|
|
|
|
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 29, 2019
(Unaudited)
|
|
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1.
|
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
The consolidated condensed balance sheet as of September 29, 2018, which has been derived from audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended September 29, 2018 (“Form 10-K”), and the unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. All adjustments that, in the opinion of management are necessary for a fair presentation for the periods presented, have been reflected as required by Article 10 of Regulation S-X. Such adjustments are of a normal, recurring nature. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K.
The Company had a working capital deficiency of
$4,288,000
at
June 29, 2019
. We believe that our existing cash balances, current banking facilities and cash provided by operations will be sufficient to meet our liquidity and capital spending requirements at least through August 14, 2020.
PRINCIPLES OF CONSOLIDATION — The consolidated condensed interim financial statements include the accounts of Ark Restaurants Corp. and all of its wholly-owned subsidiaries, partnerships and other entities in which it has a controlling interest, collectively herein referred to as the “Company”. Also included in the consolidated condensed interim financial statements are certain variable interest entities (“VIEs”). All significant intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES — The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the 13 and 39 weeks ended
June 29, 2019
are not necessarily indicative of the results to be expected for any other interim period or for the year ending
September 28, 2019
.
SEASONALITY — The Company has substantial fixed costs that do not decline proportionally with sales. The first and second fiscal quarters, which include the winter months, usually reflect lower customer traffic than in the third and fourth fiscal quarters. However, sales in the third and fourth fiscal quarters can be adversely affected by inclement weather due to the significant amount of outdoor seating at the Company’s restaurants.
FAIR VALUE OF FINANCIAL INSTRUMENTS — The carrying amount of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair values of notes receivable and payable are determined using current applicable rates for similar instruments as of the balance sheet dates and approximate the carrying value of such debt instruments.
CASH AND CASH EQUIVALENTS — Cash and cash equivalents include cash on hand, deposits with banks and highly liquid investments generally with original maturities of three months or less. Outstanding checks in excess of account balances, typically vendor payments, payroll and other contractual obligations disbursed after the last day of a reporting period are reported as a current liability in the accompanying consolidated condensed balance sheets.
CONCENTRATIONS OF CREDIT RISK — Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company reduces credit risk by placing its cash and cash equivalents with major financial institutions with high credit ratings. At times, such amounts may exceed Federally insured limits. Accounts receivable are primarily comprised of normal business receivables, such as credit card receivables, that are collected in a short period of time and amounts due from the hotel operators where the Company has a location, and are recorded upon satisfaction of the performance obligation. The Company reviews the collectability of its receivables on an ongoing basis, and provides for an allowance when it considers the entity unable to meet its obligation. The concentration of credit risk with respect to accounts receivable is generally limited due to the short payment terms extended by the Company and the number of customers comprising the Company’s customer base.
As of
June 29, 2019
, the Company had accounts receivable balances due from
one
hotel operator totaling
26%
of total accounts receivable. As of
September 29, 2018
, the Company had accounts receivable balances due from
two
hotel operators totaling
47%
of total accounts receivable.
For the 13- and 39-week periods ended
June 29, 2019
and
June 30, 2018
, the Company did not make purchases from any
one
vendor that accounted for 10% or greater of total purchases for the respective period.
As of
June 29, 2019
and September 29, 2018, all debt outstanding is with one lender (see Note 7 – Notes Payable – Bank).
SEGMENT REPORTING — As of
June 29, 2019
, the Company owned and operated
20
restaurants and bars,
19
fast food concepts and catering operations, exclusively in the United States, that have similar economic characteristics, nature of products and services, class of customers and distribution methods. The Company believes it meets the criteria for aggregating its operating segments into a single reporting segment in accordance with applicable accounting guidance.
RECENTLY ADOPTED ACCOUNTING PRINCIPLES — In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, and issued subsequent amendments to the initial guidance to provide additional clarification on specific topics (“ASC 606”). This ASU provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The Company adopted ASC 606 using the modified retrospective method on September 30, 2018 and, based on our evaluation of our revenue streams, determined that there was not a material impact as of the date of adoption between the new revenue standard and how we previously recognized revenue, and therefore the adoption did not have a material impact on our consolidated condensed financial statements.
Revenues from restaurant operations are presented net of discounts and recognized when food, beverage and retail products are sold. Sales tax collected from customers is excluded from sales and the obligation is included in sales tax payable until the taxes are remitted to the appropriate taxing authorities. Revenues from catered events are recognized in income upon satisfaction of the performance obligation (the date the event is held) and all customer payments, including nonrefundable upfront deposits, are deferred as a liability until such time. Revenues from gift cards are deferred and recognized upon redemption. Deferrals are not reduced for potential non-use as we generally have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions in which they are sold.
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance requires equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. The amendments in this update also simplified the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet and require these entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes. This guidance also changes the presentation and disclosure requirements for financial instruments as well as clarifying the guidance related to valuation allowance assessments when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The Company adopted this guidance in the first quarter of fiscal 2019 with respect to its Investment in New Meadowlands Racetrack (see Note 5). Such adoption did not have a material impact on our consolidated condensed financial statements.
In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This update provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows and addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The Company adopted this guidance in the first quarter of fiscal 2019. Such adoption did not have a material impact on our consolidated condensed financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other than Inventory. The amendments in this guidance address the income tax consequences of intra-entity transfers of assets other than inventory. Current guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice over the years for transfers of certain intangible and tangible assets. The amendments in the update will require recognition of current and deferred income taxes resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted this guidance in the first quarter of fiscal 2019. Such adoption did not have a material impact on our consolidated condensed financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business. This update provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Company adopted this guidance in the first quarter of fiscal 2019. Such adoption did not have a material impact on our consolidated condensed financial statements.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED — In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will require lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases to be recognized on the balance sheet. This guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. In August 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which permits adoption of the guidance in ASU 2016-02 using either a modified retrospective transition, requiring application at the beginning of the earliest comparative period presented or a transition method whereby companies could continue to apply existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption rather than in the earliest period presented without adjusting historical financial statements. We expect to adopt the guidance on September 29, 2019, and we are currently evaluating the effects that its adoption will have on the Company’s consolidated condensed financial statements, but anticipate that the new guidance will significantly impact our consolidated condensed balance sheet given our considerable lease obligations.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to non-employees for goods and services. Under this ASU, the guidance on share-based payments to non-employees would be aligned with the requirements for share-based payments granted to employees, with certain exceptions. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. The adoption of this standard is not expected to result in a material impact to the Company’s consolidated condensed financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. A customer’s accounting for the costs of the hosting component of the arrangement are not affected by the new guidance. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The adoption of this standard is not expected to result in a material impact to the Company’s consolidated condensed financial statements.
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2.
|
VARIABLE INTEREST ENTITIES
|
The Company consolidates any variable interest entities in which it holds a variable interest and is the primary beneficiary. Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is generally the entity that has (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
The Company has determined that it is the primary beneficiary of
three
VIEs and, accordingly, consolidates the financial results of these entities. Following are the required disclosures associated with the Company’s consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
September 29,
2018
|
|
(in thousands)
|
Cash and cash equivalents
|
$
|
118
|
|
|
$
|
181
|
|
Accounts receivable
|
320
|
|
|
354
|
|
Inventories
|
19
|
|
|
19
|
|
Prepaid and refundable income taxes
|
—
|
|
|
241
|
|
Prepaid expenses and other current assets
|
49
|
|
|
51
|
|
Due from Ark Restaurants Corp. and affiliates (1)
|
202
|
|
|
338
|
|
Fixed assets - net
|
234
|
|
|
—
|
|
Other assets
|
82
|
|
|
82
|
|
Total assets
|
$
|
1,024
|
|
|
$
|
1,266
|
|
|
|
|
|
Accounts payable - trade
|
$
|
94
|
|
|
$
|
158
|
|
Accrued expenses and other current liabilities
|
163
|
|
|
348
|
|
Operating lease deferred credit
|
(28
|
)
|
|
(21
|
)
|
Total liabilities
|
229
|
|
|
485
|
|
Equity of variable interest entities
|
795
|
|
|
781
|
|
Total liabilities and equity
|
$
|
1,024
|
|
|
$
|
1,266
|
|
|
|
(1)
|
Amounts Due from and to Ark Restaurants Corp. and affiliates are eliminated upon consolidation.
|
The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets.
|
|
3.
|
RECENT RESTAURANT EXPANSION
|
On May 15, 2019, the Company, through a newly formed, wholly-owned subsidiary, acquired the assets of
JB's on the Beach
, a restaurant and bar located in Deerfield Beach, Florida for
$7,036,000
as set out below. The acquisition is accounted for as a business combination and was financed with a bank loan from the Company’s existing lender in the amount of
$7,000,000
and cash from operations.
The Company is in the process of determining the acquisition date fair values of the assets and liabilities acquired and has recorded preliminary estimates as of the acquisition date. As the Company completes this process and additional information becomes known concerning the acquired assets and assumed liabilities, management will likely make adjustments to the fair value of the amounts recorded in the opening balance sheet of
JB's on the Beach
during the measurement period, which is no longer than a one-year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.
A preliminary allocation of the fair values of the assets acquired, subject to final purchase accounting, is as follows (amounts in thousands):
|
|
|
|
|
Cash
|
$
|
11
|
|
Inventory
|
80
|
|
Furniture, fixtures and equipment
|
200
|
|
Trademarks
|
1,110
|
|
Goodwill
|
5,690
|
|
Liabilities assumed
|
(55
|
)
|
|
$
|
7,036
|
|
Goodwill recognized in connection with this transaction represents the residual amount of the purchase price over separately identifiable intangible assets and is expected to be deductible for tax purposes.
Concurrent with the acquisition, the Company entered into a
20
year lease (with a
five
year option) for the restaurant facility and parking lot with the former owner of
JB's on the Beach
, who is also the owner of the underlying real estate. Rent payments under the lease are
$600,000
per year with
10%
increases every five years.
The consolidated condensed statements of income for the 13 and 39-weeks ended June 29, 2019 include revenues and losses of approximately
$1,239,000
and
($52,000)
, respectively, related to
JB's on the Beach
. The unaudited pro forma financial information set forth below is based upon the Company’s historical consolidated condensed statements of income for the 13 and 39-weeks ended June 29, 2019 and June 30, 2018 and includes the results of operations for
JB's on the Beach
for the periods prior to acquisition. The unaudited pro forma financial information, which has been adjusted for rent payments under the lease discussed above as well as interest expense of the term loan, is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the acquisition of
JB's on the Beach
occurred on the dates indicated, nor does it purport to represent the results of operations for future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
|
(Dollars in thousands except per share amounts)
|
|
(Dollars in thousands except per share amounts)
|
Total revenues
|
$
|
46,423
|
|
|
$
|
47,575
|
|
|
$
|
128,445
|
|
|
$
|
128,272
|
|
Net income
|
$
|
4,123
|
|
|
$
|
2,836
|
|
|
$
|
3,891
|
|
|
$
|
4,438
|
|
Net income per share - basic
|
$
|
1.18
|
|
|
$
|
0.82
|
|
|
$
|
1.12
|
|
|
$
|
1.29
|
|
Net income per share - diluted
|
$
|
1.17
|
|
|
$
|
0.80
|
|
|
$
|
1.10
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
Basic
|
3,481
|
|
|
3,440
|
|
|
3,477
|
|
|
3,436
|
|
Diluted
|
3,530
|
|
|
3,558
|
|
|
3,531
|
|
|
3,554
|
|
|
|
4.
|
RECENT RESTAURANT DISPOSITIONS
|
As of
December 29, 2018
, the Company determined that it would not be able to operate
Durgin-Park
profitably due to decreased traffic at the Faneuil Hall Marketplace in Boston, MA, where it is located, and rising labor costs. As a result, included in the consolidated condensed statements of income for the
39
weeks ended
June 29, 2019
are losses on closure in the amount of
$1,106,000
consisting of: (i) impairment of trademarks in the amount of
$721,000
, (ii) accelerated depreciation of fixed assets in the amount of
$333,000
, and (iii) write-offs of prepaid and other expenses in the amount of
$52,000
. The restaurant closed on January 12, 2019.
|
|
5.
|
INVESTMENT IN NEW MEADOWLANDS RACETRACK
|
On March 12, 2013, the Company made a
$4,200,000
investment in the New Meadowlands Racetrack LLC (“NMR”) through its purchase of a membership interest in Meadowlands Newmark, LLC, an existing member of NMR with a then
63.7%
ownership interest. On November 19, 2013, the Company invested an additional
$464,000
in NMR through a purchase of an additional membership interest in Meadowlands Newmark, LLC resulting in a total ownership of
11.6%
of Meadowlands Newmark, LLC, and an effective ownership interest in NMR of
7.4%
, subject to dilution. In 2015, the Company invested an additional
$222,000
in NMR and on February 7, 2017, the Company invested an additional
$222,000
in NMR, both as a result of capital calls, bringing its total investment to
$5,108,000
with no change in ownership. As of
September 29, 2018
, this investment was accounted for based on the cost method. As of September 30, 2018, the Company elected to account for this investment at cost, less impairment, adjusted for subsequent observable price changes in accordance with ASU No. 2016-01. Such change did not affect the value of our investment in NMR as no events or changes in circumstances occurred during the 39 weeks ended
June 29, 2019
that would indicate impairment and there are no observable prices for this investment. Any future changes in the carrying value of our Investment in NMR will be reflected in earnings.
In addition to the Company’s ownership interest in NMR through Meadowlands Newmark, LLC, if casino gaming is approved at the Meadowlands and NMR is granted the right to conduct said gaming, neither of which can be assured, the Company shall be granted the exclusive right to operate the food and beverage concessions in the gaming facility with the exception of one restaurant.
In conjunction with this investment, the Company, through a
97%
owned subsidiary, Ark Meadowlands LLC (“AM VIE”), also entered into a long-term agreement with NMR for the exclusive right to operate food and beverage concessions serving the new raceway facilities (the “Racing F&B Concessions”) located in the new raceway grandstand constructed at the Meadowlands Racetrack in northern New Jersey. Under the agreement, NMR is responsible to pay for the costs and expenses incurred in the operation of the Racing F&B Concessions, and all revenues and profits thereof inure to the benefit of NMR. AM VIE receives an annual fee equal to
5%
of the net profits received by NMR from the Racing F&B Concessions during each calendar year. AM VIE is a variable interest entity; however, based on qualitative consideration of the contracts with AM VIE, the operating structure of AM VIE, the Company’s role with AM VIE, and that the Company is not obligated to absorb expected losses of AM VIE, the Company has concluded that it is not the primary beneficiary and not required to consolidate the operations of AM VIE.
The Company’s maximum exposure to loss as a result of its involvement with AM VIE is limited to any receivable from AM VIE’s primary beneficiary (NMR, a related party). As of
June 29, 2019
and
September 29, 2018
,
no
amounts were due AM VIE by NMR.
On April 25, 2014, the Company loaned
$1,500,000
to Meadowlands Newmark, LLC. The note bears interest at
3%
, compounded monthly and added to the principal, and is due in its entirety on
January 31, 2024
. The note may be prepaid, in whole or in part, at any time without penalty or premium. On July 13, 2016, the Company made an additional loan to Meadowlands Newmark, LLC in the amount of
$200,000
. Such amount is subject to the same terms and conditions as the original loan as discussed above. The principal and accrued interest related to this note in the amounts of
$1,976,000
and
$1,928,000
are included in Investment In and Receivable From New Meadowlands Racetrack in the consolidated condensed balance sheets at
June 29, 2019
and
September 29, 2018
, respectively.
|
|
6.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
September 29,
2018
|
|
(In thousands)
|
|
|
|
|
Sales tax payable
|
$
|
1,016
|
|
|
$
|
820
|
|
Accrued wages and payroll related costs
|
2,537
|
|
|
3,226
|
|
Customer advance deposits
|
4,323
|
|
|
4,439
|
|
Accrued income taxes
|
631
|
|
|
—
|
|
Accrued occupancy and other operating expenses
|
2,342
|
|
|
2,217
|
|
|
$
|
10,849
|
|
|
$
|
10,702
|
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
September 29,
2018
|
|
(In thousands)
|
|
|
|
|
Promissory Note - Rustic Inn purchase
|
$
|
4,115
|
|
|
$
|
4,327
|
|
Promissory Note - Shuckers purchase
|
4,760
|
|
|
5,015
|
|
Promissory Note - Oyster House purchase
|
4,882
|
|
|
5,346
|
|
Promissory Note - JB's on the Beach purchase
|
7,000
|
|
|
—
|
|
Promissory Note - Sequoia renovation
|
3,200
|
|
|
—
|
|
Revolving Facility
|
3,366
|
|
|
6,568
|
|
|
27,323
|
|
|
21,256
|
|
Less: Current maturities
|
(2,701
|
)
|
|
(1,251
|
)
|
Less: Unamortized deferred financing costs
|
(171
|
)
|
|
(145
|
)
|
Long-term debt
|
$
|
24,451
|
|
|
$
|
19,860
|
|
On June 1, 2018, the Company refinanced (the "Refinancing") its then existing indebtedness with its current lender, Bank Hapoalim B.M. (“BHBM”), by entering into an amended and restated credit agreement (the "Revolving Facility”), which expires on
May 31, 2021
. The Revolving Facility provides for total availability of the lesser of (i)
$10,000,000
and (ii)
$35,000,000
less the then aggregate amount of all indebtedness and obligations to BHBM. Borrowings under the Revolving Facility are payable upon maturity of the Revolving Facility with interest payable monthly at LIBOR plus
3.5%
, subject to adjustment based on certain ratios. As of
June 29, 2019
and
September 29, 2018
, borrowings of $
3,366,000
and $
6,568,000
, respectively, were outstanding under the Revolving Facility and had a weighted average interest rate of
5.2%
and
5.4%
, respectively. As of June 29, 2019,
$6,396,000
was available under the Revolving Facility.
In connection with the Refinancing, the Company also amended the principal amounts and payment terms of its outstanding term notes with BHBM as follows:
|
|
•
|
Promissory Note – Rustic Inn purchase
– On February 25, 2013, the Company issued a promissory note to BHBM for
$3,000,000
. The note bore interest at LIBOR plus
3.5%
per annum, and was payable in
36
equal
monthly
installments of
$83,333
, commencing on
March 25, 2013
. On February 24, 2014, in connection with the acquisition of the
Rustic Inn
, the Company borrowed an additional
$6,000,000
from BHBM under the same terms and conditions as the original loan which was consolidated with the remaining principal balance from the original borrowing at that date. The new loan was payable in
60
equal
monthly
installments of
$134,722
, which commenced on
March 25, 2014
. In connection with the Refinancing, this note was amended and restated and increased by
$2,783,333
of credit facility borrowings. The new principal amount of
$4,400,000
, which is secured by a mortgage on the
Rustic Inn
real estate, is payable in
27
equal
quarterly
installments of
$71,333
, commencing on
September 1, 2018
, with a balloon payment of
$2,474,000
on June 1, 2025 and bears interest at LIBOR plus
3.5%
per annum.
|
|
|
•
|
Promissory Note – Shuckers purchase
– On October 22, 2015, in connection with the acquisition of
Shuckers
, the Company issued a promissory note to BHBM for
$5,000,000
. The note bore interest at LIBOR plus
3.5%
per annum, and was payable in
60
equal
monthly
installments of
$83,333
, commencing on
November 22, 2015
. In connection with the Refinancing, this note was amended and restated and increased by
$2,433,324
of credit facility borrowings. The new principal amount of
$5,100,000
, which is secured by a mortgage on the
Shuckers
real estate, is payable in
27
equal
quarterly
installments of
$85,000
, commencing on
September 1, 2018
, with a balloon payment of
$2,805,000
on June 1, 2025 and bears interest at LIBOR plus
3.5%
per annum.
|
|
|
•
|
Promissory Note – Oyster House purchase
– On November 30, 2016, in connection with the acquisition of the
Oyster House
properties, the Company issued a promissory note under the Revolving Facility to BHBM for
$8,000,000
. The note bore interest at LIBOR plus
3.5%
per annum, and was payable in
60
equal
monthly
installments of
$133,273
, commencing on
January 1, 2017
. In connection with the Refinancing, this note was amended and restated and separated into two notes. The first note, in the principal amount of
$3,300,000
, is secured by a mortgage on the
Oyster House Gulf Shores
real estate, is payable in
19
equal
quarterly
installments of
$117,857
, commencing on
September 1, 2018
, with a balloon payment of
$1,060,716
on June 1, 2023 and bears interest at LIBOR plus
3.5%
per annum. The second note, in the principal amount of
$2,200,000
, is secured by a mortgage on the
Oyster House Spanish Fort
real estate, is payable in
27
equal
quarterly
installments of
$36,667
, commencing on
September 1, 2018
, with a balloon payment of
$1,210,000
on June 1, 2025 and bears interest at LIBOR plus
3.5%
per annum.
|
|
|
•
|
Promissory Note - JB's on the Beach purchase
–
On May 15, 2019, in connection with the previously discussed acquisition of
JB’s on the Beach
, the Company issued a promissory note under the Revolving Facility to BHBM for
$7,000,000
which is payable in
23
equal quarterly installments of
$250,000
, commencing on
September 1, 2019
, with a balloon payment of
$1,250,000
on June 1, 2025 and bears interest at LIBOR plus
3.5%
per annum.
|
|
|
•
|
Promissory Note - Sequoia renovation
– Also on May 15, 2019, the Company converted
$3,200,000
of Revolving Facility borrowings incurred in connection with the
Sequoia
renovation to a promissory note which is payable in
23
equal quarterly installments of
$114,286
, commencing on
September 1, 2019
, with a balloon payment of
$571,429
on June 1, 2025 and bears interest at LIBOR plus
3.5%
per annum.
|
Deferred financing costs in the amount of
$207,000
are being amortized over the life of the agreements on a straight-line basis, which is materially consistent with the effective interest method, and included in interest expense. Amortization expense of approximately
$9,100
and
$4,900
is included in interest expense for the 13 weeks ended
June 29, 2019
and
June 30, 2018
, respectively. Amortization expense of approximately
$26,000
and
$13,000
is included in interest expense for the 39 weeks ended
June 29, 2019
and
June 30, 2018
, respectively.
Borrowings under the Revolving Facility, which include all of the above promissory notes, 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 loan agreements provide, among other things, that the Company meet minimum quarterly tangible net worth amounts, as defined therein, maintain a fixed charge coverage ratio of not less than
1.1
:1 on a latest 12-months' basis and minimum annual net income amounts, and contain customary representations, warranties and affirmative covenants. The agreements also contain 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. The Company was in compliance with all of its financial covenants under the Revolving Facility as of
June 29, 2019
.
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|
8.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
— The Company leases several restaurants, bar facilities, and administrative headquarters through its subsidiaries under terms expiring at various dates through
2039
. Most of the leases provide for the payment of base rents plus real estate taxes, insurance and other expenses and, in certain instances, for the payment of a percentage of the restaurant’s sales in excess of stipulated amounts at such facility and in one instance based on profits.
Legal
Proceedings
— In the ordinary course of its business, the Company is a party to various lawsuits arising from accidents at its restaurants and workers' compensation claims, which are generally handled by the Company’s insurance carriers. The employment by the Company of management personnel, waiters, waitresses and kitchen staff at a number of different restaurants has resulted, from time to time, in litigation alleging violation by the Company of employment discrimination laws. Management believes, based in part on the advice of counsel, that the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
On May 1, 2018, two former tipped service workers (the “Plaintiffs”), individually and on behalf of all other similarly situated personnel, filed a putative class action lawsuit (the “Complaint”) against the Company and certain subsidiaries as well as certain officers of the Company (the “Defendants”). Plaintiffs allege on behalf of themselves and the putative class, that the Company violated certain of the New York State Labor Laws and related regulations. The Complaint seeks unspecified money damages, together with interest, liquidated damages and attorney fees. There has been no discovery on the merits of the Complaint and the matter is still in the initial stages of discovery concerning whether the named Plaintiffs are seeking to represent an appropriate class of tipped service workers and if so, whether the named Plaintiffs are appropriate class representatives. The Company's Motion to Dismiss the Complaint was denied on June 27, 2019. The Company believes that the allegations and claims in the Complaint are without merit, and it intends to defend itself vigorously in this litigation. However, the outcomes of legal actions are unpredictable and subject to significant uncertainties, and thus it is inherently difficult to determine the probability or quantification of any loss. Based on information currently available, including the Company’s assessment of the facts underlying the Complaint and advice of counsel, the amount or range of reasonably possible losses, if any, cannot be estimated. Accordingly, the Company has not recorded any accrual related to this matter as of June 29, 2019.
The Company has options outstanding under
two
stock option plans, the 2010 Stock Option Plan (the “2010 Plan”) and the 2016 Stock Option Plan (the “2016 Plan”). Options granted under both plans are exercisable at prices at least equal to the fair market value of such stock on the dates the options were granted and expire
ten years
after the date of grant.
During the 13-week period ended June 29, 2019, options to purchase
23,000
shares of common stock at an exercise price of
$19.61
per share were granted to employees of the Company. Such options are exercisable as to
50%
of the shares commencing on the date of grant and as to an additional
50%
commencing on the first anniversary of the date of grant. Such options had an aggregate grant date fair value of
$3.48
per share and totaled approximately
$80,000
.
During the 13-week period ended June 29, 2019, options to purchase
11,000
shares of common stock at an exercise price of
$20.18
per share were granted to employees of the Company. Such options are exercisable as to
25%
of the shares commencing on the first anniversary of the date of grant and
25%
on the second, third and fourth anniversary thereof. Such options had an aggregate grant date fair value of
$3.55
per share and totaled approximately
$39,000
.
During the 13 weeks ended June 29, 2019, options to purchase
19,500
shares of common stock with a strike price of
$12.04
were exercised on a net issue basis as provided in the 2010 Plan. Accordingly,
11,774
shares were immediately repurchased and retired from treasury.
The Company generally issues new shares upon the exercise of employee stock options.
The fair value of each of the Company’s stock options is estimated on the date of grant using a Black-Scholes option-pricing model that uses assumptions that relate to the expected volatility of the Company’s common stock, the expected dividend yield of our stock, the expected life of the options and the risk free interest rate. The assumptions used for the above grants include a risk free interest rate of
2.52%
-
2.61%
, volatility of
30.6%
, a dividend yield of
5.1%
and an expected life of
10
years.
The Company also maintains a Section 162(m) Cash Bonus Plan. Under the Company's Section 162(m) Cash Bonus Plan, compensation paid in excess of
$1,000,000
to any employee who is the chief executive officer, or one of the three highest paid executive officers on the last day of that tax year (other than the chief executive officer or the chief financial officer) is not tax deductible.
A summary of stock option activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
Outstanding, beginning of period
|
378,750
|
|
|
$18.46
|
|
4.8 Years
|
|
|
|
Options:
|
|
|
|
|
|
|
|
|
Granted
|
34,000
|
|
|
$19.79
|
|
9.7 Years
|
|
|
|
Exercised
|
(40,500
|
)
|
|
$12.42
|
|
0.5 Years
|
|
|
|
Canceled or expired
|
(6,000
|
)
|
|
$18.73
|
|
3.6 Years
|
|
|
|
Outstanding and expected to vest, end of period
|
366,250
|
|
|
$19.25
|
|
5.0 Years
|
|
$
|
832,000
|
|
Exercisable, end of period
|
331,250
|
|
|
$19.11
|
|
4.1 Years
|
|
$
|
819,000
|
|
|
|
|
|
|
|
|
|
Shares available for future grant
|
441,000
|
|
|
|
|
|
|
|
|
Compensation cost charged to operations for the 13 weeks ended
June 29, 2019
and
June 30, 2018
for share-based compensation programs was approximately
$65,000
and
$0
, respectively, and for the 39 weeks ended
June 29, 2019
and
June 30, 2018
was approximately
$89,000
and
$0
, respectively. The compensation cost recognized is classified as a general and administrative expense in the consolidated condensed statements of operations.
As of
June 29, 2019
, there was approximately
$77,000
of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a period of
four years
.
The Company’s provision (benefit) for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter, the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary.
The income tax provision for the 13 and 39-week periods ended June 29, 2019 was
$283,000
and
$728,000
, respectively, and includes a discrete tax provision of approximately (
$146,000
) and
$304,000
, respectively, in connection with the settlement of various state and local tax examinations as well as changes in the uncertain tax position liability as a result of lapses in the statute of limitations. The effective tax rate for the 13 and 39-week periods ended June 29, 2019 of
6.5%
and
17.6%
, respectively, differed from the statutory rate of 21% as a result of the tax benefits related to the generation of FICA tax credits, a discrete tax provision in connection with the settlement of various state and local tax examinations offset by changes in the uncertain tax position liability as a result of lapses in the statute of limitations during the interim period ended June 29, 2019.
The income tax provision for the 13-week period ended June 30, 2018 was
$562,000
and the effective tax rate for the period of
16.1%
differed from the blended statutory rate of
24%
as a result of tax benefits related to the generation of FICA tax credits and operating income attributable to non-controlling interests that is not taxable to the Company. The income tax benefit for the 39-week period ended June 30, 2018 was
($661,000)
and includes a discrete tax benefit related to the one-time remeasurement of the Company’s deferred tax assets and liabilities for reduced federal tax rate enacted as part of the Tax Cuts and Jobs Act. The effective rate of
(19.9)%
for the 39-weeks ended June 30, 2018 differed from the blended statutory rate of
24%
as a result of tax benefits related to the generation of FICA tax credits, operating income attributable to non-controlling interests that is not taxable to the Company
coupled with a discrete tax benefit related to the one-time remeasurement of the Company’s deferred tax assets and liabilities for reduced federal tax rate enacted as part of the Tax Cuts and Jobs Act.
The Company’s overall effective tax rate in the future will be affected by factors such as the utilization of state and local net operating loss carryforwards, the generation of FICA tax credits and the mix of earnings by state taxing jurisdictions as Nevada does not impose a state income tax, as compared to the other major state and local jurisdictions in which the Company has operations. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual tax rate could differ from current estimates.
|
|
11.
|
INCOME PER SHARE OF COMMON STOCK
|
Basic earnings per share is computed by dividing net income attributable to Ark Restaurants Corp. by the weighted-average number of common shares outstanding for the period. Our diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the effect of common shares issuable upon exercise of stock options, using the treasury stock method in periods in which they have a dilutive effect.
A reconciliation of shares used in calculating earnings per basic and diluted share follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
|
June 29,
|
|
June 30,
|
|
June 29,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Basic
|
3,481
|
|
|
3,440
|
|
|
3,477
|
|
|
3,436
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options
|
|
49
|
|
|
118
|
|
|
54
|
|
|
118
|
|
Diluted
|
|
3,530
|
|
|
3,558
|
|
|
3,531
|
|
|
3,554
|
|
For the 13-week and 39-week periods ended June 29, 2019, the dilutive effect of options to purchase
209,500
shares of common stock at exercise prices ranging from
$20.18
per share to
$22.50
per share were not included in diluted earnings per share as their impact would have been anti-dilutive.
For the 13-week and 39-week periods ended June 30, 2018 no options were excluded from diluted earnings per share as all were dilutive.
On December 3, 2018, March 1, 2019, and June 3, 2019, the Board of Directors declared a quarterly dividend of
$0.25
per share on the Company’s common stock to be paid on
January 3, 2019
, April 5, 2019, and July 8, 2019 to shareholders of record at the close of business on
December 18, 2018
, March 15, 2019, and June 22, 2019, respectively. The Company intends to continue to pay such quarterly cash dividends for the foreseeable future; however, the payment of future dividends is at the discretion of the Company’s Board of Directors and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant factors.