10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021.


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 001-39828

ARKO Corp.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		85-2784337
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

8565 Magellan Parkway

Suite 400

Richmond, Virginia 23227-1150

(Address of Principal Executive Offices) (Zip Code)

(804) 730-1568

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value per share	ARKO	Nasdaq Capital Market
Warrants to purchase common stock	ARKOW	Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”

in Rule 12b-2 of the Exchange Act:


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ YES ☒ NO

As of November 10, 2021, the registrant had 124,427,805 shares of its common stock, par value $0.0001 per share (“common stock”) outstanding.

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TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	5
	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (unaudited)	5
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (unaudited)	6
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020 (unaudited)	7
	Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2021 and 2020 (unaudited)	8
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited)	10
	Notes to Condensed Consolidated Financial Statements (unaudited)	13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	46
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	51
Signatures		52

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects, including the potential impact of the COVID-19 pandemic on our businesses, operating results, cash flows and/or financial condition. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described below and in “Item 1A-Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 and this Quarterly Report on Form 10-Q, and described from time to time in our other filings with the Securities and Exchange Commission (the “SEC”). We do not undertake any obligation to update forward-looking statements, except to the extent required by applicable law. We intend that all forward-looking statements be subject to the safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.

Risks and uncertainties, the occurrence of which could adversely affect our business, include the following:



changes in economic conditions and consumer confidence in the U.S. could materially adversely affect our business;



if we do not make acquisitions on economically acceptable terms, our future growth may be limited;



we may be unable to successfully integrate the acquired operations or otherwise realize the expected benefits from our acquisitions;



our future growth depends on our ability to successfully implement our organic growth strategy, a major part of which consists of remodeling our convenience stores;



significant changes in the current consumption of and regulations related to tobacco and nicotine products;



changes in the wholesale prices of motor fuel;



significant changes in demand for fuel-based modes of transportation;



we operate in a highly competitive industry characterized by low entry barriers;



negative events or developments associated with branded motor fuel suppliers;



we depend on five principal suppliers for the majority of our gross fuel purchases and two principal suppliers for merchandise;



a portion of our revenue is generated under fuel supply agreements with independent dealers that must be renegotiated or replaced periodically;



the retail sale, distribution and storage of motor fuels is subject to environmental protection and operational safety laws and regulations that may expose us or our customers to significant costs and liabilities;



business disruption and related risks resulting from the outbreak of COVID-19 and variants of the virus;



failure to comply with applicable laws and regulations;



the loss of key senior management personnel or the failure to recruit or retain qualified personnel;



unfavorable weather conditions;



payment-related risks that may result in higher operating costs or the inability to process payments;



we may be held liable for fraudulent credit card transactions on our fuel dispensers;



significant disruptions of information technology systems or breaches of data security;



laws, regulations, standards, and contractual obligations related to data privacy and security regulations, and our actual or perceived failure to comply with such obligations;



if we fail to adequately secure, maintain, and enforce our intellectual property rights;

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

if third parties claim that we infringe upon their intellectual property rights;



we depend on third-party transportation providers for the transportation of all of our motor fuel;



our operations present risks which may not be fully covered by insurance;



labor, raw materials and building supply shortages and price fluctuations in the construction industry could delay or increase the costs of our store remodel program and our maintenance capital expenditures;



our variable rate debt;



our credit facilities have substantial restrictions and financial covenants;



the proposed phase out of the London Interbank Offered Rate (“LIBOR”);



we incur significant expenses and administrative burdens as a public company;



we may not be able to timely and effectively implement controls and procedures required by Section 404(a) of the Sarbanes-Oxley Act;



our corporate structure includes Israeli subsidiaries that may have adverse tax consequences and expose us to additional tax liabilities;



the market price and trading volume of our common stock may be volatile and could decline significantly;



if securities or industry analysts do not publish research, publish inaccurate or unfavorable research or cease publishing research about us or the convenience store industry; and



sales of a substantial number of shares of our common stock in the public market.

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PART I. FINANCIAL INFORMATION

Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company,” “ARKO,” “we,” “our,” “ours,” and “us” refer to ARKO Corp., a Delaware corporation, including our consolidated subsidiaries.

Item 1. Financial Statements

ARKO Corp.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)


	September 30, 2021			December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	275,185		$	293,666
Restricted cash with respect to bonds		—			1,230
Restricted cash		14,920			16,529
Trade receivables, net		66,182			46,940
Inventory		189,026			163,686
Other current assets		93,515			87,355
Total current assets		638,828			609,406
Non-current assets:
Property and equipment, net		531,864			491,513
Right-of-use assets under operating leases		959,675			961,561
Right-of-use assets under financing leases, net		197,377			198,317
Goodwill		188,636			173,937
Intangible assets, net		201,318			218,132
Restricted investments		31,825			31,825
Non-current restricted cash with respect to bonds		—			1,552
Equity investment		2,809			2,715
Deferred tax asset		37,382			40,655
Other non-current assets		18,716			10,196
Total assets	$	2,808,430		$	2,739,809
Liabilities
Current liabilities:
Long-term debt, current portion	$	10,028		$	40,988
Accounts payable		180,677			155,714
Other current liabilities		122,700			133,637
Operating leases, current portion		51,522			48,878
Financing leases, current portion		6,957			7,834
Total current liabilities		371,884			387,051
Non-current liabilities:
Long-term debt, net		679,560			708,802
Asset retirement obligation		56,450			52,964
Operating leases		977,639			973,695
Financing leases		230,677			226,440
Deferred tax liability		356			2,816
Other non-current liabilities		151,286			96,621
Total liabilities		2,467,852			2,448,389
Commitments and contingencies - see Note 11
Series A redeemable preferred stock (no par value) - authorized: 1,000 shares; issued and outstanding: 1,000 and 1,000 shares, respectively; redemption value: $100,000 and $100,000, in the aggregate respectively		100,000			100,000
Shareholders' equity:
Common stock (par value $0.0001) - authorized: 400,000 shares; issued and outstanding: 124,428 and 124,132 shares, respectively		12			12
Additional paid-in capital		214,895			212,103
Accumulated other comprehensive income		9,119			9,119
Retained earnings (deficit)		16,664			(29,653	)
Total shareholders' equity		240,690			191,581
Non-controlling interest		(112	)		(161	)
Total equity		240,578			191,420
Total liabilities, redeemable preferred stock and equity	$	2,808,430		$	2,739,809

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ARKO Corp.

Condensed Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020
Revenues:
Fuel revenue	$	1,580,359		$	539,938		$	4,144,069		$	1,510,491
Merchandise revenue		434,652			403,665			1,220,298			1,119,041
Other revenues, net		20,012			16,475			64,826			44,701
Total revenues		2,035,023			960,078			5,429,193			2,674,233
Operating expenses:
Fuel costs		1,459,664			462,373			3,819,571			1,279,067
Merchandise costs		301,533			290,856			866,239			814,524
Store operating expenses		164,432			131,780			464,038			386,633
General and administrative expenses		32,696			25,403			91,270			64,823
Depreciation and amortization		22,031			16,171			71,546			50,056
Total operating expenses		1,980,356			926,583			5,312,664			2,595,103
Other (income) expenses, net		(56	)		1,381			2,811			7,290
Operating income		54,723			32,114			113,718			71,840
Interest and other financial income		2,937			239			4,613			980
Interest and other financial expenses		(17,365	)		(10,500	)		(59,655	)		(30,405	)
Income before income taxes		40,295			21,853			58,676			42,415
Income tax expense		(4,795	)		(4,672	)		(12,285	)		(5,171	)
Income (loss) from equity investment		85			(24	)		105			(435	)
Net income	$	35,585		$	17,157		$	46,496		$	36,809
Less: Net income attributable to non-controlling interests		51			7,469			179			15,682
Net income attributable to ARKO Corp.	$	35,534		$	9,688		$	46,317		$	21,127
Series A redeemable preferred stock dividends		(1,449	)					(4,285	)
Net income attributable to common shareholders	$	34,085					$	42,032
Net income per share attributable to common shareholders - basic	$	0.27		$	0.14		$	0.34		$	0.31
Net income per share attributable to common shareholders - diluted	$	0.25		$	0.14		$	0.31		$	0.31
Weighted average shares outstanding:
Basic		124,428			71,390			124,406			69,221
Diluted		133,925			71,390			125,354			69,221

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ARKO Corp.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	35,585	$	17,157	$	46,496	$	36,809
Other comprehensive income:
Foreign currency translation adjustments		—		479		—		474
Total other comprehensive income		—		479		—		474
Comprehensive income	$	35,585	$	17,636	$	46,496	$	37,283
Less: Comprehensive income attributable to non-controlling interests		51		7,469		179		15,682
Comprehensive income attributable to ARKO Corp.	$	35,534	$	10,167	$	46,317	$	21,601

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ARKO Corp.

Condensed Consolidated Statements of Changes in Equity

(Unaudited, in thousands)


	Common Stock				Additional Paid-in			Accumulated Other Comprehensive		Retained Earnings			Total Shareholders'			Non- Controlling			Total
	Shares		Par Value		Capital			Income		(Deficit)			Equity			Interests			Equity
Balance at July 1, 2020		71,384	$	7	$	115,514		$	4,439	$	(31,924	)	$	88,036		$	152,790		$	240,826
Share-based compensation		—		—		132			—		—			132			—			132
Conversion of convertible bonds		23		—		108			—		—			108			—			108
Distributions to non-controlling interests		—		—		—			—		—			—			(2,359	)		(2,359	)
Other comprehensive income		—		—		—			479		—			479			—			479
Net income		—		—		—			—		9,688			9,688			7,469			17,157
Balance at September 30, 2020		71,407	$	7	$	115,754		$	4,918	$	(22,236	)	$	98,443		$	157,900		$	256,343

Balance at July 1, 2021		124,428	$	12	$	214,781		$	9,119	$	(18,870	)	$	205,042		$	(153	)	$	204,889
Share-based compensation		—		—		1,613			—		—			1,613			—			1,613
Transactions with non-controlling interests		—		—		(50	)		—		—			(50	)		50			—
Distributions to non-controlling interests		—		—		—			—		—			—			(60	)		(60	)
Dividends on redeemable preferred stock		—		—		(1,449	)		—		—			(1,449	)		—			(1,449	)
Net income		—		—		—			—		35,534			35,534			51			35,585
Balance at September 30, 2021		124,428	$	12	$	214,895		$	9,119	$	16,664		$	240,690		$	(112	)	$	240,578

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ARKO Corp.

Condensed Consolidated Statements of Changes in Equity (cont'd)

(Unaudited, in thousands)

Common Stock

Additional
Paid-in

Accumulated
Other
Comprehensive

Retained Earnings

Total
Shareholders'

Non-
Controlling

Total