Greetings and welcome to Ark Restaurants' Third Quarter 2020 Results Conference Call. I would now like to turn the conference over to your host, Sonal Shah. Thank you. You may begin.

Thank you, Operator. Good morning, and thank you for joining us on our conference call for the third fiscal quarter ended June 27, 2020. My name is Sonal Shah, and I'm General Counsel of Ark Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO; and Anthony Sirica, our Chief Financial Officer; Vinny Pascal, our Chief Operating Officer. For those of you who have not yet obtained a copy of our press release, it was issued over the newswires yesterday and is available on our website. To review the full text of that press release, along with the associated financial tables, please go to our home page at www.arkrestaurants.com. Before we begin, however, I'd like to read the safe harbor statement. I need to remind everyone that part of our discussion this morning will include forward-looking statements, and that these statements are not guarantees of future performance and therefore, undue reliance should not be placed on them. We refer everyone to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on our operating results, performance and financial condition. I'll now turn the call over to Michael.

Hi, everybody. So I'm going to call on Anthony first to explain what expenses were incurred in the June quarter during the absence of any operations of the restaurants due to government closures. So Anthony, why don't you give us an explanation of that?

Right. So obviously, the June quarter, a bunch of our restaurants were either closed for the entire quarter, some are still closed, as well as some, as noted in the press release, opened up at various times during the quarter. So we have gone through our P&Ls and identified costs associated with payroll and occupancy expenses at the restaurants from the closure date or the beginning of the quarter, which would be March 29 through either the date they opened or through the end of the quarter if they haven't opened yet. And that amounted to about approximately $2.3 million of costs related to payroll, rents, and inventory write-offs and things of that nature, that we would not have incurred, but we made the election to keep certain people at the restaurants on the payroll, not reduce salaries, while the properties were closed, so we would be in a good position to reopen them quickly when we got the word from the various state and local governments. With that, we did open a number of properties during the quarter. As you can see in the release, we opened our restaurants in Florida, Rustic Inn, Shuckers, and JB's opened in mid-May; the Food Courts at Tampa in Hollywood opened in early June; our operations at the New York-New York Resort & Casino in Vegas opened in, I believe, the second week of June; our Sequoia property in Washington, D.C., opened in early June; and our Bryant Park and Rio Grande properties in New York opened in late June on or around June 23 or 24. I turn it over to you, Michael.

Yes. And Alabama opened sometime in May as well.

Yes, Alabama opened in mid-May. The $2.3 million figure does not include any corporate expenses or salaries for the continuing corporate employees, although those have been reduced, as we consider them to be somewhat fixed.

The operations of our restaurants showed a mix of smooth and challenging experiences. Two locations had to close temporarily after opening due to COVID cases, leading to some confusion regarding local health protocols that were not well established. We made the decision to close the restaurants with more than one or two COVID cases, conduct testing, and only reopen once we had enough negative results. Shuckers was closed for about 8 or 9 days, while Gulf Shores closed for roughly 5 or 6 days during this time. All our restaurants are vulnerable to the virus, and we assess how to handle cases as they arise. Nationally, our Vegas location has been either breaking even or generating positive cash flow every week it has operated. However, sales have recently dropped as California faced a spike in COVID cases, affecting businesses in Vegas that rely on customers from California. The hotels in the area are also seeing case increases, which impacts volume at New York, New York. Nevertheless, we have generally managed to remain cash flow positive. In Alabama, we’ve continued to be cash flow positive despite the closure of Gulf Shores, which typically generates more cash flow. Overall, Florida has also mostly remained cash flow positive. JB's, however, has been cash flow negative since it started, likely due to an older clientele who seem more cautious with the recent spikes in cases in Florida. Interestingly, the two Hard Rock casinos in Hollywood and Tampa are performing well, with increasing volume each week, contrary to our initial expectations. We anticipated that JB's would thrive given its beach location, outdoor seating, and previous cash flow of around $2 million annually, but that hasn’t been the case, likely due to our customer demographic. In Washington, D.C., Sequoia is doing decent business thanks to its 600 outdoor seats along the Potomac River, which has made it an appealing spot. A new menu introduced seems to be gaining traction, but without events and limited indoor dining, achieving positive cash flow is challenging without support from the landlord. We're seeking that assistance, although it may only help us break even. We’re currently in temporary agreements with landlords across the country that extend through December, as we cannot predict the situation beyond that timeframe. Both of our New York restaurants, Bryant Park and El Rio Grande, which have outdoor seating, are currently experiencing cash flow losses. We want to remain open. The cash flow loss at El Rio Grande is manageable, whereas the loss at Bryant Park is significant despite having outdoor seating. We value being open as good stewards of the park, which has been supportive of us. However, operating a restaurant of that capacity, which can host 1,000 guests, is challenging when we can only have a minimal kitchen staff and limited servers. It requires considerable payroll and high utility costs just to keep it running. Thus, making a profit isn’t feasible. We want to operate out of respect for our landlord. Before corporate overhead, we do have positive cash flow. During the closure, we restricted salaries to no more than $50,000 annually for anyone in the company. Once we confirmed cash flow from the restaurants, we raised salaries to about 65% of prior levels, with some exceptions. We've made efforts to manage corporate expenses, including renewing our health insurance at a lower rate which should result in notable savings. We’ve switched carriers and upgraded our benefits while cutting costs, which we believe was a beneficial move. We are scrutinizing every aspect of our operations. The coming December quarter is unlikely to yield profit, and we expect it to adversely affect our cash reserves, especially as we have deposits for upcoming Christmas parties that won't be happening. The number of events will be highly restricted, and if they occur, attendee numbers will be limited. Indoor seating in New York will only represent a fraction of our capacity. We aren't able to open Clyde's due to the absence of outdoor seating, and indoor dining is prohibited there as well as at Robert in the Museum of Arts and Design, which is currently closed. We anticipate reopening these restaurants in mid-September, albeit with reduced seating arrangements.

We applied for and received about $15 million in Paycheck Protection Program loans under the CARES Act. Approximately two-thirds of this funding was received on April 30 or May 1, and the remainder came in from mid-May to the end of May. According to current regulations, we have 24 weeks from the receipt date to use the funds. In circumstances like Robert or Clyde's, where we received the funds on May 1, the restaurants are not open yet, and we are uncertain if they will open before the 24 weeks ends. Therefore, if the rules remain unchanged, we will have to decide whether to return the funds or retain them as a 1% loan for two years. This decision needs to be discussed with our banks as we want to maintain our lending capacity with them. This situation complicates many of the loans since either the restaurants or properties are closed and we cannot use the money, or they are open, as in the case of Bryant Park, where revenues are so low that we cannot exceed the payroll threshold needed for forgiveness. In the case of Bryant Park, dealing with the base rents, which we are discussing with the landlord, we would struggle to meet the requirement of spending 60% of the funds on payroll to offset the rent for loan forgiveness. Thus, we will need to make a business decision and consult our bank regarding the next steps with these funds, whether to return them or take them as a loan.

There are certain restaurants, Gulf Shores being one of them, where the PPP money will be converted into a grant.

Las Vegas.

Las Vegas will be probably converted, most of it, into a grant. There are a handful where we'll get a grant, and that will help our balance sheet in the end because those restaurants are cash flow positive. They didn't need PPP money to be cash flow positive, and we're able to spend it according to the formula that the government laid out. So there will be money granted. Of the $15 million, Anthony, take a guess? $5 million to $8 million will be granted.

Yes, I would say at least $7 million to $8 million, hopefully more.

Yes. That will improve our balance sheet. The primary concern besides the uncertainty of how the virus will be managed during the winter months is that our revenues in New York are largely unpredictable. In the South and Vegas, governors are likely to keep those facilities open. In the South, particularly Florida, if the season starts as expected around Christmas and lasts until Mother's Day, and if cases remain controlled and people choose to travel to Florida, we should see an uptick in revenues there. However, it’s a situation that changes weekly. In New York, we only have outdoor seating, and similarly in Washington, D.C. If we experience rain or a hurricane like the one last week that impacted the Northeast, our revenues and cash flows become erratic. We are optimistic about Florida's upcoming season and hopeful for progress with the virus. We are encouraged by the performance of our two casinos in Florida, and our business seems to be growing each week. After August's heat in Las Vegas, we anticipate an increase in revenues, which would translate to more cash flow. Despite these uncertainties, our balance sheet remains strong enough to handle this situation. Our bank has been very supportive, and I believe the overall situation will improve as time goes on. With that, I'm happy to answer any questions.

It seems there are no questions. I would now like to pass the call to Michael Weinstein for his closing remarks. However, we have someone who just entered the queue. We do have a question from Steve Olson, a Private Investor.

Could you just run quickly over the current debt balances, cash, and net debt as of the end of June?

Anthony?

Yes. Including the PPP loans, we have $45.5 million of debt, and we have $21 million of cash.

I want to add that a significant portion of our debt, over $20 million, was incurred from acquiring JB's on the Beach, Shuckers, and two restaurants in Alabama, which included the land and buildings. We are our own landlord in those cases. This $20 million is mostly related to the real estate. For example, we essentially developed Rustic Inn, which is our top-performing location among the four, while Gulf Shores is also performing well. We purchased Rustic Inn for $7.5 million when it was generating $1.5 million in earnings. Before the pandemic, its earnings reached $3.5 million. Given the current interest rates, we believe that in a sale-leaseback situation, we could potentially reduce rent by $1 million and could receive $12 million to $13 million for that property.

Mike, can I jump in one second?

Yes.

The total balance on those loans is about $13 million after they've been amortizing for a number of years.

Yes, they've been amortized down dramatically.

The current balance.

So because of the way we acquired those, that value doesn't really show on our balance sheet in a way that's easily understandable. But we can unlock with purchase leaseback...

Sale leaseback.

Sale leaseback, excuse me, a significant amount of money. So that's sort of a fallback plan. We during the last couple of months, we've been busy and not really investigating that. But cap rates are very favorable right now.

Now the tax benefit that was booked in the quarter, will some of that be eligible to be refunded in cash for prior taxes paid? Or is that just an adjustment to kind of deferred tax account on the balance sheet?

No. We'll be filing carryback claims, back to, I think, '14 or '15, I forget, in the year that we have...

It's '15, Anthony. I think we missed '14, I think.

Yes. Well, I don't know if we missed it. But anyway, we'll be filing carryback claims, and we expect to get refunds somewhere in the range of $1.5 million to $2.5 million.

Regarding the Meadowlands investment, the previous quarter's 10-Q mentioned that an impairment analysis was conducted and it was found that the fair market value was greater than the carrying value, so no impairment charge was necessary. Is this analysis conducted quarterly? It seems there was no impairment charge this quarter. Could you provide some insights on the Meadowlands investment? Additionally, concerning that investment, was the mobile sports betting fee a one-time payment for the joint venture? Will there be ongoing revenue for that joint venture in future years? I understand we are merely an investor in that entity, but will they receive further funds from the mobile sports betting?

I'm sorry for not discussing the Meadowlands earlier in this call. Thank you for bringing it up, as it allows me to share our current standing. We now hold approximately an 8% interest in the new Meadowlands Racetrack, with an investment of around $5 million. In the initial years of our investment, we had to cover our share of the losses, but that hasn't applied to sports betting. The sports betting arrangements were made by Jeff Gural, the general partner. For instance, FanDuel paid a one-time fee of $7.5 million along with a $7.5 million profit advance. After expenses, Meadowlands is a 50% partner in the profits. It has become the largest venue for sports betting in the U.S., surpassing the total sports betting revenue of all the casinos in Atlantic City. We also participate in internet betting deals and receive a share of that cash flow. The FanDuel deal remains active, but the $7.5 million advance will likely be utilized within the first two years. As for the internet betting cash flows, I'm uncertain, but we are still involved in that partnership. Before the pandemic, Meadowlands was already cash flow positive, though the lack of sports affected it temporarily. Currently, I believe Meadowlands is slightly above breakeven in cash flow. The state is under financial pressure, and Governor Murphy has expressed interest in having a casino in the northern region. This interest is likely to grow after downstate casinos in New York are licensed, which is expected in December 2023. A recent development involves upstate casinos asking to open earlier, even if it means relinquishing some previous commitments. If they open, it could impact the timeline for establishing a casino in the North, potentially benefiting Meadowlands. While we don't have exclusive rights to host the casino, it's the only location currently permitted for gaming in the North, free from objections from nearby communities, and has the necessary environmental credentials. Additionally, we wouldn't have to construct a new facility; we can have slot machines operational in about a month. This would mark Phase 1 of the casino, with Hard Rock as the operating partner. Although we are remaining composed about this situation, it seems the timeline for transforming this location into a casino could be moving faster than anticipated.

Last quarter, the 10-Q disclosed the investment of about $500,000 in three restaurants in Ohio. Can you talk a little bit more about this project and opportunity?

Yes. Yes.

I know you've discussed previously. So it seems like it's moving along.

Eastern Ohio is one of the most productive malls in the country, featuring 52 restaurants, some of which are small, but notable names include Cheesecake Factory, Smith & Wollensky, and P.F. Chang's. The developer, who I have known for many years, reached out to me regarding the Easton Town Center, which has been around for 20 years. They mentioned that some leases are expiring and expressed dissatisfaction with the quality of the offerings at the 52 restaurants, noting a lack of enthusiasm. As leases come due, they are hesitant to renew and sought our help in redeveloping the restaurant concepts. We agreed to start with three, investing $500,000, of which $200,000 is the responsibility of Easton Town Center, although we initially covered the entire amount. Recently, they returned half of the funds because the project is currently on hold. We are waiting for a clearer outlook on the Easton Town Center’s performance. It’s doing better than the developer anticipated during this period, but still not at full capacity. Consequently, we decided to pause everything to conserve cash until we gain a better understanding of overall company prospects. We maintain communication with the developer every other week, and they still intend to proceed eventually. However, they are only receiving about 40% to 50% of the rents, which poses challenges. Although they are a significant development company, they are facing cash flow issues that hinder their ability to establish new relationships and they are reluctant to undertake endeavors requiring substantial tenant improvement allowances. Other opportunities are emerging, as I am meeting tonight with a company managing numerous national projects with restaurants that are permanently closing, and they are interested in collaborating with us to fill those spaces. While I am uncertain about the specifics of these deals right now, we will not be investing money as a lessee; we prefer to act as a buyer, similar to our previous experiences with Rustic and Shuckers in Alabama, where we operated as our own landlord. If we are to allocate funds, that’s where we would focus. Nevertheless, developers in distress, many experiencing restaurant closures and loss of viable tenants, might create opportunities for us to manage facilities and engage in other developments. However, all plans will depend on the evolving situation with the virus, and we are not eager to rush into expansion.

Right. You know what, I understand that, but there might be opportunities to opportunistically add some units without incurring additional G&A expenses and using your expertise in...

We think so. We think so. But there's a risk. Generally, in those deals, unless a landlord is going to do something that they're not used to doing, which is making investment in working capital losses beyond kind of improvements, you can lose a lot of money before this all turns around.

Right.

It's challenging for everyone. We believe this situation is real. I recall speaking about this after 9/11 and during the 2008-2009 period, when we temporarily suspended the dividend until we regained stability. I emphasized that we have valuable assets that have historically been productive, and they will be again; we just need to navigate through this period. We must consistently assess our balance sheet to understand how much runway we have, and right now, we have considerable runway. I will not compromise that at this moment. Any expansion deal we consider must not jeopardize our balance sheet, or we need to commit to revisiting the deal when conditions improve. Currently, everything feels risky.

Would you calculate the cash burn for the quarter in the $3 million to $4 million range? Is that down?

Well, the $4.5 million, whatever the cash burn was in the current quarter, was exacerbated by us just being closed everywhere.

It was supported by the fact that no one in the company could earn more than $50,000. In one instance, salaries at the corporate level, including bonuses, dropped from $3 million to $200,000. Some of our managers, who typically earn in the mid-six figures, were brought down to $50,000. Our managers, chefs, and everyone else made sacrifices, and I'm not trying to promote any false narratives here. This company has treated everyone well, and we all understand that we will do whatever it takes to ensure we retain our valuable assets because they are good assets and will be productive moving forward. We will avoid any actions that might divert us from that goal.

Our next question comes from Roger Lipton with Lipton Financial Services.

So most of what I was going to talk about was just answered on the previous question. But it sounds like the $45 million of debt includes the PPP, right?

Correct.

Correct.

So 7 or 8 of that will go away, presumably, right?

Yes.

Yes.

Do you think you return it rather than hang on? It's cheap money, 1% money. But you don't need...

Yes, but we have a bank to deal with.

Right. Right.

And it's only a two-year amortization. I know they changed it to five years, but the five years with loans made after June 5, I believe, and these banks are not cooperating and changing the paperwork from two to five years currently.

Right. Right. So recognizing there's a lot of moving parts here and anything can happen day-to-day. Right now, I mean, as we sit here today, what's sort of the monthly cash burn, if it is burning?

It's not that much. Anthony...

I'm still waiting to finalize the July P&L, but I think it's probably about $200,000 a month, say.

Right. Okay. As you mentioned, you never can predict what next week will bring. A vaccine could make a significant difference. Just like when the towers were damaged, who would have thought that new towers would rise and people would lease space in those buildings? So never say never; we'll have a new mayor, and this city will recover. Good job, Michael. This is a strange world, and we'll do our best here. Good work.

There are no further questions at this time. At this point, I'd like to turn the call back over to Michael Weinstein for closing comments.

All right. I hope we got the answers you need into your hands, but we're always available. I'm happy if anybody has questions to give you my cell number. It's 646-322-9197. If I don't have the answer, I'll merge your sim with Anthony, and we'll get you the answers you need. Again, 646-322-9197. Other than that, we'll see you probably after the election at this point, right? So what happens? Thank you so much.

This concludes today's conference call. You may disconnect your lines at this time, and we thank you for your participation.