Greetings, and welcome to Ark Restaurants' Fourth Quarter and Year End 2022 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christopher Love, Secretary for Ark Restaurants. Thank you. You may begin.

Thank you, operator. Good morning and thank you for joining us on our conference call for the fourth quarter and year ended October 1, 2022. My name is Christopher Love, and I’m the Secretary of Ark Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO; Anthony Sirica, our President and Chief Financial Officer; and 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 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 direct bearing on our operating results, performance, and financial condition. I'll now turn the call over to Michael. Thank you.

Hi, everybody. Thank you for joining us today. The comparisons of the September quarter this year with the September quarter last year are affected by two segments of our expense side. One is a substantial increase in payrolls and the other is a substantial increase in occupancy costs. In order to try to get the flow of the business directly stated of where we are, I want to first have Anthony explain occupancy costs and how the September quarter this year compares to the September quarter last year, what were the big differences, because there were adjustments last year which sort of inflated EBITDA in the fourth quarter and there are adjustments this year which sort of deflate our EBITDA in the current September quarter. So, Anthony.

So last year, we had adjustments related to the finalization of some COVID abatement deals that were recorded in the fourth quarter. So what happened was, there were several landlords where we were negotiating, still negotiating COVID rent abatements in 2021. So we were still accruing the normal base rents the whole time, because even according to the accounting standards, we couldn't record any abatements until we had signed deals. Those deals were signed last year in the fourth quarter and they were recorded, which reduced occupancy last year by about $800,000 to $1 million. In the current year, we also had some adjustments to occupancy costs related to the Vegas leases finalized in July and August for percentage rents that need to be accrued back to the beginning of the year based on the final deals. So all-in-all, you're probably looking at a $2 million swing between those two items. And that's why occupancy looks so odd.

So basically, last year we reversed an accrual of rents for the full year of our fiscal year 2021 in September, which created a $1 million increase in EBITDA essentially based upon that accrual. This year, the opposite happened. Because we didn't have signed leases in Vegas, we weren't allowed to accrue for the full year as the year was going on until the leases were signed and essentially those rents for the full year, because we had to go back to January 1 of 2022, were about $1 million that fell into the fourth quarter. So there's a $2 million swing here. I'd like to address payroll costs. That's the other big item. Payroll went up roughly $2.8 million compared to last year's September quarter. What's interesting is the payrolls now as a percentage of sales mirror what were our pre-pandemic percentages on sales in the same quarter before the pandemic and year-end. So we're back to essentially full employment. I may have made a mistake. As labor markets started to loosen up, my directive to all my managers was that because we couldn't find good people, we were having trouble finding good people for these restaurants. We were having a lot of turnover. We would hire people and they would leave after three, four, or five weeks. It was a mess. And as the market opened up a little bit, especially in Vegas, and I want to talk about that a little bit more, the directive was just to find the right people. And if we have to pay them more, which we're going to have to pay them more, just get them on board. That stood us very well in 2008 and 2009 when things got very rough for us. We said that our customers were going to have a tough time spending money in restaurants when the economy was really tanking. And the last thing they want to do is if they spend money in a restaurant is see bad service because we don't have enough people to service them. So basically, we don't want to be in that position going forward. And markets started to ease up with good people to fill these jobs that had been vacant or jobs where we didn't have the right people, and we're paying more. But in the end, we're back to pre-pandemic levels. In the September quarter, our sales rose by $4 million. We experienced a $2 million change in rents compared to the same quarter last year, along with a $2.8 million change in labor costs. This highlights the main differences in our financials. During this quarter, we did not increase prices aggressively and in many of our restaurants, we stopped raising them altogether. Understanding pricing elasticity in these restaurants is challenging, but we are at price points that seem unique given our 50 years in business. Even if the costs are justified, it may not translate to customer comfort with those prices. This is particularly evident at Rustic Inn in Florida, where we offer a two-pound order of king crabs. The cost to prepare that dish is 85% of its selling price, which is $135, a significant jump from the previous price of $75. Historically, one in four customers come to Rustic Inn for this dish. While it used to have a food cost of 50%, it now has a cost of 85%. Despite our confidence that it will still be profitable, our customers find it too expensive and are now sharing the dish or visiting less often. This change has affected our foot traffic, leading to a decline of over 20% in sales at Rustic Inn, impacting our EBITDA significantly since it's a highly profitable restaurant. However, other areas in Florida are performing well, including our food courts and two Hard Rock locations. JB’s, Blue Moon, and Shuckers are all doing well, as are our operations in Alabama and Las Vegas. New York is seeing positive results due to a rise in events and accepted price increases for those events, indicating a strong demand for gatherings in New York and Washington DC. Overall, despite the challenges, we noted a $4 million increase in sales. The key elements causing significant differences when comparing this September quarter to last year's are the changes in rents and the labor-related accruals. I believe our labor situation is currently strong. I think we're going to get more efficient with labor as we hire better people. I think the headcounts of the number of employees we have will sort of go down because in many cases we had two people doing the job or one person. We had a lot of overtime. That's going to start to be eliminated. So I think we're going to become more efficient. I'll open it up for questions now.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Paul Johnson, a private investor. Please proceed with your question.

Good morning and thank you for the explanation around those numbers. So I guess the tricky thing is to try to predict what is sort of a normal level of payroll and occupancy costs? And so I'm wondering, I know you don't give forward guidance, but all things being equal going forward for, let's say, the next fiscal year, do you think that we should be using this level of EBITDA, let's say, going forward, again, obviously not predicting what can happen to the economy and traffic and all that, but all things being equal, would you say that the payroll and occupancy costs incurred over the last fiscal year are what we should be modeling going forward?

It's a challenging question. There is something important to recognize. Our business in Las Vegas has performed exceptionally well. We have new management in place there, but they inherited some difficult circumstances. We were unable to fill certain gaps. Last year, two new hotels opened in Vegas that required an additional 8,000 workers, which was a significant challenge from the outset. What masked our difficulties and aided us considerably was the surge in demand and acceptance of higher prices when we implemented price increases. My main concern is whether this level of sales can be maintained. There are many indicators suggesting it can. Conventions are making a comeback, and the T-Mobile Arena, adjacent to New York-New York where much of our sales in Vegas are generated, is busier than ever with hockey games and concerts. A football team has also been introduced, and NBA teams are scheduled to play. We anticipate that sales will continue at these levels. However, I should note that due to price increases and higher earnings before interest and taxes, customer numbers, our Vegas business grew by 15% compared to last year. If this trend is sustainable, I believe the earnings we achieved this year are likely to remain steady. I expect New York to continue performing well. Sequoia in Washington is expected to improve. I anticipate Florida will maintain its current volume levels. However, there is a significant gap in Rustic’s EBITDA. That restaurant previously generated $3.4 million in operating cash flow and has dropped to $1.6 million annualized. The $14 million EBITDA we achieved this year indicates a substantial shortfall, with $1.8 million missing from Rustic Inn. I hope it will improve at some point, though perhaps not immediately. The Vegas numbers included a one-time $500,000 retirement payment for Paul Gordon, who retired as General Manager. Anthony can provide more details about that one-time expense. We are in the process of paying down our term loan with the bank and replacing it with a credit line for the same amount, which will save us $400,000 in interest charges. Currently, we have approximately $28 million to $29 million in cash in the bank. What's the status of the debt?

23.

23 million in long-term debt, plus $5 million there. We're in a strong position to make acquisitions. I actually see the $14 million number as a base, if that's an answer as opposed to being at risk, I see that as the base and hopefully we can get beyond that.

No, that's really helpful. Thank you. Can you just give an update on the Meadowlands?

Certainly. We're confident that the Meadowlands will serve as the location for a casino in northern New Jersey for several reasons. Firstly, the Racetrack already has established betting, which is a significant advantage. The Meadowlands has been the largest venue for sports betting in the U.S. Despite the impact of online betting from New York, our performance has remained strong, and the decline hasn't been as severe as we anticipated. Everything is permitted for environmental concerns, and we don't expect any residential lawsuits since we are not in a residential area. If New Jersey aims to generate tax revenue from casinos, we could be just 90 days away from initiating operations once approved. The Racetrack was designed with a casino in mind. The goal is to gain public support for a constitutional change through a referendum, especially given the presence of New York casinos in locations like Yonkers, Long Island, and potentially Manhattan. There are currently two groups competing for one of the three licenses in Manhattan, and if those licenses are awarded, Yonkers and Aqueduct could start operations immediately. New Jersey is aware of the revenue flow to New York casinos, and we believe this is the opportune moment to push for the referendum. Governor Murphy is very supportive of a northern casino, but we are uncertain about the specific details of the referendum itself. Historically, the last referendum mandated that the casino be run by an existing licensed operator in New Jersey, which would include one of the Atlantic City operators. At that time, Hard Rock didn't have a casino in New Jersey, but they currently do. They manage the former Taj Mahal and are our partners in this project. Overall, we haven't faced any negative developments, and favorable factors like our continued sports betting operations and the progress of New York casinos are encouraging for our pursuit of a casino license.

Thank you. To wrap up, you've mentioned before that it seems likely that a company like Hard Rock could potentially buy us out. Some have speculated that the price they would need to pay might be close to our entire market cap. Do you see that as a possibility?

I won't accept a number equal to the capitalization. I believe it's worth significantly more. When we were looking for partners, particularly as the first referendum approached, we learned it was voted down due to its poor wording, which gave the impression the state had to provide funding, which was misleading. The referendum did not specify where the tax revenues would be allocated, making it seem vague. We did discuss with MGM because, despite Hard Rock being our 20% partner in the deal, we required a licensed operator in New Jersey for operations in the North. MGM provided us with projections indicating that this venture could generate $500 million annually after taxes and cash flow. We own nearly 8% of this, fully diluted. More dilution is possible if we secure our equity percentage. Even if our stake drops to 4%, that would translate to $20 million in cash flow attributable to Ark’s interest. Additionally, we have exclusive rights to all food and beverage services, with only a carve-out for a Hard Rock Cafe, potentially representing a $50 million to $60 million business for us. The economic prospects are remarkable. However, our first priority is to obtain the casino license, which we don't currently have. I'm not certain of its value, but I definitely believe it's not reflected in the stock price.

I appreciate that. Thank you.

Our next question comes from Jason Walters, a private investor. Please go ahead with your question.

Thanks. Good morning, guys. A quick question on acquisitions and capital allocation. I know, Michael, you like to purchase companies for 3x to 5x EBITDA depending on whether you're getting the land included and Ark is trading at that level or below that level. Any thoughts on share repurchases, and then, what are you seeing in terms of opportunities from the acquisition side? Thank you.

Well, thank you. And I'm glad you got it right, the 3x to 5x depending upon whether land comes with it or not is absolutely correct. So we're constantly looking. We've seen a couple of interesting things. There are ongoing discussions, one of them further along than the other. The philosophy here would be we would rather acquire cash flow, which would be hopefully long-term consistent cash flow than reducing the number of shares. We think we're better off acquiring assets as opposed to share repurchase. And another influence, which we don't even think about but you should think about is already the liquidity built into our capitalization. We just don't have that many shares outstanding, floating around. I could tell you where 60% or 65% of the float is right now and it's not leaving those hands. So we just don't have enough shares outstanding. That's a bad thing because somebody that wants to buy it has to find moments like this when the stock is down and maybe there's a seller. But also it's a bad thing if you want to sell the stock. A block comes up, there's not necessarily a buyer available. So we just don't want to shrink the shares anymore. That all being said, we’re still much better off buying stuff at 3x to 5x with lease positions where we have 25 years left on a lease, if it's a lease; or if we own the land, it’s forever. We're confident enough that we know how to run these things. The cash flow from an acquisition should be long-lasting. We've been very lucky in the past. And make no mistake, I think we made smart acquisitions, but the luck involved has been that every chef and every manager of every restaurant that we've acquired has stayed with us. It's extraordinary. I think we're a good company to work for. But to have nobody leave and have all that expertise, I'm not so sure we'll be as fortunate going forward. I hope so. But that's a big issue with us as well and slows us down in jumping into acquisitions. We got to make sure that we have management in place that we have a good chance of retaining. So I hope that answers your question.

Yes. Thank you.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you. We're working hard here. We really are. Hopefully, things continue to improve for us. And we'll speak to you in the next quarter. And I appreciate your participation and the questions, very good today, and gives me a chance to explain the business a little bit better. Have a good day. Happy holidays, everybody.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.