ARK Restaurants Corp. — Form 10-Q summary
Business context and reporting period. The filing covers the 13 and 26 weeks ended April 3, 2021, the company’s fiscal second quarter and first half, respectively. Ark operated 18 restaurants and bars, 17 fast-food concepts, and catering operations in the United States. Blue Moon Fish Company, acquired December 1, 2020, contributed partial-period results.
Financial performance and position
| Metric | 13 weeks ended April 3, 2021 | 26 weeks ended April 3, 2021 |
|---|---|---|
| Total revenue | $25.767 million, down 24.2% year over year | $46.066 million, down 40.6% |
| Operating income (loss) | $(1.497) million, versus $(1.936) million | $(4.803) million, versus $0.500 million income |
| Net income (loss) attributable to Ark | $4.161 million, versus $(1.778) million | $3.398 million, versus $(0.265) million |
| Basic EPS | $1.19, versus $(0.51) | $0.97, versus $(0.08) |
Profit quality and costs. Quarterly net income included a $4.124 million gain from PPP loan forgiveness and a substantial income-tax benefit. The six-month tax benefit was $4.839 million, with a reported 376.56% effective tax rate; the company attributed the unusual rate primarily to the nontaxable PPP forgiveness and tax-loss carrybacks. Quarterly food and beverage costs were 30.1% of revenue (28.2% a year earlier), payroll 32.6% (38.5%), and occupancy 13.7% (11.3%). For the half-year, food costs were 29.8% of revenue (26.5%), payroll 37.0% (36.4%), and occupancy 15.2% (12.0%).
Cash flow and liquidity. First-half operating cash flow was $(1.644) million, versus $2.110 million provided a year earlier; investing cash flow was $(2.926) million and financing cash flow $(0.918) million. Cash fell $5.488 million to $11.398 million. Working capital was deficient by $3.561 million at April 3, compared with a $3.234 million deficiency at October 3, 2020. Management said cash and other measures should fund liquidity and capital spending through May 18, 2022.
Debt and leases. Notes payable totaled $40.849 million before current maturities and deferred financing costs, including $9.666 million outstanding on the revolving facility and $11.009 million of PPP loans. The revolving facility maturity was extended by the lender on May 11, 2021, to May 19, 2022; financial covenants had been modified through fiscal Q2 2022, and the company reported compliance at April 3. Operating lease liabilities totaled $62.631 million. Debt is substantially secured, and the facility has financial covenants.
Material changes versus the prior comparable periods
- Same-store sales fell 25.4% in the quarter. Florida was nearly flat, Alabama increased 13.7%, while New York declined 71.9%, Connecticut 74.4%, Las Vegas 36.9%, Washington, D.C. 41.7%, and Atlantic City 49.8%.
- COVID-19 capacity limits, temporary employee-related closures, and weak event business—particularly in New York and Washington, D.C.—weighed on revenue and first-half operating results. Management cited recovery in Florida, Las Vegas, and Alabama.
- Blue Moon Fish Company was acquired for $2.820 million, funded with $1.820 million cash and a four-year, $1.000 million seller note bearing 5% interest. It contributed approximately $1.962 million revenue and $448,000 net income in the quarter, and $2.441 million revenue and $455,000 net income for the half-year.
- Gallagher’s Steakhouse and Gallagher’s Burger Bar in Atlantic City closed January 2, 2021, and the company decided not to reopen Thunder Grill in Washington, D.C. Neither closure resulted in a material charge.
- No dividends were paid in the current half-year; management said it did not expect quarterly cash dividends for the foreseeable future.
Outlook, risks, and unusual items
- As of April 3, all properties other than Thunder Grill had reopened, subject to varying capacity limits. Management cautioned that restrictions, social-distancing protocols, customer return rates, and pandemic effects remained uncertain. New York City announced 100% indoor seating capacity subject to social-distancing guidelines beginning May 19, 2021.
- The company identified COVID-19, economic conditions, labor and food costs, consumer preferences, weather, competition, civil unrest, debt-service capacity, food safety, and cybersecurity as risks. It warned that continued disruption could materially affect results, liquidity, covenant compliance, and asset recoverability.
- No goodwill, trademark, or long-lived-asset impairment was recorded for the period, but management said future impairment charges could be material if projected performance is not achieved.
- After quarter-end, an additional $1.717 million of PPP loans, including accrued interest, was forgiven. PPP forgiveness for remaining amounts was not assured at the filing date.
- A New York wage-and-hour class-action settlement reached in December 2020 received preliminary court approval for approximately the amount previously accrued. Management did not expect other ordinary-course litigation to have a material effect.
Important facts for investors to verify
- Whether restaurant traffic and same-store sales recover as capacity and social-distancing restrictions change, especially in New York and other weaker markets.
- Actual operating cash generation and working-capital trends, given the first-half cash outflow and working-capital deficiency.
- Final PPP forgiveness amounts and the effect of any unforgiven balances on debt service and liquidity.
- Compliance with amended lender covenants and refinancing or repayment plans before the May 19, 2022 revolving-facility maturity.
- Whether operating performance supports the carrying values of goodwill, trademarks, and restaurant and lease assets, and the final economics of the J B’s on the Beach/Newco arrangement.