Ark Restaurants Corp. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended March 28, 2020 (13 and 26 weeks, respectively). The filing was delayed by 45 days under SEC COVID-19 relief; it was signed June 23, 2020. Amounts below are in U.S. dollars.
Business context and results
Ark operated 20 restaurants and bars, 17 fast-food concepts, and catering operations. Government-mandated COVID-19 closures left all locations closed as of March 28, 2020. The company reports one operating segment.
| Metric | 13 weeks ended Mar. 28, 2020 | 13 weeks ended Mar. 30, 2019 | 26 weeks ended Mar. 28, 2020 | 26 weeks ended Mar. 30, 2019 |
|---|---|---|---|---|
| Revenue | $34.0m | $35.3m | $77.5m | $75.9m |
| Operating income (loss) | $(1.9)m | $0.1m | $0.5m | $0.4m |
| Net income (loss) attributable to Ark | $(1.8)m | $(0.7)m | $(0.3)m | $(0.7)m |
| Loss per share, basic and diluted | $(0.51) | $(0.19) | $(0.08) | $(0.21) |
| Net cash from operating activities | Not presented by quarter | $2.1m | $2.0m |
Second-quarter revenue fell 3.7%; company-wide same-store sales declined 12.4%. Operating margin was approximately (5.7%) versus 0.2% a year earlier. For the first half, revenue rose 2.2% and operating income increased to $0.5m, but remained a small margin of approximately 0.6%. First-half operating cash flow was $2.1m; investing cash use was $1.8m and financing cash use was $0.2m. Cash increased $0.2m to $7.3m.
Financial position and material changes
- At March 28, cash was $7.3m and working capital was negative $10.0m, compared with a $4.4m deficit at September 28, 2019. Management attributed much of the deterioration to adoption of lease-accounting standard ASC 842.
- Bank notes payable totaled $28.3m before $2.7m current maturities and $0.1m unamortized financing costs; reported long-term debt, net of current maturities and costs, was $25.5m. The revolving facility balance was $6.4m, with $3.4m available at quarter-end. Gross debt increased from $26.6m at September 28, 2019.
- Operating lease liabilities were $59.3m, including $6.1m current and $53.2m long-term. ASC 842 adoption recognized $62.3m of right-of-use assets and $63.9m of lease liabilities; comparative prior-year balance-sheet amounts were not restated.
- Total assets were $143.2m and total liabilities $102.3m at quarter-end. Accounts receivable were concentrated: three hotel operators represented 88% of receivables.
- First-half capital expenditures were $1.8m. The company accrued an unpaid $0.25-per-share dividend of $0.9m; it subsequently suspended future dividends.
Management commentary, outlook, and risks
Management expected COVID-19 to have a material adverse effect on revenue, earnings, and cash flows, and said the duration of closures, reopening timetable, customer return, and ultimate financial impact could not be determined. Despite the working-capital deficit, management believed cash, credit facilities, and cost-cutting measures would meet liquidity and capital requirements through June 24, 2021.
- Actions included furloughing hourly staff and approximately 95% of restaurant management, temporary pay reductions, suspending most lease payments for April–June while negotiating concessions, deferring dividends, and canceling or delaying nonessential capital spending.
- After quarter-end, the lender deferred interest payments through June 1, 2020 and $0.675m of principal due June 1 to loan maturities, and relaxed financial covenants through fiscal Q3 2021. The company said it was covenant-compliant at March 28. It drew the remaining $3.396m of its revolver on June 9.
- Subsidiaries received approximately $14.9m in Paycheck Protection Program loans during May and June, bearing 1% interest. Forgiveness was uncertain; unforgiven amounts would require repayment.
- As of June 22, several Florida and Alabama properties and selected locations in Las Vegas, Washington, D.C., and New York had reopened at government-permitted limited capacity. The filing gives no quantified post-reopening operating outlook or earnings guidance.
- The quarter included a $0.364m loss on terminating a New York catering-space lease. The company identified potential future impairment risk for goodwill, trademarks, long-lived assets, and lease assets if pandemic-driven performance weakened; no goodwill or trademark impairment was recorded in the period.
- A putative New York wage-and-hour class action remained pending. The company recorded an accrual, but the filing does not state its amount; management disputes the claims and intends to defend them.
Important facts for investors to verify
- Current restaurant operating status, sales, capacity limits, and cash burn after the June 2020 reopening updates.
- Whether PPP loans qualify for forgiveness and the repayment burden, if any, on the approximately $14.9m received.
- Progress on rent concessions and the amount and timing of deferred lease payments.
- Debt covenant compliance, amended terms, remaining borrowing availability, and refinancing needs as maturities approach.
- Recoverability of goodwill, trademarks, property, and right-of-use assets, plus the outcome and potential exposure of the wage-and-hour litigation.
- Whether the accrued dividend will be paid and when, if ever, the board may reinstate dividends.