ARK RESTAURANTS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to any historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "potential," "project," "projection," "plan," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended October 1, 2022 and the consolidated condensed financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. COVID-19 Pandemic and Inflation Recent global events, including the COVID-19 pandemic ("COVID-19"), have adversely affected global economies, disrupted global supply chains and labor force participation and created significant volatility and disruption of financial markets. As a result, we experienced significant and variable disruptions to our business as federal, state and local restrictions were mandated, among other remedial measures, to mitigate the spread of the COVID-19 virus. While restrictions on the type of permitted operating model and occupancy capacity may continue to change, during fiscal 2022 all of our restaurants operated with no restrictions, other than in New York City where customers were required to show proof of vaccination through November 1, 2022. In addition to the associated impacts of COVID-19, our operating results have been impacted by geopolitical and other macroeconomic factors, leading to increased commodity and wage inflation and other increased costs. The ongoing effects of COVID-19 and its variants, along with other geopolitical and macroeconomic events, could lead to further government mandates, including but not limited to capacity restrictions, shifts in consumer behavior, wage inflation, staffing challenges, product and services cost inflation and disruptions in our supply chain. If these factors significantly impact our cash flow in the future, we may again implement mitigation actions such as suspending dividends, increasing borrowings or modifying our operating strategies. Some of these measures may have an adverse impact on our business, including possible impairments of assets. Overview As of December 31, 2022, the Company owned and operated 17 restaurants and bars, 16 fast food concepts and catering operations, exclusively in the United States, that have similar economic characteristics, nature of products and service, class of customer and distribution methods. The Company believes it meets the criteria for aggregating its operating components into a single operating segment in accordance with applicable accounting guidance. Accounting Period Our fiscal year ends on the Saturday nearest September 30. We report fiscal years under a 52/53-week format. This reporting method is used by many companies in the hospitality industry and is meant to improve year-to-year comparisons of operating results. Under this method certain years will contain 53 weeks. The periods ended December 31, 2022 and January 1, 2022 each included 13 weeks. Seasonality The Company has substantial fixed costs that do not decline proportionally with sales. Although our business is highly seasonal, our broader geographical reach as a result of recent acquisitions mitigates some of the risk. For instance, the second quarter of our fiscal year, consisting of the non-holiday portion of the cold weather season in New York and Washington, D.C. (January, February and March), is the poorest performing quarter; however, in recent years this has been partially offset by our locations in Florida as they experience increased results in the winter months. We generally achieve our best results during the warm weather, attributable to our extensive outdoor dining availability, particularly at Bryant Park in New York and Sequoia in Washington, D.C. (our largest restaurants) and our outdoor cafes. However, even during summer months these facilities can be adversely - 20 - affected by unusually cool or rainy weather conditions. Our facilities in Las Vegas are indoor and generally operate on a more consistent basis throughout the year. Results of Operations The Company’s operating income for the 13 weeks ended December 31, 2022 decreased 21.1% to $2,203,000 as compared to $2,791,000 for the 13 weeks ended January 1, 2022. This decrease resulted primarily from increased labor costs in connection with record low unemployment and ongoing COVID-related labor challenges, percentage rents paid on higher sales in the current period and the inflationary impact on commodity prices and other high-volume items partially offset by a 7.9% increase in revenues. The following table summarizes the significant components of the Company’s operating results for the 13-week periods ended December 31, 2022 and January 1, 2022: 13 Weeks Ended Variance December 31, 2022 January 1, 2022 $ % (in thousands) REVENUES: Food and beverage sales $ 46,539 $ 43,237 $ 3,302 7.6 % Other revenue 906 749 157 21.0 % Total revenues 47,445 43,986 3,459 7.9 % COSTS AND EXPENSES: Food and beverage cost of sales 12,435 12,542 (107) -0.9 % Payroll expenses 16,522 14,241 2,281 16.0 % Occupancy expenses 6,183 5,232 951 18.2 % Other operating costs and expenses 5,932 5,138 794 15.5 % General and administrative expenses 3,137 2,963 174 5.9 % Depreciation and amortization 1,033 1,079 (46) -4.3 % Total costs and expenses 45,242 41,195 4,047 9.8 % OPERATING INCOME $ 2,203 $ 2,791 $ (588) -21.1 % - 21 - Revenues During the 13-week period ended December 31, 2022, revenues increased 7.9% as compared to revenues in the 13-week period ended January 1, 2022. This increase resulted primarily from an increase in same-store sales discussed below. Food and Beverage Same-Store Sales On a Company-wide basis, same-store sales increased 6.4% during the 13 weeks ended December 31, 2022 as compared to the same period of last year as follows: 13 Weeks Ended Variance December 31, 2022 January 1, 2022 $ % (in thousands) Las Vegas $ 15,297 $ 14,002 $ 1,295 9.2 % New York 10,744 8,525 2,219 26.0 % Washington, DC 2,818 2,328 490 21.0 % Atlantic City, NJ 592 661 (69) -10.4 % Alabama 3,128 3,079 49 1.6 % Florida 12,648 13,924 (1,276) -9.2 % Same-store sales 45,227 42,519 $ 2,708 6.4 % Other 1,312 718 Food and beverage sales $ 46,539 $ 43,237 The increases in company-wide same-store sales for the 13 weeks ended December 31, 2022 as compared to the prior period were driven primarily by increased customer traffic and targeted menu price increases in Las Vegas, New York and Washington, D.C. as the impact of the COVID-19 pandemic continues to subside. In New York and Washington, D.C., the current period also benefited from very strong revenues from our event business. Same-store sales in Alabama increased 1.6% primarily as a result of targeted menu rice increases. Same-store sales in Florida decreased 9.2% primarily as a result of lower traffic in the current period as the prior period benefited from outsized volumes as a result of the population increase in Southeast Florida as a result of the migration of people during the pandemic, partially offset by targeted menu price increases. Other food and beverage sales consist of sales related to new restaurants opened or acquired during the applicable period, sales related to properties that were closed and other adjustments and fees. Costs and Expenses Costs and expenses for the 13 weeks ended December 31, 2022 and January 1, 2022 were as follows (in thousands): 13 Weeks Ended December 31, 2022 % to Total Revenues 13 Weeks Ended January 1, 2022 % to Total Revenues Increase (Decrease) $ % Food and beverage cost of sales $ 12,435 26.2 % $ 12,542 28.5 % (107) -0.9 % Payroll expenses 16,522 34.8 % 14,241 32.4 % 2,281 16.0 % Occupancy expenses 6,183 13.0 % 5,232 11.9 % 951 18.2 % Other operating costs and expenses 5,932 12.5 % 5,138 11.7 % 794 15.5 % General and administrative expenses 3,137 6.6 % 2,963 6.7 % 174 5.9 % Depreciation and amortization 1,033 2.2 % 1,079 2.5 % (46) -4.3 % Total costs and expenses $ 45,242 $ 41,195 $ 4,047 - 22 - Food and beverage costs as a percentage of total revenues for the 13 weeks ended December 31, 2022 as compared with the same period of last year decreased as a result of targeted increases in menu pricing, changes in menu mix and a very strong event business in Washington, D.C. and New York City in the current period, partially offset by increases in commodity prices and other high-volume items caused by inflation. Payroll expenses as a percentage of total revenues for the 13 weeks ended December 31, 2022 increased as compared with the same period of last year primarily as a result of record low unemployment and ongoing COVID-related labor challenges combined with merit increases. Occupancy expenses as a percentage of total revenues for the 13 weeks ended December 31, 2022 increased as compared with the same period of last year primarily as a result of increases in base rents, percentage rents paid on higher sales in the current period and increases in property and liability insurance premiums. Other operating costs and expenses as a percentage of total revenues for the 13 weeks ended December 31, 2022 as compared to the same period of last year increased slightly primarily as a result of inflation. General and administrative expenses (which relate solely to the corporate office in New York City) for the 13 weeks ended December 31, 2022 increased slightly as compared with the same period of last year primarily as a result of annual merit increases. Depreciation and amortization expense for the 13 weeks ended December 31, 2022 decreased slightly as compared to the same period of last year primarily as a result of the timing of additions in the prior period. Liquidity and Capital Resources Our primary source of capital has been cash provided by operations and, in recent years, bank and other borrowings to finance specific transactions, acquisitions and large remodeling projects. We utilize cash generated from operations to fund the cost of developing and opening new restaurants and smaller remodeling projects of existing restaurants we own. Consistent with many other restaurant operators, we typically use operating lease arrangements for our restaurants. In recent years we have been able to acquire the underlying real estate at several locations along with the restaurant operation. We believe that our operating lease arrangements provide appropriate leverage of our capital structure in a financially efficient manner. As of December 31, 2022, we had a cash and cash equivalents balance of $19,427,000 and a certificate of deposit in the amount of $5,044,000 that matured in January 2023. In addition, the Company had working capital of $4,850,000 at December 31, 2022 as compared with working capital of $4,210,000 at October 1, 2022. Inflation The country is currently experiencing multi-decade high inflation. Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the cost of food and other raw materials, labor, energy and other supplies and services. While we have not had material disruptions in our supply chain, we have experienced some product shortages and higher costs for many commodities. There has also been a general shortage in the availability of restaurant staff and hourly workers in certain geographic areas in which we operate and has caused increases in the costs of recruiting and compensating such employees. In addition, certain operating and other costs, including health benefits, taxes, insurance, and other outside services, continue to increase with the general level of inflation and may also be subject to other cost and supply fluctuations outside of our control. While we have been able to offset inflation and other changes in the costs of key operating resources by targeted increases in menu prices, coupled with more efficient purchasing practices, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions will limit our menu pricing flexibility. In addition, macroeconomic conditions that impact consumer discretionary spending for food away from home could make additional menu price increases imprudent. There can be no assurance that all of our future cost increases can be offset by higher menu prices or that higher menu prices will be accepted by our restaurant customers without any resulting changes in their visit frequencies or purchasing patterns. Cash Flows for 13 Weeks Ended December 31, 2022 and January 1, 2022 Net cash used in operating activities for the 13 weeks ended December 31, 2022 decreased to $(903,000) as compared to $3,852,000 provided by operating activities in the same period of last year. This decrease was primarily attributable to a decrease in accrued expenses related to catering deposits, the payment of bonuses and changes in net working capital primarily related to accounts receivable, inventory and accounts payable. - 23 - Net cash used in investing activities for the 13 weeks ended December 31, 2022 and January 1, 2022 was $(751,000) and $(408,000), respectively, and resulted primarily from purchases of fixed assets at existing restaurants. Net cash used in financing activities for the 13 weeks ended December 31, 2022 of $(2,358,000) resulted primarily from principal payments on notes payable, the payment of dividends and the payment of distributions to non-controlling interests. Net cash used in financing activities for the 13 weeks ended January 1, 2022 of $(2,448,000) resulted primarily from principal payments on notes payable and the payment of distributions to non-controlling interests. Recent Restaurant Expansions and Other Developments On April 8, 2022, the Company extended its lease for Gallagher's Steakhouse at the New York-New York Hotel and Casino in Las Vegas, NV through December 31, 2032. In connection with the extension, the Company has agreed to spend a minimum of $1,500,000 (of which approximately $500,000 has been spent to date) to materially refresh the premises by April 30, 2023 (as extended from September 30, 2022 due to supply chain issues), subject to various extensions as set out in the agreement. On June 24, 2022, the Company extended its lease for America at the New York-New York Hotel and Casino in Las Vegas, NV through December 31, 2033. In connection with the extension, the Company has agreed to spend a minimum of $4,000,000 to materially refresh the premises by December 31, 2024, subject to various extensions as set out in the agreement. On July 21, 2022, the Company extended its lease for the Village Eateries at the New York-New York Hotel and Casino in Las Vegas, NV through December 31, 2034. As part of this extension, the Broadway Burger Bar and Grill and Gonzalez y Gonzalez, were carved out of the Village Eateries footprint and the extended date for those two locations is December 31, 2033. In connection with the extension, the Company has agreed to spend a minimum of $3,500,000 to materially refresh all three of these premises by June 30, 2023, subject to various extensions as set out in the agreement. Each of the above refresh obligations are to be consistent with designs approved by the Landlord which shall not be unreasonably withheld. We will continue to pay all rent as required by the leases without abatement during construction. Note that our substantial completion of work set forth in plans approved by the Landlord shall constitute our compliance with the requirements of the completion deadlines, regardless of whether or not the amount actually expended in connection therewith is less than the minimum. Our restaurants generally do not achieve substantial increases in revenue from year to year, which we consider to be typical of the restaurant industry. To achieve significant increases in revenue or to replace revenue of restaurants that lose customer favor or which close because of lease expirations or other reasons, we would have to open additional restaurant facilities or expand existing restaurants. There can be no assurance that a restaurant will be successful after it is opened, particularly since in many instances we do not operate our new restaurants under a trade name currently used by us, thereby requiring new restaurants to establish their own identity. We may take advantage of other opportunities we consider to be favorable, when they occur, depending upon the availability of financing and other factors. Recent Restaurant Dispositions On July 5, 2022, the Company terminated its lease for Lucky 7 at the Foxwoods Resort Casino. The closure did not result in a material change to the Company's operations. Notes Payable – Bank On June 1, 2018, the Company refinanced (the "Refinancing") its then existing indebtedness with its current lender, Bank Hapoalim B.M. (“BHBM”), by entering into an amended and restated credit agreement (the “Revolving Facility”), which was to mature on May 19, 2022 (as extended). The Revolving Facility provides for total availability of the lesser of (i) $10,000,000 and (ii) $35,000,000 less the then aggregate amount of all indebtedness and obligations to BHBM. On July 26, 2021, all outstanding borrowings under the Revolving Facility, in the amount of $9,666,000, were converted to a promissory note with quarterly principal payments of $500,000 commencing on September 1, 2021, with a balloon payment of $2,166,000 on June 1, 2025. Such note bears interest at LIBOR plus 3.5% per annum. We expect that the LIBOR rate will be discontinued by June 30, 2023 and will continue to work with BHBM to identify a suitable replacement rate and amend our debt agreements to reflect this new reference rate accordingly. We do not expect the discontinuation of LIBOR as a reference rate in our debt agreements to have a material adverse effect on our financial position or materially affect our interest expense. Borrowings under the Revolving Facility, which include the promissory notes as discussed in Note 8 of the consolidated condensed financial statements, are secured by all tangible and intangible personal property (including accounts receivable, - 24 - inventory, equipment, general intangibles, documents, chattel paper, instruments, letter-of-credit rights, investment property, intellectual property and deposit accounts) and fixtures of the Company. The Revolving Facility also requires, among other things, that the Company meet minimum quarterly tangible net worth amounts, maintain a minimum fixed charge coverage ratio and meet minimum annual net income amounts. The Revolving Facility contains customary representations, warranties and affirmative covenants as well as customary negative covenants, subject to negotiated exceptions on liens, relating to other indebtedness, capital expenditures, liens, affiliate transactions, disposal of assets and certain changes in ownership. Paycheck Protection Program Loans During the year ended October 3, 2020, subsidiaries and consolidated VIEs (the “Borrowers”) of the Company received loan proceeds from several banks (the “Lenders”) in the aggregate amount of $14,995,000 (the “PPP Loans”) under the Paycheck Protection Program (the “PPP”) of the CARES Act, which was enacted March 27, 2020. In addition, during the 13 weeks ended April 3, 2021, one of our consolidated VIEs received a second draw PPP Loan in the amount of $111,000. The PPP Loans were evidenced by individual promissory notes of each of the Borrowers (together, the “Notes”) in favor of the Lender, which Notes bore interest at the rate of 1.00% per annum. Funds from the PPP Loans were to be used only for payroll and related costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations that were incurred by a Borrower prior to February 15, 2020 (the “Qualifying Expenses”). Under the terms of the PPP Loans, some or all of the amounts thereunder, including accrued interest, were to be forgiven if they were used for Qualifying Expenses as described in and in compliance with the CARES Act. During the 13 weeks ended December 31, 2022 and January 1, 2022, $272,000 and $0 of PPP Loans, respectively (including $6,000 and $0 of accrued interest, respectively) were forgiven. During the 13 weeks ended December 31, 2022 and January 1, 2022, the Company made payments related to the unforgiven portion of PPP Loans in the aggregate amount of $531,000 and $0, respectively. As of December 31, 2022, no PPP Loans were outstanding; however, the Company is appealing a forgiveness denial in the amount of $280,000. Such loan was repaid as we await the appeal decision, Cash Flow Outlook We are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe that our existing cash balances, internal cash-generating capabilities, current banking facilities and ability to secure additional financing, if necessary, are sufficient to finance our capital expenditures, debt maturities and other operating activities for at least the next twelve months. Recent Events On February 8, 2023, the Board of Directors of the Company (the "Board") declared a quarterly cash dividend of $0.125 per share to be paid on March 14, 2023 to the stockholders of record of each share of the Company's common stock at the close of business on February 28, 2023. Future decisions to pay or to increase or decrease dividends are at the discretion of the Board and will depend upon operating performance and other factors. Critical Accounting Estimates The preparation of financial statements requires the Company to make estimates and assumptions of future events. In the process of preparing its consolidated condensed financial statements, the Company estimates the appropriate carrying value of certain assets and liabilities, which are not readily apparent from other sources. The critical accounting estimates underlying the Company’s consolidated condensed financial statements include projected cash flows for fixed asset impairments, allowances for potential bad debts on accounts and notes receivable, assumptions regarding discount rates related to lease accounting, the useful lives and recoverability of its long-lived assets, such as property and intangibles, fair values of financial instruments, the realizable value of its tax assets and other matters. Management bases its estimates on certain assumptions, which it believes are reasonable in the circumstances, and actual results could differ from those estimates. Although management does not believe that any change in those assumptions in the near term would have a material effect on the Company’s consolidated condensed financial position or the results of operations, differences in actual results could be material to the consolidated condensed financial statements. The Company’s critical accounting estimates are described in the Company’s MD&A included in Form 10-K for the year ended October 1, 2022. There have been no significant changes to such critical accounting estimates during the first fiscal quarter 2023. Recently Adopted and Issued Accounting Standards See Note 1 to the consolidated condensed financial statements for a description of recent accounting pronouncements, including those adopted in fiscal 2023 and the expected dates of adoption of new accounting standards and the anticipated impact on the consolidated condensed financial statements. - 25 - Item 3. Quantitative and Qualitative Disclosures about Market Risk Not Applicable