Greetings. Welcome to the Ark Restaurants' Fourth Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference call is being recorded. I will now turn the conference over to your host, Sonal Shah. You may begin.

Thank you, operator. Good morning, and thank you for joining us on our conference call for the fourth fiscal quarter ended October 3, 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; Vinny Pascal, our Chief Operating Officer; and Anthony Sirica, our Chief Financial 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 homepage 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, everyone. To go over revenue by region, Florida has been largely open since June, with some restrictions still in place. Despite various measures, like limited hours and 50% indoor occupancy, our restaurants in Broward County are doing reasonably well given the circumstances. On average, I would say we are down about 20% from pre-COVID levels across our Florida properties. Florida is generating good cash flow, although we are a bit disappointed with the sales at JB’s, a prime beach location that typically caters to an older crowd, who seem to have moved away from dining out altogether. In Alabama, business has been strong. When restrictions were lifted, we continued to operate under 50% capacity indoors, but both Alabama locations have effectively utilized curbside pickup, which has kept them busy. During the busy summer season at Gulf Shores, we actually exceeded last year's sales, likely due to both curbside delivery and people seeking activities, with our restaurants filling that gap. Las Vegas has faced challenges recently. Historically, we are in the slowest season right now, compounded by a 25% limit on indoor dining and casino room availability, leading to a significant drop in our business—about half of what we were doing just a few weeks ago. It’s slow right now, and I doubt we’ll see demand exceed 25% capacity in this period. Typically, we would have substantial revenue around Christmas, but with current restrictions, we won’t reach those figures. The situation has shifted Vegas from generating cash flow to a slight negative cash flow, but I believe it will improve after this slow three-week cycle. In Washington, D.C., we had a good summer at Sequoia with 600 outdoor seats, but indoor dining has now been shut down, and we will be temporarily closing until restrictions are lifted, which we hope will be by January 15. In New York, every restaurant has been unprofitable over the summer, even with outdoor seating at Bryant Park. The revenue there has dropped to only 10% of what it used to be, making it impossible to cover payroll and rent. Our larger locations have struggled with social distancing rules that limit customer volume. Clyde’s and ROBERT also experienced similar declines, with no outdoor seating options and restricted indoor capacity. El Rio Grande did relatively well during the summer but isn’t making cash now due to closed indoor dining and poor weather, so we will close it too. Almost all of our operations, except for Bryant Park in New York, are essentially closed right now, as are those in Washington, D.C., and our revenue is sharply restricted in Las Vegas. As for Bryant Park, we are still open mainly due to landlord requirements and are attempting to renegotiate our rent. We’ve received some rent relief until the end of the year, and we will continue discussions for support in the coming months. On a financial note, we’ve reduced corporate overhead from $11 million to $7.5 million. Positive cash flow at the restaurants has been manageable largely due to rent breaks from landlords and salary cuts among managers and staff. There was a point where the highest weekly salary across our 2,300 employees was capped at $1,000, and some have seen salary reductions of over 95%. As restaurants began to reopen, we started to restore some wages, but most employees are still earning around 65% to 70% of their previous salaries. We have taken extensive measures to minimize payroll expenses, cut restaurant rents, and reduced office space costs, postponing capital improvements except for one project at Rustic Inn in Florida, which we completed. It’s been difficult, but we are optimistic. We anticipate positive cash flow in the June quarter and believe that as the vaccine distribution begins and people resume their normal lives, our restaurants are well-positioned for recovery. The rents are manageable, and we plan to work with landlords as revenue increases. We are hopeful regarding our future, and our balance sheet remains solid. Now, I’ll hand it over to Anthony to discuss new legislation from Congress that may affect our PPP funding.

Sure. Okay. There’s someone on the line that has a lot of background noise; if they can mute their phone, it's a little difficult to hear. So, a couple of things. As of year-end, we had $16.8 million of cash. We currently have about $13 million in cash. The reduction is due to the acquired restaurant in Florida called Blue Moon Fish Company, and the purchase price there was about $1.7 million in cash with the balance of $1 million in notes payable over four years at 5% interest. We made principal payments on our debt facilities and our notes for another $700,000. We had some CapEx to get the barge installed and operational. Obviously, we had some losses. Our debt is $45 million, which includes $30 million to our lender, which consists of a revolving credit facility of $10 million and $20 million in term notes related to purchases of restaurants over the last four or five years. The other $15 million is the PPP loans. As we discussed in prior filings, we have received approximately $15 million. We expect to start the forgiveness process at the beginning of the New Year on several of the loans. We are looking at the current legislation that just came out yesterday and was approved by Congress last night, which is waiting for Trump's signature. It's 5,600 pages. I've managed to narrow it down to a couple of hundred pages that impact us. The biggest takeaway is that Congress has overridden the IRS in its effort to make the forgiveness of the PPP loans taxable. So, just to go back on the CARES Act, which became law in March, the PPP loan forgiveness was intended to not be taxable, meaning the expenses would be deductible. When the loans are forgiven, you would not have to declare that income. The IRS came out with a ruling in November stating that the company cannot deduct the PPP expenses that were paid with forgiven loans. We took the position that at that point in our year-end financial statements, we were still going to record deferred tax assets for the losses related to these expenses. Congress's approval last night again overturns this, so the expenses that the money was paid with are deductible, and the forgiveness of the loans will not be income. This creates an operating loss on our tax returns for the September year-end, which we will carry back to recapture taxes we paid at 35% rates, and we're currently at 21%. We expect to have an NOL carry back claim of approximately $2.5 million to $3.5 million that we’ll file in the next three to four months. Other things in the new legislation suggest that there are other expenses that will be eligible to use PPP funds for, like cost of goods sold and similar items. We’re looking into whether any of the stimulus will be available for Ark to apply for additional loans. For that, we're still trying to determine what the legislation means. It's voluminous, and we've only had a couple of hours to review it. Michael, back to you.

Alright. Thank you, Anthony. I think that's a good explanation. We believe our balance sheet is in good shape now with the NOL carry back around $3 million, which is our expectation, by granting of the PPP money. What Anthony said, there are other things in there. We’re not sure of this, but it seems to be tangible for us. The original PPP loans were meant for payroll and rent. This bill seems to expand it to include costs of goods sold. To the extent that we had cost of goods sold that can be included as part of the grant, our expectation is some $10 million in grants may go up by a few million dollars, which means $5 million – we took in $15 million in total in PPP money.

Yes. Could I jump in, Michael?

Yes. Sure.

The law required us to spend the PPP funds within 24 weeks from when the money was deposited into our bank account. For the restaurants in New York and D.C., most of the funds were received in early May, giving us until mid-October to use the money for payroll, rent, and utilities. This was quite challenging since the restaurants did not reopen until late June or late July. Initially, New York allowed only outdoor dining, with indoor dining capped at 25%. We couldn't reach the spending requirement within the designated time frame. We had thought we would use about 30% to 40% of the funds for payroll and rent, and return or keep the remaining 60% to 70% as a loan. However, it appears that new legislation might allow for a larger percentage of the funds to be used based on the inclusion of inventory and perishable goods as eligible expenses during the covered period.

Thank you for the clarification, Anthony. So, all that being said, I'm happy to take questions.

Our first question is from Milan Mehta with Value Investment Principals.

I would just like to know if the acquisition that was announced in December will be EPS accretive and cash flow positive?

Alright. So, we bought a restaurant that historically has been strong, up 15% to 20% of its revenues in positive cash flow. Revenues used to be $6 million. So, the $2.7 million purchase price, $1.7 million down and $1 million over four years in equal installments. If you were buying that $1 million in cash flow, you would think that this was a very attractively priced purchase. The restaurant is in Fort Lauderdale on one of the canals. We validated the sales of other similar restaurants in the area who are situated on the canals. By the way, this restaurant has generated $6 million a year for some 20 years, pre-pandemic. For whatever reason, we were able to negotiate this price with the sellers, who are good guys, fishermen who established the restaurant 26 years ago. They didn't want to operate it anymore. The revenues are obviously down, but that is due to the restrictions imposed on the restaurant. It has the capacity to achieve much more volume. We think we can improve their cost of goods sold while also enhancing the quality. We've been operating for about two weeks. Its volume is currently in line with other restaurants in Fort Lauderdale in that area but down 20% to 22% from their historic sales. So, I would say that until we can really assess the payroll and our ability to influence cost of goods sold, we don't know if we are generating positive cash flow yet; however, I think we are and there's work to be done. But I can tell you that we’re pleased with the sales at this point.

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

Good summary. The PPP loans, will the possibility of including cost of goods allow you to use up the entire $15 million?

Yes. I don't know if it'll be the entire $15 million, but it will definitely be higher than what we were estimating. We were figuring about $10 million to $11 million would be forgiven. That will go up if I'm reading this correctly. Again, I want to go through it a couple more times and consult with our external auditors and some other firms studying this as we speak. But yes, we will definitely get closer to the $15 million.

And going forward, while it's early and you're studying it, what's your hope? I was a little confused with the old bill versus the new bill changes. So, the hope in terms of the new bill is what?

The new bill adds food purchases. But it appears it adds it retroactively to when the CARES Act was enacted. There are additional loan opportunities, and there's another $300 billion of loans available. I want to see how that aligns with our eligibility for those loans, especially given our prior PPP loans.

So, you don't know yet to what extent, if at all, you'll be able to access the new funding?

No, we don't know yet.

That's helpful. And obviously, $15 million reduction of your balance sheet debt off would be good, right?

Yes. Yes.

About the online betting situation. Anything at all?

I'll address that now; no problem. We're on a non-diluted basis somewhere around the 10% to 11% holder of a limited partnership interest in the new Meadowlands Racetrack in Northern New Jersey. We took that position almost five years ago. We have about $5.5 million to $6 million invested there, between equity and loans? We took that position because we thought the situation in Atlantic City was eroding dramatically and that the state would have to, at some point, issue a casino license in Northern New Jersey, given the significant density. We noticed that New York State said five years ago that in seven years they were going to introduce downstate gaming, which prompted MGM to buy Yonkers. And Aqueduct is currently active as a partial casino mostly for slots. We believed Jersey would have to respond. The partners in Meadowlands were conducting annual cash calls because the operation was losing money. We were offering food services pro bono, without gaining any financial benefit. Then came sports betting. New Jersey was the first state to approve sports betting, which went to the Supreme Court, and it was allowed. Our situation changed dramatically. I think it is now the largest grossing sports betting venue in the United States, achieving nearly $10 million in handle on certain days pre-pandemic and even during the pandemic. The cash from this venture is not distributed back to us. Anthony, am I right in the accounting? We don’t show any revenue or K-1 income from that, correct?

Correct. This is a cost method investment. We show any cash received as dividends.

We've received some interest paid on our notes, but not significantly. Our expectation is that if New York accelerates its timeline due to its budget deficit, it could prompt New Jersey to respond. The Meadowlands is closer to downtown New York than either Aqueduct or Yonkers regarding travel time, so we’re hopeful. Hard Rock is one of our partners, and they would operate the casino. At first, we believed we needed a partner holding an Atlantic City Casino license, but Hard Rock's recent takeover of the Taj Mahal puts them in a position to manage the casino at the Meadowlands should that occur. That’s the current situation. The New Meadowlands LLC is operating at a positive cash flow now, meaning there are no cash calls on us, and we’re receiving interest on our outstanding loan to the facility.

So, we hope to see Cuomo's move. Surely he is keen on generating revenue, so presumably…

Yes, we believe that will trigger it. The Meadowlands is, without a doubt, the best site available in Northern New Jersey for a casino.

Our next question is from Bruce Geller from Geller Ventures.

I'd like to revisit the deal you announced; the economics seem quite attractive, particularly as the world normalizes. Do you see other opportunities like this right now? I know that many restaurants are just barely holding on. While it might not be the best time to spend a lot of money, it does seem like there could be some opportunities at levels you might never see again. I’m curious if you could take advantage of such opportunities now, if you desired. How do you address the capital needs for such actions? Given the current environment, there seems to be potential for positive growth as things recover next year.

Let me address it from the micro, regarding this one deal. Our preference has shifted to purchasing restaurants that own the properties on which they sit. We did this in Alabama, Rustic, and Shuckers. JB’s did not come with a property purchase, but it does have a reasonable 25-year lease. We also were able to negotiate a very strong 26-year lease with Blue Moon. The first 15 years are at about a 6% rent, which accelerates in the last 11 years. The first 15 years are very reasonable rent. We believe it’s a property we will not be able to buy. It's a restaurant none of us from Ark has seen. A broker connected to us provided insights. Our management at Rustic and JB’s, nearby, were relied upon heavily, along with some friends who live there and have visited Blue Moon. All stated it's an excellent location, ambiance, and quality food. The challenge was in the negotiation; we felt the asking price was a bargain. Recently, we've had interest from two groups: one a wealthy family office and the other a corporate entity not in the restaurant industry, both expressing their desire to partner with us for attractive opportunities. I did not delve into the specifics of potential partnerships yet. I know one group is involved with gaming and wants to participate through Ark in prospective ownership in Meadowlands. We previously pursued joint ventures with others, like at the Hard Rock food markets many years ago. We're not witnessing appealing deals currently; what we do see is flowing at 6 to 7 times EBITDA. We are looking to acquire at around 3 to 3.5 times EBITDA, which might make us too conservative. Consequently, beyond Blue Moon, we haven't seen much else. We have a few months to see how the vaccine impacts restaurant sales. I prefer paying a little more once it’s clear things are improving rather than taking risks with debt. The value proposition in Blue Moon is that we are paying less than 3 times historical earnings. Well, it’s hard to say no to that; we believe we made a savvy decision. Such deals are unlikely to be frequent.

That all makes sense. I recently read that around 17% of all restaurants in the U.S. have closed due to the pandemic. If that’s accurate, could there be a situation where, even if the world doesn't fully normalize, business could outperform expectations due to the reduced supply?

It depends on the venue. In New York City, we've noted numerous notable restaurants closing permanently, which is shocking. Many of them were independently owned or operated only one or two locations, and their businesses have been severely struck. Few understand, apart from those in our business, the ramifications this pandemic has had on employees, many of whom have returned to unemployment after the business closures. A considerable portion of our staffing base has moved back to their home states. The reasons for their presence have vanished. Golden opportunities existed in New York; the Controller's Office expects 50% of all restaurants in New York City will close permanently. Do I truly think it’s that severe? No. But if 30% of restaurants close, I would feel relieved that it's only that much. Owners of independent restaurants are in a difficult place; they cannot sustain themselves without steady income. This industry was struggling even before this pandemic, primarily due to rising minimum wages for tipped employees. Minimum wages for our tipped employees climbed from a net of $5 to $15; they’ve effectively received a 100% raise over three years. Rents have also exceeded what makes sense economically for restaurants. Our insurance premiums have soared too, causing additional headaches. So, if you are a single restaurant owner and had to close for three months, now you must install new ventilation systems—our setup at Bryant Park cost around $50,000. Some restaurants can handle that, but many cannot. I predict around 30% of New York restaurants will close, while the remaining will thrive after the closures. However, ultimately, as confidence returns, those vacant spaces will not remain empty; they will reopen as new restaurants.

We have reached the end of the question-and-answer session. I'll now turn the call over to Michael Weinstein for closing remarks.

Thank you, everybody. Obviously, we're out of the office. We have someone there every day to handle mail, but nobody is taking calls. If anyone has a question, feel free to contact me directly. My cell number is 646-322-9197. I’m happy to take calls during business hours. I wish you all well during the holiday season and hope you all stay healthy both physically and mentally. It’s been a tough time for everyone, and I genuinely hope your families are well. We’ll speak again next quarter. Thank you for attending.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.