Greetings, and welcome to the Ark Restaurants Third Quarter 2024 Results 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. I would now like to turn the conference over to your host, Mr. 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 third quarter ended June 29, 2024. My name is Christopher Love, and I am the Secretary of Ark Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO; Anthony Sirica, our CFO; and Sam Weinstein and Jennifer Jordan, our joint co-COOs. 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 Anthony, our CFO.

Good morning, everyone. A couple of things I wanted to touch on before Michael provides his commentary. We ended the quarter with $11.5 million of cash and $5.7 million of debt. All of our debt is current now. We have three more quarterly payments of $435,000 due in September, December, and February. And then on June 1, we have balloon payments of $4.4 million. We'll be meeting with the bank to discuss a new credit agreement over the next month or two. The other item of note is the impairment charge that we took on the Sequoia restaurant. We continue to look at the performance of the restaurant, and it was lower than expected. So with that, it was considered a triggering event. We then engaged an independent third party to do a market rent study. Based on that and a discounted cash flow analysis, we had an impairment charge of $2.5 million, which was broken up between long-lived assets, approximately $939,000, and the right-of-use asset of $1.5 million. We will continue to monitor that as we go forward. Based on revised projections, we hope things get better. I think other than that, the rest of the balance sheet was relatively stable compared to the prior quarter and year-end. So, Michael?

Hi, everybody. So obviously, we're struggling with sales here. I think, if you remove the Gallagher's closure from last year and the amount of business we did in Gallagher's this year just to compare apples-to-apples, we're down just slightly, 3%, in comp sales. The problem isn't just comp sales, obviously. The problem is payroll, which, while they're not going up anymore in terms of trying to find qualified people for jobs, it's still hard for us to find people who can fulfill the responsibilities we need them to fill at the management level. Legislation in various venues where we operate has increased minimum wage. Insurance costs are substantially higher and other expenses, aside from food and beverage pricing, are also going up. So the combination of lackluster sales and expenses responding to inflationary pressures squeezes gross margins. I'm not displeased with the $3.3 million result given that scenario. Again, we haven't raised prices as aggressively as other companies. I think that has stood us in good stead. I think it will continue to put us in a better position as we come out of this lackluster period for restaurant sales. If I go by venue, the thing that hurt us most are the full-service restaurants in Florida. They were down substantially in head counts. Vegas was alright; Alabama has been just great for us. New York has been good, driven by a lot of events in Bryant Park and Robert. Washington Sequoia has been a little difficult. We can point to the whole Washington D.C. area suffering from several bad influences in the city. We have competition there, obviously, from other waterfront sites. We're spending a lot of time now trying to figure out what a more affordable menu for Sequoia might be. And we're doing that with all our restaurants. But basically, Sequoia is probably the one restaurant in the company that needs a refresh in menu and maybe even in branding. We have lots of opportunities in terms of acquisitions that have put in front of us in the last three months. We're following up on those. We also have lots of responsibilities in terms of refurbishing costs in Las Vegas, contractual when we signed a new lease. So given the sort-of lackluster sales that seem to be continuing right now and the cash flow needed to progress our company with new development and refurbishing in Vegas, we decided to eliminate the dividend for the moment just to preserve cash. That also segues into the conversation about Bryant Park. We have still not had a judgment on whether or not we will continue with the new lease or if they're going to award it to somebody else; it's just been radio silence. There are always rumors, but we're not paying attention to those. We think with the uncertainty of Bryant Park and what our responsibilities are, that eliminating the dividend for this quarter is a wise move. In relation to the Meadowlands, New York State has not acted on their casino applications. As we stated before, New Jersey is reluctant to do anything unless they see activity in downstate casinos in New York. So, that's been kind of quiet, even though we firmly believe we're going to be a licensee at some point. With that, I'd like to entertain any questions.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Jeffery with JJK Consultants. Please proceed with your question.

Good morning, everyone. Michael, you've pointed out the specific weaknesses in Florida, which is understandable. While the industry is experiencing challenges with payroll and insurance costs, Florida is still a strong market. I have a question regarding your strategy moving forward. In the past, you've mentioned plans to acquire properties and integrate them into the portfolio, which you still seem committed to. However, given the current weakness in such a significant market that is generally thriving, what is the strategy in Florida to turn things around? There hasn't been any discussion on these calls about what Ark intends to do with its existing properties and how we can advance revenues. This has been a frustrating investment so far, and the news seems to be getting worse. I would really appreciate hearing about the company's vision for the immediate future.

So, Jeff, you broke up a few times during that question, but I think I get the gist of it, and I hope I'm answering it correctly. First of all, we've been looking at several businesses over the last 12 months in Florida, well-established companies or one-offs. We're looking at numbers, and every deal has fallen apart in part because numbers are deteriorating in those restaurants. When we talk to brokers in Florida, they tell us everybody is down 15% to 20%. If you look at a city like Delaware, which was very hot for a while, it probably still is hot. The vacancies in restaurant spaces have been increasing every day because they were getting top rents when things were hot, and now business has slowed down, and restaurants' cash flow has been squeezed, and they can't afford the rent. Our strategy is to try to buy institutions with good management. In every case in Florida, we think we've accomplished that; however, this may not satisfy what you're looking for. The way I see things is there are years when you make more money than you deserve to and years when, due to circumstances outside of your performance, you don't make the money that you would like. Right now, the latter is true. We believe we have great locations in Florida. One of the disadvantages of those locations is that they're all on the water, and wind and property insurance has skyrocketed in those areas, which is squeezing our margins. From a performance level, if you look at the reviews of the restaurants, most are excellent. Every once in a while, we see that our revenues are creeping up above last year, but that doesn't mean that the headcounts are because there have been some price increases. In general, Florida has not been as good for us over the past 18 months as it had been in the past.

Michael, let me interrupt for a second. I apologize. Perhaps that's where I broke up before. I recognize that your strategy continues to be acquiring property where you think you could buy it at the right price and make some money. Let's put that aside for now; that hasn't happened recently and may not happen at all. What is the strategy of the current properties for turning them around, such as menu changes, happy hours, entertainment, and other things that drive new people?

Jeff, you're making the assumption that these things aren't doing well. They're performing well, they're all making money; they're just not making as much money as they used to make. And that’s a result of three things. Number one, traffic is not as strong as it used to be in general for all full-service restaurants down there. Now you can point to the three or four hot restaurants in every market where you can’t get a reservation after 5:00 or before 11:00, that will always exist. Our restaurants are not that; alright, they're not doing bottle service. There are no DJs; we’re not that. So these restaurants are performing well at the level of sales that presently exist. It's a question of three things. First, are they profitable? Yes. They had strong reputations and strong brand identities in the past, and do they still? Yes. The issue is traffic and the problem caused by increased expenses. The problem stems from my reluctance to raise prices and make up for squeezed gross margins. You can look at analogies that aren’t necessarily appropriate, but McDonald's is struggling because they raised prices beyond what customers can absorb. Starbucks is experiencing difficulties as well. Many brands face challenges trying to figure out pricing amidst current economic conditions. Given that these restaurants are profitable and performing well in terms of menu execution and service, and since they’re all in great locations, we’re prepared to stand by and accept less in terms of cash flow because we don’t think they need a drastic change. Yes, they all look at menus and try to be more efficient and bring in new products to entice customers. But we won't dismantle everything. We have one solid laboratory that is very telling: Las Vegas. We have a building in Las Vegas and one in Hollywood that are major casinos, and they all offer full-service restaurants as well as fast food options. Our food costs there are increasing significantly.

Michael, just to respond to what you said, I was not referring to restaurants in Florida that you need to have a reservation at; rather, I was referring to successful local restaurants that have re-engaged with the community. In particular, you mentioned having happy hours and events that tie down customers, particularly in Florida’s work-from-home environment.

I sympathize with your concerns. I'm certainly aware of it. It represents a significant part of my net worth, and I certainly don’t like seeing the stock at 11% or 12%, down from 20% a year ago. It doesn’t make me happy. I feel like the company is perhaps a little too conservative in the deals we’ve considered and subsequently passed on. That past conservatism has usually held us in good stead, and I'm happy that Jennifer and Sam are on board as their perspectives have been helpful in how we're looking at things moving forward. But that's where we are. It's not a lack of effort on behalf of the restaurants to perform; no one is dropping the ball. We just haven't found new opportunities that align with our former criteria. When I said previously, the deals we look at seem to fall apart due to deteriorating numbers; that is true.

Almost every deal we've looked at over the last year has been priced based on 2023 income, and when we look at 2024 year-to-date comps against last year, they're down 20% on sales and EBITDA. Sellers are attempting to price their businesses at 2023 levels even though we're seeing substantial declines in their financials and they’re not willing to drop the prices.

Hey, good morning, gentlemen. You discussed the pressures on both sales and costs. Given the macro environment, it's hard to see much relief on either side of those at the moment. So I'm curious, adding on to the previous line of questioning, what additional self-help measures can you put into place to address this environment? Waiting for the environment to get better isn’t going to be enough.

Yes, Bruce. One thing we're doing is, we're just six weeks away from opening up Lucky Pig. We've never done brands before, but we think it will be successful. When we look at the marketplace, there's nothing like what we're doing, and we think that’s expandable. We also have further interest beyond New York if it’s successful to expand in the Las Vegas area almost immediately. So there’s interest in what we’re doing. We’re also looking at automation; we will likely have a test within the next four months of a burger-making machine that will save us some labor. We’re looking at robotic janitors and dishwashers. We're very active in trying to find ways to save on labor. The biggest issue we have, honestly, is finding reliable dishwashers at hourly rates we’re willing to pay. Turnover is significant, and we will pursue anything that alleviates labor costs as long as we know that equipment is properly supported by its manufacturer.

We are actively looking at other costs and cutting them where possible. We've worked on driving safety initiatives at the restaurants to keep workers' compensation claims down, which has been effective over the past two years. Our premiums have decreased, and we just received a big refund on workers' compensation for the prior year based on their audit. We're continually searching every line item to identify cost-saving opportunities.

What about other strategies to drive revenue in the existing restaurants?

We have not been very effective in using social media, but we are changing our strategy and plan to be more active in that space. It will take time to see the impact, but we believe it has potential. Historically, our advertising has not been successful because we tend to focus on individual promotions rather than a cohesive brand approach. However, we see potential in social media. Our company is not struggling; each unit is mostly profitable, although they are generating less revenue than before. We will continue to move forward. I do want to address the decision to suspend the dividend. Shareholders have received minimal returns over the past few years, and the dividend was one minor source of return for them. The company is sitting on net cash, and you're expressing confidence in the future, but suspending a dividend can send mixed signals about confidence levels. We have $4 million or $5 million in refurbishing costs for which we are responsible in Las Vegas as part of our new lease agreement. We've completed renovations at Gallagher's and are in the process of revamping the food court. I believe the upgrades we’re doing in the food court will not negatively impact revenues, as one unit closing will likely lead patrons to other nearby units. However, it may affect cash flow when we close American next year and start refurbishing it. We're also evaluating two potential acquisitions that won’t be inexpensive. This decision to eliminate the dividend was made to preserve cash. Additionally, the question around Bryant Park remains uncertain. If tomorrow morning we find we’re not awarded the Bryant Park lease, I don't want to be in a position where we're paying out $3 million plus a year with no clarity on our future.

I understand, but much of this is speculative. It’s frustrating to know that you’re spending on obligations, yet there doesn’t seem to be substantial progress being made. Your results remain stagnant or even decline.

I acknowledge those observations. It may seem like we are not making any progress. However, we are working diligently to progress the business. We are striving to capture more cash flow. It has not worked out at Sequoia; you're correct. In the past, you purchased other properties. I’m curious about the estimated value of the real estate you own. Given the current enterprise value, what is the market value of those waterfront properties? The value of owned properties would only come into play for a sale-leaseback transaction. We haven't included the possibility of those properties holding any value as development sites because we never investigated them as such. The only properties where we own the land are the two in Alabama, the Rustic Inn and Shuckers. You’re right; we don't see a sizable amount of activity.

Thank you. Our next question comes from the line of Walter with Private Investor. Please proceed with your question.

Thank you. Could you please elaborate more on the Bryant Park lease? Specifically, if you can share some information on the impact to top line and/or bottom line if the lease is not renewed? Given Ark's historical presence in New York and the move south, is there a transformational strategy if Bryant Park does not get picked up? What would be the hit to top and bottom lines? Would you relocate, or move your back office? You have a lot of back office employees from a business that was established over 20 years ago, and that seems to be clearly shifting south. I'd love to hear more about your plans.

That's a great question. The cash flow from Bryant Park is significant. There are around 300 employees working with us there, especially during peak business times. An internal study showed that 19 out of 25 members of the management team have been with us for over 25 years. Letting them go would be very distressing. We discussed our ethical obligations towards these employees if we are unable to keep them and how we can support them as they look for new opportunities. If we need to leave Bryant Park, we could incur a hit to EBITDA of approximately $3.5 million to $4 million. This factor also led us to pause the dividend since such a loss will impact our financial decisions. New York has become quite challenging with high construction costs, rent, and strict regulations. We are actively pursuing expansion in the South. There may come a time when the overhead in New York does not make financial sense, prompting us to consider relocating some office operations.

Thank you for that detail; it was helpful. I’d also like to add that while the Meadowlands would be an attractive opportunity, it may take years to come to fruition. We've observed substantial increases in labor costs for tipped employees, and it's a good idea to explore jurisdictions with more favorable conditions. Have you considered investing in alternatives, such as service charges or administrative fees to offset the increased minimum wage pressures?

We really haven't explored those alternatives thoroughly. We usually see one or two opportunities each year warranting investigation, but the volume isn't high.

Thank you. We have a follow-up from the line of Jeffery with JJK Consultants. Please proceed with your question.

Michael, just a follow-up to Bruce's comment earlier; you kind of asked the same question that I did, using different terminology. There wasn’t any real answer regarding changing the menu or adding craft cocktails or other elements in that area. I’m curious about your revenue projections based on the square footage and the property. How quickly do you anticipate it would be successful and scalable enough to contribute meaningfully to company revenues?

Yes. The scalability on Lucky Pig would happen quickly; the outlet... it's a counter basically. We believe the menu is very attractive and we have immediate options for a larger space within another casino in the area. We'll be very proactive about testing it in various markets. That is one reason we want the capital.

Regarding the decisions from Nashville County recently to approve the casino project, I wonder how that might affect your plans.

Jeff, all of that helps. We just need New Jersey to initiate a referendum at a time when they think it will pass. There’s been a reluctance to hold a referendum unless there's evidence of public support, such as people going outside of Bergen County to gamble, which we need to demonstrate.

Thank you.

You're welcome.

Mr. Weinstein, there are no further questions. I'll turn the floor back to you for final comments.

Thank you. See you all next quarter.

Thank you, everyone.

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