ARK Restaurants Corp. — FY2020 Form 10-K
Reporting period: Fiscal year ended October 3, 2020 (53 weeks), compared with the 52-week year ended September 28, 2019. The company operated 20 restaurants and bars, 17 fast-food concepts and catering operations across the United States. Results were heavily affected by COVID-19 closures and capacity restrictions.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $106.49 million | $162.35 million | Down 34.4% |
| Operating income (loss) | $(7.80) million | $3.25 million | Declined $11.04 million |
| Net income (loss) attributable to Ark | $(4.69) million | $2.68 million | Loss of $1.34 per share, versus income of $0.77 per share |
| Cash from (used in) operations | $(4.53) million | $10.62 million | Down $15.14 million |
| Cash and cash equivalents at year-end | $16.89 million | $7.18 million | Up $9.71 million |
Food and beverage cost was 26.8% of revenue in both years. Payroll was 38.5% of revenue versus 34.9%; occupancy was 14.5% versus 10.7%. Same-store food and beverage sales fell 37.1%. The company estimated $3.15 million of costs directly related to COVID-19, including paid leave, inventory waste, and rent and related costs for closed restaurants.
At October 3, 2020, working capital was negative $3.23 million, compared with a $4.37 million deficit a year earlier. Notes payable totaled $45.24 million, including $14.995 million of PPP loans; $9.001 million was classified as current. The company also reported $56.08 million of operating lease liabilities. Operating cash flow was negative, while financing cash flow was $16.69 million, principally reflecting PPP proceeds and credit-facility borrowings.
Material changes and unusual items
- Government shutdowns began in March 2020. By year-end, properties had reopened at restricted capacities except Thunder Grill in Washington, D.C.; several locations also closed temporarily after reopening.
- Revenues declined 34.4%, and operating results moved from income to a substantial loss. Management attributed the deterioration principally to closures and limited-capacity operations.
- The company drew an additional $6.3 million under its revolving facility and received approximately $15.0 million in PPP loans. PPP loans bear 1% interest; eligibility for full or partial forgiveness remained uncertain.
- A $4.385 million income tax benefit helped reduce the reported net loss. It included a $2.673 million income tax receivable associated with expected carryback of tax losses; the company cautioned that tax treatment of PPP-funded expenses could require later reversal of related tax benefits.
- The company recorded a $364,000 loss on terminating a New York catering-space lease. No long-lived-asset impairment was recorded for FY2020, although management said future impairment charges could be material if restaurant performance disappoints.
- Cash dividends were suspended: the declared $0.25-per-share April 2020 payment was canceled, and the company did not expect to resume quarterly dividends in the foreseeable future. Non-essential capital spending was canceled or delayed.
Outlook, liquidity and risks
Management believed existing cash, PPP proceeds and cost-control measures would cover liquidity and capital-spending needs through December 23, 2021. Measures included furloughs and salary reductions, reduced capital spending, rent negotiations, and lender covenant relief through fiscal Q3 2021. The company said it was in compliance with financial covenants at year-end. Landlord concessions were not assured, and several rent negotiations remained ongoing.
Subsequent to year-end, the lender extended the revolving facility maturity to October 3, 2021 and extended two working-capital advances to July 31, 2021. On December 11, 2020, New York City announced an indefinite shutdown of indoor dining beginning December 14; management expected a material adverse effect on its New York operations. The pandemic’s duration, customer recovery, capacity limits, possible renewed closures and effects on liquidity remained uncertain.
Other subsequent events included the December 1, 2020 acquisition of Blue Moon Fish Company for $2.75 million plus inventory, funded with $1.75 million cash and a $1.0 million seller note; and notice that the company must vacate its two Resorts Atlantic City locations, expected January 4, 2021. A New York wage-law class action reached a settlement on December 14, 2020 for approximately the amount already accrued, subject to court approval.
Important facts for investors to verify
- Whether the PPP loans qualify for forgiveness, and any resulting debt-service or tax adjustments.
- Available liquidity and covenant compliance as the extended credit-facility and advance maturities approach, including any refinancing or conversion to term loans.
- Actual restaurant capacity, sales recovery and cash generation after the December 2020 New York indoor-dining shutdown and any further restrictions.
- Final rent concessions and deferred lease obligations, and the potential for future asset impairments.
- Approval and accounting outcome of the wage-law settlement, and the financial impact of the Blue Moon acquisition and Atlantic City closures.