, 2019, due primarily to increased package liquor store traffic which we believe has been caused by COVID-19, as well as the opening of our new Store #45 during the first quarter of our fiscal year 2020. Our gross profit margin, (calculated as gross profit reflected as a percentage of package liquor store sales), for package store sales was 27.21% for the thirty-nine weeks ended June 27, 2020 and 27.19% for the thirty-nine weeks ended June 29, 2019. We anticipate that the gross profit margin for package liquor 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 thirty-nine weeks ended June 27, 2020 decreased $188,000 or 0.70% to $26,582,000 from $26,770,000 for the thirty-nine weeks ended June 29, 2019. Lower payroll and related costs for the thirty-nine weeks ended June 27, 2020 were due to certain cost cutting measures including material layoffs at our restaurants and reduced corporate personnel salaries from mid-March 2020 through mid-May, 2020 and thereafter due to an adjustment to our traditional staffing model to meet customer demand, increased by payroll for our new package liquor store in Kendall, Florida. We anticipate that until our restaurant operations are restored to pre-COVID 19 levels, of which there can be no assurance, payroll and related costs will be less than our costs from 2019. Payroll and related costs as a percentage of total sales was 31.37% in the thirty-nine weeks of our fiscal year 2020 and 30.72% of total sales in the thirty-nine weeks of our fiscal year 2020.

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 thirty-nine weeks ended June 27, 2020 increased $808,000 or 17.77% to $5,355,000 from $4,547,000 for the thirty-nine weeks ended June 29, 2019 due primarily to our adoption of ASC 842. We anticipate that our occupancy costs will increase throughout our fiscal year 2020 as compared to 2019 due primarily to 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 thirty-nine weeks ended June 27, 2020 decreased $648,000 or 4.05% to $15,359,000 from $16,007,000 for the thirty-nine weeks ended June 29, 2019. Selling, general and administrative expenses decreased as a percentage of total sales in the thirty-nine weeks of our fiscal year 2020 to 18.12% as compared to 18.37% in the thirty-nine weeks of our fiscal year 2019 due to a decrease of total sales caused by COVID 19 during the thirty-nine weeks of our fiscal year 2020. We anticipate that until our operations are restored to pre-COVID 19 levels, of which there can be no assurance, our selling, general and administrative expenses will be less than our expenses from 2019, offset by increases in expenses across all categories.

Depreciation and Amortization. Depreciation and amortization expense for the thirty-nine weeks ended June 27, 2020 increased $196,000 or 8.73% to $2,441,000 from $2,245,000 from the thirty-nine weeks ended June 29, 2019. As a percentage of total revenue, depreciation and amortization expense was 2.88% of revenue in the thirty-nine weeks ended June 27, 2020 and 2.58% of revenue in the thirty-nine weeks ended June 29, 2019.

Interest Expense, Net. Interest expense, net, for the thirty-nine weeks ended June 27, 2020 increased $57,000 to $598,000 from $541,000 for the thirty-nine weeks ended June 29, 2019. 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 and our borrowing of an additional $10.0 million during the third quarter of our fiscal year 2020 on the PPP Loans.

Income Taxes. Income tax expense for the thirty-nine weeks ended June 27, 2020 was a benefit of $23,000, as compared to an expense of $653,000 for the thirty-nine weeks ended June 29, 2019. The income tax expense for the thirty-nine weeks ended June 27, 2020 is based upon a COVID-19 estimated annual net income for our fiscal year 2020.

Net Income. Net income for the thirty-nine weeks ended June 27, 2020 decreased $2,461,000 or 62.48% to $1,478,000 from $3,939,000 for the thirty-nine weeks ended June 29, 2019. Net income for the thirty-nine weeks ended June 27, 2020 decreased when compared to the thirty-nine weeks ended June 29, 2019 due to the negative effects of COVID 19 on our operations, our adoption of ASC 842, higher food costs and overall expenses, offset by our implementation of the cost cutting measures and the 2019 Price Increases. As a percentage of sales, net income for the thirty-nine weeks of our fiscal year 2020 is 1.74%, as compared to 4.52% in the thirty-nine weeks of our fiscal year 2019.

Net Income Attributable to Stockholders. Net income attributable to stockholders for the thirty-nine weeks ended June 27, 2020 decreased $2,045,000 or 74.85% to $687,000 from $2,732,000 for the thirty-nine weeks ended June 29, 2019. Net income attributable to stockholders for the thirty-nine weeks ended June 27, 2020 decreased when compared to the thirty-nine weeks ended June 29, 2019 primarily due to the negative effects of COVID 19 on our operations, our adoption of ASC 842, higher food costs and overall expenses, offset by our implementation of the cost cutting measures and the 2019 Price Increases. As a percentage of sales, net income for the thirty-nine weeks of our fiscal year 2020 is 0.81%, as compared to 3.14% in the thirty-nine weeks 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 thirteen weeks ended June 27, 2020, we had one new restaurant location in Sunrise, Florida in the development stage and have advanced $716,000 through June 27, 2020. 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.

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.

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, and despite experiencing increased sales and traffic at certain of our package liquor stores, COVID-19 has materially adversely affected our results of operations for the thirteen weeks ended June 27, 2020, and will, in all likelihood, impact our results of operations, liquidity and/or financial condition for the remainder of fiscal year 2020 and into our fiscal year 2021. 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.

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) located in Kendall, Florida 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 shopping center in Miramar, Florida, which shopping center is currently under construction.

Liquidity and Capital Resources

We fund our operations through cash from operations. As of June 27, 2020, we had cash of approximately $30,482,000, an increase of $16,810,000 from our cash balance of $13,672,000 as of September 28, 2019. During the third quarter of our fiscal year 2020, we, certain of the entities owning the limited partnership stores (the “LP’s”), franchised stores (the “Franchisees”) 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 $13.1 million (the “PPP Loans”), of which approximately: (i) $5.9 million was loaned to us ; (ii) $4.1 million was loaned to 8 of the LP’s ; (iii) $2.6 million was loaned to 5 of the Franchisees; and (iv) $0.5 million was loaned to the Managed Store. The PPP Loans to the Franchisees and the Managed Store are not included in our consolidated financial statements. 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.

The PPP Loans, which are in the form of Notes issued by each of the Borrowers, mature five years from the date of funding (dates ranging from May 5, 2025 to May 11, 2025) and bear interest at a rate of 1.00% per annum, payable monthly commencing approximately six months from the date of issuance of the Notes (issuance dates ranging from April 30, 2020 to May 6, 2020). The Notes may be prepaid by the applicable Borrower at any time prior to maturity with no prepayment penalties. Proceeds from the PPP Loans are available to the respective Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, including rent and interest on mortgages and other debt obligations incurred before February 15, 2020. Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent the proceeds of the PPP Loans are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. No assurance can be given that the Borrowers will obtain forgiveness of the PPP Loan in whole or in part.

With respect to any portion of any of the PPP Loans that is not forgiven under the terms of the PPP, such amounts will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the applicable PPP Note and cross-defaults on any other loan with the Lender or other creditors.

Prior to obtaining the PPP Loans, we were in compliance with the financial covenants contained in our five (5) loans with our unrelated third party institutional lender (the “Institutional Lender”) under which as of June 27, 2020, we owe in the aggregate approximately $12,600,000 (the “Institutional Loans”). We have determined that as of June 27, 2020, we are not in compliance with our financial covenants contained in each of the Institutional Loans related to the Rent Adjusted Funded Debt to EBITDA Ratio because our consolidated debt as of June 27, 2020 increased due to the repayment obligations caused by our repayment obligations under the PPP Loans (the “Covenant Breach’). The Institutional Loans each contain a cross-default provision. Under these cross-default provisions, a default under an Institutional Loan may constitute a ‘default’ under all Institutional Loans. Pursuant to the terms of the Institutional Loans, a default, including but not limited to the Covenant Breach, grants the Institutional Lender the right to exercise certain remedies under the Institutional Loans, including the right to accelerate the indebtedness owed by us to the Institutional Lender thereunder. On August 10, 2020, we received a written waiver of the Covenant Breach from the Institutional Lender, which, among other things, waives the Covenant Breach through June 30, 2021.

There can be no assurances that we will be in compliance with our financial covenants thereafter due to, among other things, that our results of operations will likely continue to be materially impacted by the COVID-19 pandemic. Absent a waiver, failure to be in compliance with our financial covenants would constitute a default under the Institutional Loans with our Institutional Lender when reported. Such a default, if not cured or waived, would allow the Institutional Lender to accelerate the maturity of the indebtedness we owe under the Institutional Loans, making it due and payable at the time. If maturity of the Institutional Loans were accelerated, it would have a material adverse impact on our consolidated financial statements and results of operations.

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 thirty-nine weeks ended June 27, 2020 and June 29, 2019.

On March 24, 2020, due to the negative effects of COVID 19 on our operations, our Board of Directors cancelled a previously declared cash dividend of $.30 per share to shareholders of record on March 20, 2020 and payable on April 3, 2020. During the thirty-nine weeks ended June 29, 2019, our Board of Directors declared and paid a cash dividend of 28 cents per share to shareholders of record on March 15, 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 to fund the development and construction of new restaurants and to fund capitalized property improvements for our existing restaurants. During the thirty nine weeks ended June 27, 2020, we acquired property and equipment and construction in progress of $2,171,000, (of which $96,000 was deposits recorded in other assets and $2,000 was purchase deposits transferred to construction in process as of September 28, 2019), which amount included $263,000 for the renovation to two (2) existing limited partnership restaurants and $429,000 for renovations to five (5) Company owned restaurants. During the thirty nine weeks ended June 29, 2019, we acquired property and equipment and construction in progress of $5,244,000, (of which $1,300,000 was for the purchase of vacant real property in Pompano Beach, Florida; $236,000 was for construction in process; and $548,000 was deposits recorded in other assets as of September 29, 2018), which amount included $73,000 for renovations to one (1) existing limited partnership restaurant and $385,000 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), $692,000 of which has been spent through June 27, 2020.

Long Term Debt

As of June 27, 2020, we had long term debt of $27,157,000, as compared to $13,828,000 as of June 29, 2019, and $13,080,000 as of September 28, 2019. Our long term debt increased as of June 27, 2020 as compared to September 28, 2019 due to (i) the PPP Loan to us of $5.9 million; (ii) the PPP Loans to our eight limited partnerships of $4.1 million; (iii) 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 (iv) $1,281,000 for financed insurance premiums, less any payments made on account thereof.

Prior to obtaining the PPP Loans, we were in compliance with the financial covenants contained in our five (5) loans with our unrelated third party institutional lender (the “Institutional Lender”) under which as of June 27, 2020, we owe in the aggregate approximately $12,600,000 (the “Institutional Loans”). We have determined that as of June 27, 2020, we are not in compliance with our financial covenants contained in each of the Institutional Loans related to the Rent Adjusted Funded Debt to EBITDA Ratio because our consolidated debt as of June 27, 2020 increased due to the repayment obligations caused by our repayment obligations under the PPP Loans (the “Covenant Breach’). The Institutional Loans each contain a cross-default provision. Under these cross-default provisions, a default under an Institutional Loan may constitute a ‘default’ under all Institutional Loans. Pursuant to the terms of the Institutional Loans, a default, including but not limited to the Covenant Breach, grants the Institutional Lender the right to exercise certain remedies under the Institutional Loans, including the right to accelerate the indebtedness owed by us to the Institutional Lender thereunder. On August 10, 2020, we received a written waiver of the Covenant Breach from the Institutional Lender, which, among other things, waives the Covenant Breach through June 30, 2021.

There can be no assurances that we will be in compliance with our financial covenants thereafter due to, among other things, that our results of operations will likely continue to be materially impacted by the COVID-19 pandemic. Absent a waiver, failure to be in compliance with our financial covenants would constitute a default under the Institutional Loans with our Institutional Lender when reported. Such a default, if not cured or waived, would allow the Institutional Lender to accelerate the maturity of the indebtedness we owe under the Institutional Loans, making it due and payable at the time. If maturity of the Institutional Loans were accelerated, it would have a material adverse impact on our consolidated financial statements and results of operations.

As of June 27, 2020, the aggregate principal balance owed from the financing of our property, general liability, boiler and directors and officers liability insurance policies is $729,000.

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 $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 through June 27, 2020.

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 $62,000 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 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, of which $-0- has been paid through June 27, 2020.

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

During the third quarter of our fiscal year 2019, we also 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. 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 by $18,000 to $140,000, of which $97,000 has been paid through June 27, 2020.

Purchase Commitments / Supply

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 thirty-nine weeks ended June 27, 2020, we did not purchase any limited partnership interests. During the thirty-nine weeks ended June 29, 2019, we purchased from one limited partner (who is not an officer, director or family member of officers or directors) a limited partnership interest of 0.63% in a limited partnership which owns a restaurant, for a purchase price of $4,800.

Working Capital

The table below summarizes the current assets, current liabilities, and working capital for our fiscal quarters ended June 27, 2020, June 29, 2019 and our fiscal year ended September 28, 2019.

Our working capital increased during our fiscal quarter ended June 27, 2020 from our working capital for our fiscal quarter ended June 29, 2019 and our fiscal year ended September 28, 2019 due to the cash received from (i) the PPP Loan to us of $5.9 million; (ii) the PPP Loans to our eight limited partnerships of $4.1 million; and (iii) 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, offset by $967,000 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, cash flow from operations and funds available from our borrowings will adequately fund operations, debt reductions and planned capital expenditures throughout our fiscal year 2020.

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. 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 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 June 27, 2020 we held none.

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 June 27, 2020, 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 June 27, 2020, 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 June 27, 2020, the interest rate swap agreement is an effective hedging agreement and the fair value was not material

At June 27, 2020, 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 June 27, 2020, 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 June 27, 2020.

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 1A. RISK FACTORS

The novel coronavirus pandemic and related “shelter-in-place” orders and other governmental mandates (“COVID-19”) has adversely affected our restaurant operations and financial results since March 2020 and will, in all likelihood continue to adversely affect our restaurant operations and financial results for the remainder of fiscal 2020 and the foreseeable future, particularly if these changes are in place for a significant amount of time.

Due to COVID-19, from mid-March 2020 through mid-May 2020, we ceased dine-in service at all of our restaurants, limiting service to take-out and delivery only, ceased the sale of alcoholic beverages at our restaurants and implemented reduced hours at our retail package liquor stores. From mid-May 2020 through the beginning of July 2020, there was a gradual elimination of restrictions on our restaurant operations, permitting us to, among other things, operate at up to 50% capacity (depending on the location of the restaurant), but with no bar service and increased operating hours at our package liquor stores. Since the beginning of July 2020, we ceased dine-in service at all of our Miami-Dade County, Florida restaurants, except for outdoor seating (2 Company owned and 6 limited partnership owned restaurants), and continue to operate at up to 50% capacity at all other of our restaurants, but with no bar service. Due to COVID-19, we implemented (i) certain cost cutting measures including material layoffs at our restaurants and reduced corporate personnel salaries; and (ii) a number of changes to our operations such as the establishment of an in-house delivery service and an adjustment to our traditional staffing model to meet customer demand. Although we reversed certain of the cost cutting measures during the third quarter of our fiscal year 2020 due to receipt of the PPP Loans, the proceeds of which are being used to fund expenses, there can be no assurance that additional cost cutting measures will not be necessary. In addition, although up to the entire amount of principal and accrued interest may be forgiven to the extent the proceeds of the PPP Loans are used for qualifying expenses as described in the CARES Act under the PPP, no assurance can be given that we or the other Borrowers will obtain forgiveness of the PPP Loans in whole or in part. With respect to any portion of any of the PPP Loans that is not forgiven under the terms of the PPP, such amounts will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the applicable PPP Note and cross-defaults on any other loan with the Lender or other creditors.

We do not believe COVID-19 has had a material adverse effect on our access to supplies or labor, although there can be no assurance that there will not be a significant adverse impact on our supply chain or access to labor in the future. We are actively monitoring our food suppliers to determine how they are managing their operations to mitigate supply flow and food safety risks. To ensure we mitigate potential supply availability risk, we are building additional inventory back stock levels when appropriate and we have also identified alternative supply sources in key product categories including but not limited to food, sanitation and safety supplies.

Prior to obtaining the PPP Loans, we were in compliance with the financial covenants contained in our five (5) loans with our unrelated third party institutional lender (the “Institutional Lender”) under which as of June 27, 2020, we owe in the aggregate approximately $12,600,000 (the “Institutional Loans”). We have determined that as of June 27, 2020, we are not in compliance with our financial covenants contained in each of the Institutional Loans related to the Rent Adjusted Funded Debt to EBITDA Ratio because our consolidated debt as of June 27, 2020 increased due to the repayment obligations caused by our repayment obligations under the PPP Loans (the “Covenant Breach’). The Institutional Loans each contain a cross-default provision. Under these cross-default provisions, a default under an Institutional Loan may constitute a ‘default’ under all Institutional Loans. Pursuant to the terms of the Institutional Loans, a default, including but not limited to the Covenant Breach, grants the Institutional Lender the right to exercise certain remedies under the Institutional Loans, including the right to accelerate the indebtedness owed by us to the Institutional Lender thereunder. On August 10, 2020, we received a written waiver of the Covenant Breach from the Institutional Lender, which, among other things, waives the Covenant Breach through June 30, 2021.

There can be no assurances that we will be in compliance with our financial covenants thereafter due to, among other things, that our results of operations will likely continue to be materially impacted by the COVID-19 pandemic. Absent a waiver, failure to be in compliance with our financial covenants would constitute a default under the Institutional Loans with our Institutional Lender when reported. Such a default, if not cured or waived, would allow the Institutional Lender to accelerate the maturity of the indebtedness we owe under the Institutional Loans, making it due and payable at the time. If maturity of the Institutional Loans were accelerated, it would have a material adverse impact on our consolidated financial statements and results of operations.

For a detailed discussion of the risks that affect our business, please refer to the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended September 28, 2019 filed with the SEC on December 20, 2019 as well as other periodic reports.  

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

Purchase of Company Common Stock

During the thirty nine weeks ended June 27, 2020 and June 29, 2019, we did not purchase any shares of our common stock. As of June 27, 2020, 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.