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 September 30, 2023 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. Inflation Our operating results have been and continue to be impacted by geopolitical and macroeconomic events, causing increased commodity prices, wage inflation and other increased costs. The ongoing impact of these events could lead to further shifts in consumer behavior, wage inflation, staffing challenges, product and services cost inflation, disruptions in the supply chain and delays in opening or acquiring new restaurants. 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 June 29, 2024, 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 June 29, 2024 and July 1, 2023 each included 13 and 39 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 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. - 21 - Results of Operations The Company’s operating income for the 13 and 39 weeks ended June 29, 2024 (which include impairment charges of $1,561,000 and $939,000 related to Sequoia's ROU assets and long-lived assets, respectively) decreased 77.3% and 79.1%, respectively, as compared to the same periods of the prior year. Excluding the impairment charges, operating income of $3,324,000 and $3,725,000 for the 13 and 39 weeks ended June 29, 2024, respectively, decreased 8.6% and 36.5% as compared to the same periods of the prior year. These decreases resulted primarily from increases in labor costs combined with increased base rents and inflationary pressures related to non-commodity items partially offset by the reversal of stock-based compensation expenses relating to forfeitures in the amount of $774,000 combined with the negative impact on the prior period of the temporary closure of Gallagher's Steakhouse for renovation on February 5, 2023 (which reopened on April 28, 2023). The following table summarizes the significant components of the Company’s operating results for the 13- and 39-week periods ended June 29, 2024 and July 1, 2023: 13 Weeks Ended Variance 39 Weeks Ended Variance June 29, 2024 July 1, 2023 $ % June 29, 2024 July 1, 2023 $ % (in thousands) (in thousands) REVENUES: Food and beverage sales $ 49,176 $ 49,807 $ (631) -1.3 % $ 136,994 $ 137,259 $ (265) -0.2 % Other revenue 1,220 1,244 (24) -1.9 % 3,145 3,134 11 0.4 % Total revenues 50,396 51,051 (655) -1.3 % 140,139 140,393 (254) -0.2 % COSTS AND EXPENSES: Food and beverage cost of sales 13,304 13,241 63 0.5 % 37,512 37,472 40 0.1 % Payroll expenses 17,479 17,194 285 1.7 % 49,969 49,027 942 1.9 % Occupancy expenses 6,261 6,151 110 1.8 % 18,368 17,589 779 4.4 % Other operating costs and expenses 6,305 6,274 31 0.5 % 18,233 17,557 676 3.9 % General and administrative expenses 2,690 3,495 (805) -23.0 % 9,151 9,655 (504) -5.2 % Depreciation and amortization 1,033 1,059 (26) -2.5 % 3,181 3,230 (49) -1.5 % Impairment losses on right-of use and long-lived assets 2,500 — 2,500 100.0 % 2,500 — 2,500 100.0 % Total costs and expenses 49,572 47,414 2,158 4.6 % 138,914 134,530 4,384 3.3 % OPERATING INCOME $ 824 $ 3,637 $ (2,813) -77.3 % $ 1,225 $ 5,863 $ (4,638) -79.1 % Revenues During the 13- and 39-week periods ended June 29, 2024, revenues decreased marginally as compared to revenues for the 13- and 39-week periods ended July 1, 2023. The net decreases resulted primarily from decreases in same-store sales discussed below, offset by an increase in sales at Gallagher's Steakhouse at the New York-New York Hotel and Casino in Las Vegas, NV, which was substantially closed for renovation in the prior period from February 5, 2023 through April 27, 2023. Revenues related to Gallagher's Steakhouse for the period of closure were $1,068,000 as compared to $3,056,000 for the comparable current period, of which $354,000 as compared to $918,000 related to the 13-week periods ended July 1, 2023 and June 29, 2024, respectively, and $714,000 as compared $2,138,000 related to the 39-week periods ended July 1, 2023 and June 29, 2024, respectively. - 22 - Food and Beverage Same-Store Sales On a Company-wide basis, same-store sales decreased 0.7% during the 13 weeks ended June 29, 2024 as compared to the same period of last year as follows: 13 Weeks Ended Variance June 29, 2024 July 1, 2023 $ % (in thousands) Las Vegas $ 13,532 $ 13,202 $ 330 2.5 % New York 11,481 12,117 (636) -5.2 % Washington, D.C. 3,178 3,773 (595) -15.8 % Atlantic City, NJ 734 798 (64) -8.0 % Alabama 5,690 5,184 506 9.8 % Florida 13,840 13,743 97 0.7 % Same-store sales 48,455 48,817 $ (362) -0.7 % Other 721 990 Food and beverage sales $ 49,176 $ 49,807 Same-store sales in Las Vegas increased 2.5% primarily as a result of the negative impact on the prior period of the temporary closure of Gallagher's Steakhouse for renovation on February 5, 2023 (which reopened on April 28, 2023). Same-store sales in New York decreased 5.2% primarily as a result of decreased revenues from our event business. Same-store sales in Washington, D.C. decreased 15.8% as a result of lower headcounts, especially during lunch and after-work hours, which we attribute to continued hybrid work schedules. Same-store sales in Atlantic City decreased 8.0% as a result of as a result of lower customer traffic at the property where we are located. Same-store sales in Alabama increased 9.8% primarily as a result of better-than-expected customer traffic combined with targeted menu price increases. Same-store sales in Florida increased 0.7% primarily as a result of increased traffic at our food court located in the Hard Rock Hotel and Casino in Hollywood, FL. On a Company-wide basis, same-store sales during the 39 weeks ended June 29, 2024 were consistent as compared to the same period of last year as follows: 39 Weeks Ended Variance June 29, 2024 July 1, 2023 $ % (in thousands) Las Vegas $ 42,175 $ 41,407 $ 768 1.9 % New York 28,561 27,610 951 3.4 % Washington, D.C. 7,079 8,101 (1,022) -12.6 % Atlantic City, NJ 2,052 2,142 (90) -4.2 % Alabama 12,334 11,857 477 4.0 % Florida 42,358 43,788 (1,430) -3.3 % Same-store sales 134,559 134,905 $ (346) -0.3 % Other 2,435 2,354 Food and beverage sales $ 136,994 $ 137,259 Same-store sales in Las Vegas increased 1.9% primarily as a result of the negative impact on the prior period of the temporary closure of Gallagher's Steakhouse for renovation on February 5, 2023 (which reopened on April 28, 2023), partially offset by lower headcounts in the current period. Same-store sales in New York increased 3.4% driven primarily by strong revenues from our event business in the first two quarters of fiscal 2024. Same-store sales in Washington, D.C. decreased 12.6% as a result of lower headcounts, especially during lunch and after-work hours, which we attribute to continued hybrid work schedules as well as the closure of the property from Monday through lunch on Thursdays for the winter. Same-store sales in Atlantic City decreased 4.2% as a result of lower customer traffic at the property where we are located. Same-store sales in Alabama increased 4.0% primarily as a result of better-than-expected customer traffic combined with targeted menu price increases. Same-store sales in Florida decreased 3.3% primarily as a result of lower headcounts as compared to the comparable prior period which benefited from outsized volumes as a result of the population increase in Southeast Florida. - 23 - Costs and Expenses Costs and expenses for the 13 and 39 weeks ended June 29, 2024 and July 1, 2023 were as follows (in thousands): 13 Weeks Ended June 29, 2024 % to Total Revenues 13 Weeks Ended July 1, 2023 % to Total Revenues Increase (Decrease) 39 Weeks Ended June 29, 2024 % to Total Revenues 39 Weeks Ended July 1, 2023 % to Total Revenues Increase (Decrease) $ % $ % Food and beverage cost of sales $ 13,304 26.4 % $ 13,241 25.9 % 63 0.5 % $ 37,512 26.8 % $ 37,472 26.7 % 40 0.1 % Payroll expenses 17,479 34.7 % 17,194 33.7 % 285 1.7 % 49,969 35.7 % 49,027 34.9 % 942 1.9 % Occupancy expenses 6,261 12.4 % 6,151 12.0 % 110 1.8 % 18,368 13.1 % 17,589 12.5 % 779 4.4 % Other operating costs and expenses 6,305 12.5 % 6,274 12.3 % 31 0.5 % 18,233 13.0 % 17,557 12.5 % 676 3.9 % General and administrative expenses 2,690 5.3 % 3,495 6.8 % (805) -23.0 % 9,151 6.5 % 9,655 6.9 % (504) -5.2 % Depreciation and amortization 1,033 2.0 % 1,059 2.1 % (26) -2.5 % 3,181 2.3 % 3,230 2.3 % (49) -1.5 % Impairment losses on right-of use and long-lived assets 2,500 5.0 % — — % 2,500 100.0 % 2,500 1.8 % — — % 2,500 100.0 % Total costs and expenses $ 49,572 $ 47,414 $ (342) $ 138,914 $ 134,530 $ 1,884 Food and beverage costs as a percentage of total revenues for the 13 weeks ended June 29, 2024 as compared with the same period of last year increased as a result of increases in commodity prices, which had been easing for several quarters. Food and beverage costs as a percentage of total revenues for the 39 weeks ended June 29, 2024 as compared with the same period of last year increased marginally as a result of a strong event business in New York City in the first two quarters, which has higher margins, partially offset by higher commodity prices in the current quarter. Payroll expenses as a percentage of total revenues for the 13 and 39 weeks ended June 29, 2024 increased as compared with the same period of last year primarily as a result of increasing minimum wages in the states where we operate. Occupancy expenses as a percentage of total revenues for the 13 and 39 weeks ended June 29, 2024 increased as compared with the same periods of last year primarily as a result of increases in base rents and increases in property and liability insurance premiums. Other operating costs and expenses as a percentage of total revenues for the 13 and 39 weeks ended June 29, 2024 as compared to the same period of last year increased primarily as a result of inflation. General and administrative expenses (which relate solely to the corporate office in New York City) for the 13 and 39 weeks ended June 29, 2024 decreased as compared to the same periods of last year primarily as a result of the reversal of compensation expense in the amount of $774,000 related to options that expired unexercised. Depreciation and amortization expense for the 13 weeks and 39 weeks ended June 29, 2024 decreased slightly as compared to the same period of last year primarily as a result of certain assets becoming fully depreciated. Impairment losses on Right-of-Use and Long-lived Assets During the 13 weeks ended June 29, 2024, impairment indicators were identified at our Sequoia property located in Washington, D.C. due to lower-than-expected operating results. Accordingly, the Company tested the recoverability of Sequoia's ROU and long-lived assets and concluded they were not recoverable. Based on a discounted cash flow analysis, the Company recognized impairment charges of $1,561,000 and $939,000 related to Sequoia's ROU assets and long-lived assets, respectively. No impairment charges were recognized related to long-lived assets or ROU assets during the 13 and 39 weeks ended July 1, 2023. Given the inherent uncertainty in projecting results of restaurants, the Company will continue to monitor the recoverability of the carrying value of the assets of Sequoia and several other restaurants on an ongoing basis. If expected performance is not realized, further impairment charges may be recognized in future periods, and such charges could be material. - 24 - 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 June 29, 2024, we had a cash and cash equivalents balance of $11,467,000. The Company had a working capital deficit of $(9,057,000) at June 29, 2024 as compared with a working capital deficit of $(5,932,000) at September 30, 2023. This increase in the deficit is primarily the result of all of our note payments becoming current as they mature through May 31, 2025. 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 39 Weeks Ended June 29, 2024 and July 1, 2023 Net cash provided by operating activities for the 39 weeks ended June 29, 2024 and July 1, 2023 was $3,926,000 and $6,872,000, respectively, and resulted primarily due to changes in working capital, primarily accounts receivable and accrued expenses. Net cash used in investing activities for the 39 weeks ended June 29, 2024 was $1,204,000 as compared to cash provided by investing activities of $2,008,000 in the same period as last year. This resulted primarily from proceeds from the maturity of certificates of deposit in the prior period partially offset by lower purchases of fixed assets at existing restaurants in the current period. Net cash used in financing activities for the 39 weeks ended June 29, 2024 and July 1, 2023 was $(4,670,000) and $(18,333,000), respectively, and resulted primarily from principal payments on notes payable, the payment of dividends and the payment of distributions to non-controlling interests and in the prior year principal payments on PPP Loans. Recent Restaurant Expansions and Other Developments 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. To date approximately $100,000 has been spent on this refresh. 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, 2024, as extended. To date approximately $250,000 has been spent on this refresh. 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 - 25 - 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 and Other Developments During the 13 weeks ended December 30, 2023, the Company dissolved the entity which owned Lucky 7 at the Foxwoods Resort and Casino, which was closed in July of 2022. In connection with the dissolution, the Company reclassified the remaining non-controlling interest balance to additional paid-in capital. Credit Facility On March 30, 2023, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”), with its lender, Bank Hapoalim B.M. (“BHBM”). This facility, which matures on June 1, 2025, replaced our revolving credit facility which was entered into in June 1, 2018 (the “Prior Credit Agreement”). Under the terms of the Credit Agreement: (i) a promissory note under the Prior Credit Agreement in the amount of $6,666,000 was repaid, (ii) BHBM established a new revolving credit facility in the amount of $10,000,000 with a commitment termination date of May 31, 2025, (iii) the Company may use the revolving commitments of BHBM to obtain letters of credit up to a sublimit thereunder of $1,000,000, and (iv) the LIBOR rate option for all borrowings was replaced with the secured overnight financing rate for U.S. Government Securities (“SOFR”). Advances under the Credit Agreement bear interest, at the Company's election at the time of the advance, at either BHBM's prime rate of interest plus a 0.45% spread or SOFR plus a 3.65% spread. In addition, there is a 0.30% per annum fee for any unused portion of the $10,000,000 revolving facility. As of June 29, 2024, no advances were outstanding under the Credit Agreement. As of June 29, 2024, the weighted average interest on the outstanding BHBM indebtedness was approximately 9.0%. Borrowings and all other obligations under Credit Agreement, 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, 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 Credit Agreement 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 Credit Agreement 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. 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. 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 - 26 - 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 September 30, 2023. There have been no significant changes to such critical accounting estimates during the second fiscal quarter 2024. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not Applicable