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 28, 2024 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 and Other Matters 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. The Company's agreements with the Bryant Park Corporation (the “Landlord”), (a private non-profit entity that manages Bryant Park under agreements with the New York City Department of Parks & Recreation) for the Bryant Park Grill & Cafe and The Porch at Bryant Park expire on April 30, 2025. During July 2023 (for the Bryant Park Grill & Cafe ) and September 2023 (for The Porch at Bryant Park ), the Company received requests for proposals (the "RFPs") from the Landlord to which we responded on October 26, 2023. The agreements offered under the RFPs for both locations are for new 10-year agreements, with one five-year renewal option. On January 27, 2025, at a public local community board meeting, the Landlord stated that it had selected a new operator for both locations, although no agreements have been signed. Any such agreements must be approved by both the New York City Department of Parks & Recreation and the New York Public Library. Management continues to work with its outside advisors who have been assisting with our efforts to obtain the extensions by ensuring the RFP awards process was both fair and transparent. We intend to pursue all available options to protect the Company's interests. Overview As of December 28, 2024, the Company owned and operated 16 restaurants and bars, 12 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 28, 2024 and December 30, 2023 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, - 18 - 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. Results of Operations The Company’s operating income for the 13 weeks ended December 28, 2024 (which includes a loss on the closure of El Rio Grande of $146,000 and a gain on the termination of our Tampa Food Court lease of $5,235,000) increased 254.9% as compared to the same period of the prior year. Excluding the El Rio Grande closure loss and the Tampa Food Court lease termination gain, operating income of $600,000 for the 13 weeks ended December 28, 2024 decreased 62.6% as compared to the same period of the prior year. We attribute this decrease primarily to a decrease in same store sales as discussed below combined with continued inflationary pressures in most areas as well as minimum wage increases. The following table summarizes the significant components of the Company’s operating results for the 13-week periods ended December 28, 2024 and December 30, 2023: 13 Weeks Ended Variance December 28, 2024 December 30, 2023 $ % (in thousands) REVENUES: Food and beverage sales $ 44,442 $ 46,630 $ (2,188) -4.7 % Other revenue 546 857 (311) -36.3 % Total revenues 44,988 47,487 (2,499) -5.3 % COSTS AND EXPENSES: Food and beverage cost of sales 12,107 12,071 36 0.3 % Payroll expenses 16,408 16,977 (569) -3.4 % Occupancy expenses 6,148 6,332 (184) -2.9 % Other operating costs and expenses 5,800 6,092 (292) -4.8 % General and administrative expenses 3,148 3,320 (172) -5.2 % Depreciation and amortization 777 1,092 (315) -28.8 % Loss on closure of El Rio Grande 146 — 146 N/A Gain on closure of Tampa Food Court (5,235) — (5,235) N/A Total costs and expenses 39,299 45,884 (6,585) -14.4 % OPERATING INCOME $ 5,689 $ 1,603 $ 4,086 254.9 % Revenues During the 13-week period ended December 28, 2024, revenues decreased 5.3% as compared to revenues for the 13-week period ended December 30, 2023. We attribute this decrease primarily to the decreases in same-store sales discussed below and the closures of El Rio Grande and the Tampa Food Court . - 19 - Food and Beverage Same-Store Sales On a Company-wide basis, same-store sales decreased 2.3% during the 13 weeks ended December 28, 2024 as compared to the same period of last year as follows: 13 Weeks Ended Variance December 28, 2024 December 30, 2023 $ % (in thousands) Las Vegas $ 14,279 $ 14,844 $ (565) -3.8 % New York 11,161 11,339 (178) -1.6 % Washington, D.C. 2,015 2,463 (448) -18.2 % Atlantic City, NJ 553 555 (2) -0.4 % Alabama 3,290 3,077 213 6.9 % Florida 10,828 10,844 (16) -0.1 % Same-store sales 42,126 43,122 $ (996) -2.3 % Other 2,316 3,508 Food and beverage sales $ 44,442 $ 46,630 Same-store sales in Las Vegas decreased 3.8% which we attribute primarily to lower customer traffic at the New York-New York Hotel and Casino. Same-store sales in New York decreased 1.6% which we attribute primarily to a decrease in revenue from our event business. Same-store sales in Washington, D.C. decreased 18.2% which we attribute primarily to lower headcounts, especially during lunch and after-work hours, which we attribute to continued hybrid work schedules. Same-store sales in Alabama increased 6.9% which we attribute primarily to better-than-expected customer traffic combined with targeted menu price increases. Other food and beverage sales consist of sales related to properties that were closed and other fees. Costs and Expenses Costs and expenses for the 13 weeks ended December 28, 2024 and December 30, 2023 were as follows (in thousands): 13 Weeks Ended December 28, 2024 % to Total Revenues 13 Weeks Ended December 30, 2023 % to Total Revenues Increase (Decrease) $ % Food and beverage cost of sales $ 12,107 26.9 % $ 12,071 25.4 % $ 36 0.3 % Payroll expenses 16,408 36.5 % 16,977 35.8 % (569) -3.4 % Occupancy expenses 6,148 13.7 % 6,332 13.3 % (184) -2.9 % Other operating costs and expenses 5,800 12.9 % 6,092 12.8 % (292) -4.8 % General and administrative expenses 3,148 7.0 % 3,320 7.0 % (172) -5.2 % Depreciation and amortization 777 1.7 % 1,092 2.3 % (315) -28.8 % Loss on closure of El Rio Grande 146 0.3 % — — % 146 N/A Gain on closure of Tampa Food Court (5,235) (11.6) % — — % (5,235) N/A Total costs and expenses $ 39,299 $ 45,884 $ (6,585) Food and beverage costs as a percentage of total revenues for the 13 weeks ended December 28, 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, combined with a slightly weaker event business in New York City in the first quarter of the current year compared to the prior year. Payroll expenses as a percentage of total revenues for the 13 weeks ended December 28, 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 weeks ended December 28, 2024 increased as compared with the same period of last year primarily as a result of increases in base rents and increases in property and liability insurance premiums. - 20 - Other operating costs and expenses as a percentage of total revenues for the 13 weeks ended December 28, 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 weeks ended December 28, 2024 decreased as compared to the same periods of last year primarily as a result of the lower bonus accruals partially offset by increased legal and consulting fees. Depreciation and amortization expense for the 13 weeks ended December 28, 2024 decreased slightly as compared to the same period of last year primarily as a result of certain assets becoming fully depreciated and the removal of assets associated with El Rio Grande and the Tampa Food Court . Loss on Closure of El Rio Grande In October 2024, the Company advised the landlord of El Rio Grande we would be terminating the lease and closing the property permanently. In connection with this notification, the Company recorded a loss of $876,000 during the year ended September 28, 2024 consisting of: (i) rent and other costs incurred in accordance with the termination provisions of the lease in the amount of $398,000, (ii) accrued severance and other costs in the amount of $94,000, (iii) an impairment charge related to long-lived assets in the amount of $269,000 and (iv) the write-off of our security deposit in the amount of $238,000, all partially offset by a gain related to the write-off of ROU assets and related lease liabilities in the net amount of $123,000. The property closed on January 3, 2025 and during the 13 weeks ended December 28, 2024, the Company incurred additional operating losses of $146,000. Gain on Termination of Tampa Food Court Lease On November 26, 2024, the Company agreed to terminate its lease for the food court at The Hard Rock Hotel and Casino in Tampa, FL and, accordingly, vacated the premises on December 15, 2024. In connection with this, Ark Hollywood/Tampa Investment LLC, a subsidiary of the Company, (in which we own a 65% interest) received a termination payment in the amount of $5,500,000, all obligations under the lease ceased and we recorded a gain, net of expenses in the amount of $5,235,000 during the 13 weeks ended December 28, 2024. It is expected that Ark Hollywood/Tampa Investment LLC will distribute approximately 35% of the net proceeds, after expenses, to the other equity holders of Ark Hollywood/Tampa Investment LLC during the second fiscal quarter of 2025. 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 28, 2024, we had a cash and cash equivalents balance of $13,101,000. The Company had a working capital deficit of $4,264,000 at December 28, 2024 as compared with a working capital deficit of $10,659,000 at December 30, 2023. This decrease in the deficit is primarily the result of the payment received in connection with the termination of the Tampa Food Court lease. 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 - 21 - 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 28, 2024 and December 30, 2023 Net cash used in operating activities for the 13 weeks ended December 28, 2024 was $1,346,000 as compared to net cash provided by operating activities of $558,000 in the same period last year and resulted primarily from a decrease in operating income, excluding the loss on the closure of El Rio Grande and a gain on the termination of our Tampa Food Court lease. Net cash provided by investing activities for the 13 weeks ended December 28, 2024 was $4,895,000 as compared to cash used in investing activities of $254,000 in the same period as last year. This increase resulted primarily from the payment received in connection with the termination of the Tampa Food Court lease. Net cash used in financing activities for the 13 weeks ended December 28, 2024 and December 30, 2023 was $721,000 and $1,597,000, respectively, and resulted primarily from principal payments on notes payable and the payment of distributions to non-controlling interests and in the prior year the payment of dividends. 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 December 28, 2024, no advances were outstanding under the Credit Agreement. As of December 28, 2024, the weighted average interest on the outstanding BHBM indebtedness was approximately 8.2%. Borrowings and all other obligations under the Credit Agreement, which include the promissory notes as discussed in Note 7 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 The Company's agreements with the Bryant Park Corporation (the “Landlord”), (a private non-profit entity that manages Bryant Park under agreements with the New York City Department of Parks & Recreation) for the Bryant Park Grill & Cafe and The Porch at Bryant Park expire on April 30, 2025. During July 2023 (for the Bryant Park Grill & Cafe ) and September 2023 (for The Porch at Bryant Park ), the Company received requests for proposals (the "RFPs") from the Landlord to which we responded on October 26, 2023. The agreements offered under the RFPs for both locations are for new 10-year agreements, with one five-year renewal option. On January 27, 2025, at a public local community board meeting, the Landlord stated that it had selected a new operator for both locations, although, to the best of our knowledge, no agreements have been signed as of the date of this filing. Any such agreements must be approved by both the New York City Department of Parks & Recreation and the New York Public Library. Management continues to work with its outside advisors who have been assisting with our efforts to obtain the extensions by ensuring the RFP awards process was both fair and transparent. We intend to pursue all available options to protect the Company's interests. Other than the status of the above property, we are not aware of any other 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 12 months. - 22 - 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 September 28, 2024. There have been no significant changes to such critical accounting estimates during the first fiscal quarter 2025. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not Applicable