ARK Restaurants Corp. — Q1 FY2021 10-Q
Reporting period: 13 weeks ended January 2, 2021. Comparisons are to the 13 weeks ended December 28, 2019. Unless stated otherwise, amounts are in millions of dollars.
Business context
Ark operated 18 restaurants and bars, 17 fast-food concepts and catering operations in the United States. COVID-19 restrictions, temporary restaurant closures and reduced dining capacity materially disrupted operations. The quarter included Blue Moon Fish Company from its December 1, 2020 acquisition.
Financial performance and liquidity
- Revenue: $20.3 million, down 53.4% from $43.5 million. Food and beverage sales were $19.9 million, down 53.6%; catering revenue fell to $0.137 million from $5.682 million.
- Same-store sales: Down 51.9% company-wide. New York fell 80.4%, while Florida and Alabama fell 21.1% and 22.5%, respectively.
- Operating results: Operating loss was $3.307 million, versus operating income of $2.436 million. Loss attributable to Ark was $0.763 million, or $0.22 per share, versus income of $1.513 million, or $0.43 per share.
- Costs and margins: Total costs and expenses decreased 42.5%, less than the revenue decline. Food costs were 29.3% of revenue (25.1% prior period), payroll 42.6% (34.8%), and occupancy 17.1% (12.5%). Management cited lower sales, fixed costs, seafood and other input costs, and rents without finalized abatements.
- Cash flow: Operating cash use was $2.985 million, compared with $2.452 million provided in the prior period. Investing used $2.413 million, including $1.820 million cash paid for Blue Moon; financing used $0.675 million. Cash fell $6.073 million to $10.813 million.
- Balance sheet and debt: Current assets were $22.886 million and current liabilities $24.446 million, a $1.560 million working-capital deficit. Notes payable totaled $45.566 million before deferred financing costs, including $14.995 million of PPP loans; operating lease liabilities totaled $62.363 million. Total liabilities were $122.308 million.
- Tax: A $2.919 million income-tax benefit, primarily from tax-loss carrybacks and FICA credits, reduced the reported consolidated net loss. The effective tax rate was 80.67%; management noted the annual rate remains an estimate.
Material changes and unusual items
- Blue Moon Fish Company was acquired for $2.820 million: $1.820 million cash and a $1.000 million four-year seller note bearing 5% interest. It contributed approximately $0.478 million revenue and $0.007 million income in the quarter. Purchase-price allocation remained preliminary.
- Gallagher’s Steakhouse and Gallagher’s Burger Bar in Atlantic City closed January 2, 2021 after the landlord required the company to vacate. Ark also decided not to reopen Thunder Grill in Washington, D.C. Neither closure resulted in a material charge.
- Management identified potential impairment indicators for goodwill and trademarks but recorded no impairment. It also recorded no impairment for long-lived or right-of-use assets or its New Meadowlands Racetrack investment; further impairment charges remain possible.
- A New York labor-law class action settlement was reached for approximately the amount already accrued, subject to court approval.
Outlook, liquidity and risks
Management said cash, PPP proceeds and cost-reduction measures should fund liquidity and capital needs through February 17, 2022, despite the working-capital deficit. The filing provides no earnings or revenue guidance. Management emphasized that the pandemic’s duration, future restrictions and pace of customer recovery are uncertain and could continue to materially harm results, cash flow and liquidity.
- Actions included furloughs and salary reductions, reduced capital spending, canceled dividends, and efforts to obtain rent concessions. Some landlord negotiations remained unresolved.
- On February 15, 2021, the lender extended the $9.666 million revolving-facility maturity to February 17, 2022 and agreed to modified financial covenants through fiscal Q2 2022. The company reported covenant compliance as of January 2, 2021.
- PPP forgiveness was uncertain; applications for $4.097 million were pending after January 2021 filings. Any unforgiven portion remains debt.
- On January 26, 2021, Ark exercised its right of first refusal to acquire the J.B.’s on the Beach property for $11 million, then contributed its rights to a new entity whose partner funded the deposit and was to fund the balance. Ark was to receive an interest in future real-estate development; if the transaction did not close, Ark was obligated to reimburse the partner’s $3 million deposit plus expenses.
- New York City indoor dining, shut down beginning December 14, 2020, was permitted to resume at 25% capacity starting February 12, 2021. Washington, D.C. and Las Vegas had reduced indoor capacity to 25% in mid-December.
Key facts for investors to verify
- Whether restaurant capacity and customer demand recover sufficiently to improve revenue and operating cash flow.
- PPP loan forgiveness outcomes and the company’s ability to meet debt obligations and covenants after amended terms.
- Progress on rent concessions and the resulting occupancy costs and cash commitments.
- Final purchase accounting for Blue Moon and the outcome and financial consequences of the J.B.’s on the Beach property transaction.
- Whether operating performance supports the carrying values of goodwill, trademarks, lease assets and the New Meadowlands investment.