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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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 March 31, 2024.

OR

 

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

 

img27455001_0.jpg 

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(s)

 

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

 

 

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 (§ 232.405 of this chapter) 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, a 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 May 6, 2024, the registrant had 115,743,761 shares of its common stock, par value $0.0001 per share (“common stock”) outstanding.

 

 


Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

5

 

Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 (unaudited)

 

5

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2024 and 2023 (unaudited)

 

6

 

Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2024 and 2023 (unaudited)

 

7

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023 (unaudited)

 

8

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

11

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

Controls and Procedures

 

36

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

37

Item 1A.

Risk Factors

 

37

Item 2.

Unregistered Sales of Equity Securities, and Use of Proceeds

 

37

Item 3.

Defaults Upon Senior Securities

 

37

Item 4.

Mine Safety Disclosures

 

37

Item 5.

Other Information

 

38

Item 6.

Exhibits

 

39

Signatures

 

40

 

 

 

2


Table of Contents

 

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, 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. 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, 2023 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 United States;
our ability to make acquisitions on economically acceptable terms;
our ability to successfully integrate acquired operations or otherwise realize the expected benefits from our acquisitions;
our ability to successfully implement our growth strategies;
significant changes in the current consumption of, and related regulations and litigation related to, cigarettes and other tobacco products;
changes in the wholesale prices of motor fuel;
significant changes in demand for fuel-based modes of transportation;
the highly competitive fragmented industry in which we operate, characterized by many similar competing products and services;
negative events or developments associated with branded motor fuel suppliers;
we depend on several principal suppliers for our fuel purchases and one principal supplier for merchandise;
a portion of our revenue is generated under fuel supply agreements with dealers that must be renegotiated or replaced periodically;
the retail sale, distribution, transportation 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;
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;
significant disruptions of information technology systems, breaches of data security or compromised data;
evolving laws, regulations, standards, and contractual obligations related to data privacy and security regulations, and our actual or perceived failure to comply with such obligations;
our failure to adequately secure, maintain, and enforce our intellectual property rights and third-party claims of infringement upon their intellectual property rights;
our dependence on third-party transportation providers for the transportation of most of our motor fuel;
our operations present risks which may not be fully covered by insurance;

 

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our variable rate debt;
the agreements governing our indebtedness contain various restrictions and financial covenants;
the majority of our common stock is held by a limited number of stockholders and management and their interests may conflict with yours;
our corporate structure includes Israeli subsidiaries that may have adverse tax consequences and expose us to additional tax liabilities;
we may not be able to maintain an effective system of internal control over financial reporting and we may not be able to accurately report our financial results or prevent fraud;
the market price and trading volume of our common stock may be volatile and could decline significantly; and
sales of a substantial number of shares of our common stock in the public market could cause the prices of our common stock to decline.

 

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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, except share data)

 

 

 

March 31, 2024

 

 

December 31, 2023

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

184,480

 

 

$

218,120

 

Restricted cash

 

 

21,234

 

 

 

23,301

 

Short-term investments

 

 

4,588

 

 

 

3,892

 

Trade receivables, net

 

 

158,712

 

 

 

134,735

 

Inventory

 

 

250,405

 

 

 

250,593

 

Other current assets

 

 

116,144

 

 

 

118,472

 

Total current assets

 

 

735,563

 

 

 

749,113

 

Non-current assets:

 

 

 

 

 

 

Property and equipment, net

 

 

743,394

 

 

 

742,610

 

Right-of-use assets under operating leases

 

 

1,365,200

 

 

 

1,384,693

 

Right-of-use assets under financing leases, net

 

 

160,357

 

 

 

162,668

 

Goodwill

 

 

292,173

 

 

 

292,173

 

Intangible assets, net

 

 

207,416

 

 

 

214,552

 

Equity investment

 

 

2,907

 

 

 

2,885

 

Deferred tax asset

 

 

62,368

 

 

 

52,293

 

Other non-current assets

 

 

51,505

 

 

 

49,377

 

Total assets

 

$

3,620,883

 

 

$

3,650,364

 

Liabilities

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Long-term debt, current portion

 

$

17,297

 

 

$

16,792

 

Accounts payable

 

 

233,960

 

 

 

213,657

 

Other current liabilities

 

 

150,569

 

 

 

179,536

 

Operating leases, current portion

 

 

68,403

 

 

 

67,053

 

Financing leases, current portion

 

 

9,392

 

 

 

9,186

 

Total current liabilities

 

 

479,621

 

 

 

486,224

 

Non-current liabilities:

 

 

 

 

 

 

Long-term debt, net

 

 

867,661

 

 

 

828,647

 

Asset retirement obligation

 

 

85,063

 

 

 

84,710

 

Operating leases

 

 

1,378,302

 

 

 

1,395,032

 

Financing leases

 

 

212,174

 

 

 

213,032

 

Other non-current liabilities

 

 

236,822

 

 

 

266,602

 

Total liabilities

 

 

3,259,643

 

 

 

3,274,247

 

Commitments and contingencies - see Note 13

 

 

 

 

 

 

Series A redeemable preferred stock (no par value) - authorized: 1,000,000 shares; issued and
   outstanding:
1,000,000 and 1,000,000 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: 400,000,000 shares; issued: 130,114,413 and 125,268,525 shares, respectively; outstanding: 115,743,761 and 116,171,208 shares, respectively

 

 

12

 

 

 

12

 

Treasury stock, at cost - 14,370,652 and 9,097,317 shares, respectively

 

 

(106,055

)

 

 

(74,134

)

Additional paid-in capital

 

 

267,671

 

 

 

245,007

 

Accumulated other comprehensive income

 

 

9,119

 

 

 

9,119

 

Retained earnings

 

 

90,493

 

 

 

96,097

 

Total shareholders' equity

 

 

261,240

 

 

 

276,101

 

Non-controlling interest

 

 

 

 

 

16

 

Total equity

 

 

261,240

 

 

 

276,117

 

Total liabilities, redeemable preferred stock and equity

 

$

3,620,883

 

 

$

3,650,364

 

 

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

 

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Table of Contents

 

ARKO Corp.

Condensed Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)

 

 

 

For the Three Months
Ended March 31,

 

 

 

2024

 

 

2023

 

Revenues:

 

 

 

 

 

 

Fuel revenue

 

$

1,631,332

 

 

$

1,661,664

 

Merchandise revenue

 

 

414,655

 

 

 

400,408

 

Other revenues, net

 

 

26,467

 

 

 

26,424

 

Total revenues

 

 

2,072,454

 

 

 

2,088,496

 

Operating expenses:

 

 

 

 

 

 

Fuel costs

 

 

1,502,302

 

 

 

1,537,882

 

Merchandise costs

 

 

279,737

 

 

 

277,443

 

Site operating expenses

 

 

218,931

 

 

 

192,683

 

General and administrative expenses

 

 

42,158

 

 

 

40,416

 

Depreciation and amortization

 

 

31,716

 

 

 

28,399

 

Total operating expenses

 

 

2,074,844

 

 

 

2,076,823

 

Other expenses, net

 

 

2,476

 

 

 

2,720

 

Operating (loss) income

 

 

(4,866

)

 

 

8,953

 

Interest and other financial income

 

 

22,014

 

 

 

7,210

 

Interest and other financial expenses

 

 

(24,471

)

 

 

(20,812

)

Loss before income taxes

 

 

(7,323

)

 

 

(4,649

)

Income tax benefit

 

 

6,707

 

 

 

2,158

 

Income (loss) from equity investment

 

 

22

 

 

 

(36

)

Net loss

 

$

(594

)

 

$

(2,527

)

Less: Net income attributable to non-controlling interests

 

 

 

 

 

53

 

Net loss attributable to ARKO Corp.

 

$

(594

)

 

$

(2,580

)

Series A redeemable preferred stock dividends

 

 

(1,414

)

 

 

(1,418

)

Net loss attributable to common shareholders

 

$

(2,008

)

 

$

(3,998

)

Net loss per share attributable to common shareholders – basic and diluted

 

$

(0.02

)

 

$

(0.03

)

Weighted average shares outstanding:

 

 

 

 

 

 

Basic and diluted

 

 

117,275

 

 

 

120,253

 

 

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, except share data)

 

 

Common Stock

 

 

Treasury

 

 

Additional

 

 

Accumulated
Other

 

 

Retained

 

 

Total

 

 

Non-

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

Stock, at Cost

 

 

Paid-in Capital

 

 

Comprehensive Income

 

 

Earnings

 

 

Shareholders' Equity

 

 

Controlling Interests

 

 

Total Equity

 

Balance at January 1, 2023

 

 

120,074,542

 

 

$

12

 

 

$

(40,042

)

 

$

229,995

 

 

$

9,119

 

 

$

81,750

 

 

$

280,834

 

 

$

56

 

 

$

280,890

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

4,069

 

 

 

 

 

 

 

 

 

4,069

 

 

 

 

 

 

4,069

 

Transactions with non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

94

 

 

 

 

 

 

 

 

 

94

 

 

 

(94

)

 

 

 

Distributions to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(60

)

 

 

(60

)

Dividends on redeemable preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,418

)

 

 

(1,418

)

 

 

 

 

 

(1,418

)

Dividends declared (3 cents per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,609

)

 

 

(3,609

)

 

 

 

 

 

(3,609

)

Common stock repurchased

 

 

(274,479

)

 

 

 

 

 

(2,310

)

 

 

 

 

 

 

 

 

 

 

 

(2,310

)

 

 

 

 

 

(2,310

)

Vesting of restricted share units

 

 

504,945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,580

)

 

 

(2,580

)

 

 

53

 

 

 

(2,527

)

Balance at March 31, 2023

 

 

120,305,008

 

 

$

12

 

 

$

(42,352

)

 

$

234,158

 

 

$

9,119

 

 

$

74,143

 

 

$

275,080

 

 

$

(45

)

 

$

275,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2024

 

 

116,171,208

 

 

$

12

 

 

$

(74,134

)

 

$

245,007

 

 

$

9,119

 

 

$

96,097

 

 

$

276,101

 

 

$

16

 

 

$

276,117

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

3,329

 

 

 

 

 

 

 

 

 

3,329

 

 

 

 

 

 

3,329

 

Transactions with non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

(2,984

)

 

 

 

 

 

 

 

 

(2,984

)

 

 

(16

)

 

 

(3,000

)

Dividends on redeemable preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,414

)

 

 

(1,414

)

 

 

 

 

 

(1,414

)

Dividends declared (3 cents per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,596

)

 

 

(3,596

)

 

 

 

 

 

(3,596

)

Common stock repurchased

 

 

(5,273,335

)

 

 

 

 

 

(31,921

)

 

 

 

 

 

 

 

 

 

 

 

(31,921

)

 

 

 

 

 

(31,921

)

Vesting and settlement of restricted share units

 

 

1,427,973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares

 

 

3,417,915

 

 

 

 

 

 

 

 

 

22,319

 

 

 

 

 

 

 

 

 

22,319

 

 

 

 

 

 

22,319

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(594

)

 

 

(594

)

 

 

 

 

 

(594

)

Balance at March 31, 2024

 

 

115,743,761

 

 

$

12

 

 

$

(106,055

)

 

$

267,671

 

 

$

9,119

 

 

$

90,493

 

 

$

261,240

 

 

$

 

 

$

261,240

 

 

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

 

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ARKO Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

For the Three Months
Ended March 31,

 

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(594

)

 

$

(2,527

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

31,716

 

 

 

28,399

 

Deferred income taxes

 

 

(10,075

)

 

 

(10,230

)

Loss on disposal of assets and impairment charges

 

 

2,664

 

 

 

287

 

Foreign currency loss

 

 

27

 

 

 

34

 

Gain from issuance of shares as payment of deferred consideration related to business
  acquisition (see Note 4)

 

 

(2,681

)

 

 

 

Gain from settlement related to business acquisition (see Note 4)

 

 

(6,356

)

 

 

 

Amortization of deferred financing costs and debt discount

 

 

664

 

 

 

592

 

Amortization of deferred income

 

 

(1,946

)

 

 

(1,860

)

Accretion of asset retirement obligation

 

 

616

 

 

 

491

 

Non-cash rent

 

 

3,484

 

 

 

2,798

 

Charges to allowance for credit losses

 

 

327

 

 

 

283

 

(Income) loss from equity investment

 

 

(22

)

 

 

36

 

Share-based compensation

 

 

3,329

 

 

 

4,069

 

Fair value adjustment of financial assets and liabilities

 

 

(10,772

)

 

 

(4,228

)

Other operating activities, net

 

 

624

 

 

 

329

 

Changes in assets and liabilities:

 

 

 

 

 

 

Increase in trade receivables

 

 

(24,304

)

 

 

(11,182

)

Decrease (increase) in inventory

 

 

188

 

 

 

(2,845

)

Decrease in other assets

 

 

5,095

 

 

 

3,545

 

Increase in accounts payable

 

 

21,347

 

 

 

5,940

 

Decrease in other current liabilities

 

 

(4,152

)

 

 

(127

)

(Decrease) increase in asset retirement obligation

 

 

(55

)

 

 

67

 

Increase in non-current liabilities

 

 

3,631

 

 

 

2,012

 

Net cash provided by operating activities

 

$

12,755

 

 

$

15,883

 

 

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

 

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ARKO Corp.

Condensed Consolidated Statements of Cash Flows (cont’d)

(Unaudited, in thousands)

 

 

 

For the Three Months
Ended March 31,

 

 

 

2024

 

 

2023

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property and equipment

 

$

(29,228

)

 

$

(23,380

)

Proceeds from sale of property and equipment

 

 

2,039

 

 

 

208,436

 

Business acquisitions, net of cash

 

 

 

 

 

(338,342

)

Prepayment for acquisition

 

 

(1,000

)

 

 

 

Loans to equity investment, net

 

 

14

 

 

 

 

Net cash used in investing activities

 

 

(28,175

)

 

 

(153,286

)

Cash flows from financing activities:

 

 

 

 

 

 

Receipt of long-term debt, net

 

 

41,588

 

 

 

55,000

 

Repayment of debt

 

 

(6,635

)

 

 

(5,592

)

Principal payments on financing leases

 

 

(1,135

)

 

 

(1,418

)

Early settlement of deferred consideration related to business acquisition

 

 

(17,155

)

 

 

 

Proceeds from sale-leaseback

 

 

 

 

 

51,604

 

Common stock repurchased

 

 

(31,921

)

 

 

(2,310

)

Dividends paid on common stock

 

 

(3,596

)

 

 

(3,609

)

Dividends paid on redeemable preferred stock

 

 

(1,414

)

 

 

(1,418

)

Net cash (used in) provided by financing activities

 

 

(20,268

)

 

 

92,257

 

Net decrease in cash and cash equivalents and restricted cash

 

 

(35,688

)

 

 

(45,146

)

Effect of exchange rate on cash and cash equivalents and restricted cash

 

 

(19

)

 

 

(21

)

Cash and cash equivalents and restricted cash, beginning of period

 

 

241,421

 

 

 

316,769

 

Cash and cash equivalents and restricted cash, end of period

 

$

205,714

 

 

$

271,602

 

Reconciliation of cash and cash equivalents and restricted cash

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

$

218,120

 

 

$

298,529

 

Restricted cash, beginning of period

 

 

23,301

 

 

 

18,240

 

Cash and cash equivalents and restricted cash, beginning of period

 

$

241,421

 

 

$

316,769

 

Cash and cash equivalents, end of period

 

$

184,480

 

 

$

255,852

 

Restricted cash, end of period

 

 

21,234

 

 

 

15,750

 

Cash and cash equivalents and restricted cash, end of period

 

$

205,714

 

 

$

271,602

 

 

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

 

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Table of Contents

 

ARKO Corp.

Condensed Consolidated Statements of Cash Flows (cont’d)

(Unaudited, in thousands)

 

 

 

For the Three Months
Ended March 31,

 

 

 

2024

 

 

2023

 

Supplementary cash flow information:

 

 

 

 

 

 

Cash received for interest

 

$

1,650

 

 

$

2,197

 

Cash paid for interest

 

 

16,724

 

 

 

12,174

 

Cash received for taxes

 

 

268

 

 

 

212

 

Cash paid for taxes

 

 

648

 

 

 

125

 

Supplementary noncash activities:

 

 

 

 

 

 

Prepaid insurance premiums financed through notes payable

 

$

3,073

 

 

$

6,224

 

Purchases of equipment in accounts payable and accrued expenses

 

 

11,775

 

 

 

11,577

 

Purchase of property and equipment under leases

 

 

10,586

 

 

 

826

 

Disposals of leases of property and equipment

 

 

9,100

 

 

 

2,476

 

Issuance of shares as payment of deferred consideration related to business acquisition

 

 

22,319

 

 

 

 

Deferred consideration related to business acquisition

 

 

 

 

 

45,845

 

 

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

 

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Table of Contents

 

ARKO Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. General

ARKO Corp. (the “Company”) is a Delaware corporation whose common stock, par value $0.0001 per share (“common stock”), and publicly-traded warrants are listed on the Nasdaq Stock Market (“Nasdaq”) under the symbols “ARKO” and “ARKOW,” respectively.

The Company’s operations are primarily performed by its wholly owned subsidiary, GPM Investments, LLC, a Delaware limited liability company (“GPM”). Formed in 2002, GPM is primarily engaged directly and through fully owned and controlled subsidiaries in retail activity, which includes the operations of a chain of convenience stores, most of which include adjacent gas stations. GPM is also engaged in wholesale activity, which includes the supply of fuel to gas stations operated by third-parties and, in fleet fueling, which includes the operation of proprietary and third-party cardlock locations (unstaffed fueling locations) and issuance of proprietary fuel cards that provide customers access to a nationwide network of fueling sites. As of March 31, 2024, GPM’s activity included the operation of 1,540 retail convenience stores, the supply of fuel to 1,816 gas stations operated by dealers and the operation of 296 cardlock locations, in the District of Columbia and throughout more than 30 states in the Mid-Atlantic, Midwestern, Northeastern, Southeastern and Southwestern United States (“U.S.”).

The Company has four reportable segments: retail, wholesale, fleet fueling, and GPMP. Refer to Note 12 below for further information with respect to the segments.

2. Summary of Significant Accounting Policies

Basis of Presentation

All significant intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Interim Financial Statements

The accompanying condensed consolidated financial statements (“interim financial statements”) as of March 31, 2024 and for the three months ended March 31, 2024 and 2023 are unaudited and have been prepared in accordance with GAAP for interim financial information and Regulation S-X set forth by the Securities and Exchange Commission (the “SEC”) for interim reporting. In the opinion of management, all adjustments (consisting of normal and recurring adjustments except those otherwise described herein) considered necessary for a fair presentation have been included in the accompanying interim financial statements. However, they do not include all of the information and disclosures required by GAAP for complete financial statements. Therefore, the interim financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “annual financial statements”).

The same significant accounting policies, presentation and methods of computation have been followed in these interim financial statements as were applied in the preparation of the annual financial statements.

Accounting Periods

The Company’s fiscal periods end on the last day of the month, and its fiscal year ends on December 31. This results in the Company experiencing fluctuations in current assets and current liabilities due to purchasing and payment patterns which change based upon the day of the week. As a result, working capital can change from period to period not only due to changing business operations, but also due to a change in the day of the week on which a period ends. The Company earns a disproportionate amount of its annual operating income in the second and third quarters as a result of the climate and seasonal buying patterns of its customers. Inclement weather, especially in the Midwest and Northeast regions of the U.S. during the winter months, can negatively impact financial results.

Use of Estimates

In the preparation of interim condensed consolidated financial statements, management may make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual

 

11


results could differ from those estimates. Significant estimates include right-of-use assets and lease liabilities; impairment of goodwill, intangible, right-of-use and fixed assets; environmental assets and liabilities; deferred tax assets; and asset retirement obligations.

Cash and Cash Equivalents

The Company considers all unrestricted highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents are maintained at several financial institutions, and in order to have sufficient working capital on hand, the Company maintains concentrations of cash at several financial institutions in amounts that are above the FDIC standard deposit insurance limit of $250,000.

Revenue Recognition

Revenue is recognized when control of the promised goods or services is transferred to the customers. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a single point in time or over time, based on when control of goods and services transfers to a customer. Control is transferred to the customer over time if the customer simultaneously receives and consumes the benefits provided by the Company’s performance. If a performance obligation is not satisfied over time, the Company satisfies the performance obligation at a single point in time.

Revenue is recognized in an amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services.

When the Company satisfies a performance obligation by transferring control of goods or services to the customer, revenue is recognized against contract assets in the amount of consideration to which the Company is entitled. When the consideration amount received from the customer exceeds the amounts recognized as revenue, the Company recognizes a contract liability for the excess.

An asset is recognized related to the costs incurred to obtain a contract (e.g. sales commissions) if the costs are specifically identifiable to a contract, the costs will result in enhancing resources that will be used in satisfying performance obligations in the future and the costs are expected to be recovered. These capitalized costs are recorded as a part of other current assets and other non-current assets and are amortized on a systematic basis consistent with the pattern of transfer of the goods or services to which such costs relate. The Company expenses the costs to obtain a contract, as and when they are incurred, in cases where the expected amortization period is one year or less.

The Company evaluates if it is a principal or an agent in a transaction to determine whether revenue should be recorded on a gross or a net basis. In performing this analysis, the Company considers first whether it controls the goods before they are transferred to the customers and if it has the ability to direct the use of the goods or obtain benefits from them. The Company also considers the following indicators: (1) the primary obligor, (2) the latitude in establishing prices and selecting suppliers, and (3) the inventory risk borne by the Company before and after the goods have been transferred to the customer. When the Company acts as principal, revenue is recorded on a gross basis. When the Company acts as agent, revenue is recorded on a net basis.

Fuel revenue and fuel cost of revenue included fuel taxes of $272.2 million and $264.3 million for the three months ended March 31, 2024 and 2023, respectively.

Refer to Note 12 for disclosure of the revenue disaggregated by segment and product line, as well as a description of the reportable segment operations.

3. Limited Partnership

As of December 31, 2023, GPM, directly and through certain of its wholly owned subsidiaries, held approximately 99.8% of the limited partnership interests in the Company’s subsidiary, GPM Petroleum LP (“GPMP”) and all of the rights in the general partner of GPMP. A non-controlling interest had been recorded for the interests owned in GPMP by the seller in the Company’s 2019 acquisition of 64 sites from a third-party (the “Riiser Seller”) and was classified in the consolidated statements of changes in equity as “Non-controlling interests.”

At December 31, 2023, the Riiser Seller owed GPM approximately $3.375 million with respect to a post-closing adjustment, in addition to other amounts, including interest and expenses. The Riiser Seller satisfied $3.0 million of such adjustment by tendering all of its limited partnership units in GPMP to GPM in January 2024. As a result, as of March 31, 2024, GPM, directly and through certain of its wholly owned subsidiaries, held 100% of the limited partnership interests in GPMP.

4. Transit Energy Group, LLC Acquisition

 

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On March 1, 2023, the Company completed the acquisition of certain assets from Transit Energy Group, LLC and certain of its affiliated entities (collectively, “TEG”) pursuant to a purchase agreement entered on September 9, 2022, as amended (the “TEG Purchase Agreement”), including (i) 135 convenience stores and gas stations, (ii) fuel supply rights to 181 dealer locations, (iii) a commercial, government, and industrial business, including certain bulk plants, and (iv) certain distribution and transportation assets, all in the southeastern United States (the “TEG Acquisition”). The purchase price for the TEG Acquisition was, as of closing, approximately $370 million, plus the value of inventory at the closing, of which $50 million was to be deferred and payable in two annual payments of $25 million (the “Installment Payments”), which the Company was entitled to elect to pay in either cash or, subject to the satisfaction of certain conditions, shares of common stock (the “Installment Shares”), on the first and second anniversaries of the closing. Pursuant to the TEG Purchase Agreement, at closing, ARKO and TEG entered into a registration rights agreement, pursuant to which ARKO agreed to prepare and file a registration statement with the SEC, registering the Installment Shares, if any, for resale by TEG.

Pursuant to the TEG Purchase Agreement, on March 1, 2024, the Company issued 3,417,915 Installment Shares to TEG in respect of the first installment payment (the “First Installment Shares”) at a price per share of $7.31, which was based on the 10-day volume weighted average price calculation contained in the TEG Purchase Agreement. As a result, the Company recorded a gain of approximately $2.7 million as a component of interest and other financial income in the condensed consolidated statement of operations for the three months ended March 31, 2024.

On March 26, 2024, the Company and TEG entered into a second amendment to the TEG Purchase Agreement (the “Purchase Agreement Amendment”), pursuant to which, in full satisfaction of all Installment Payments, (i) the Company repurchased the First Installment Shares from TEG for an aggregate purchase price of approximately $19.3 million in cash, or $5.66 per share, and (ii) the Company paid to TEG an additional amount in cash equal to approximately $17.2 million in satisfaction of the second Installment Payment, which would have otherwise been due on March 1, 2025. The $36.5 million was financed with the Capital One Line of Credit (refer to Note 5 below). The Purchase Agreement Amendment additionally terminated the registration rights agreement, terminated TEG’s indemnity obligations under the TEG Purchase Agreement and extended the transition services agreement entered into between the Company and TEG. As a result of this transaction, the Company recorded a net gain of approximately $6.4 million, out of which approximately $6.5 million was recorded as a component of interest and other financial income in the condensed consolidated statement of operations for the three months ended March 31, 2024.

 

5. Debt

The components of debt were as follows:

 

 

 

March 31,
2024

 

 

December 31,
2023

 

 

 

(in thousands)

 

Senior Notes

 

$

444,634

 

 

$

444,432

 

M&T debt

 

 

67,164

 

 

 

65,228

 

Capital One Line of Credit

 

 

368,889

 

 

 

332,027

 

Insurance premium notes

 

 

4,271

 

 

 

3,752

 

Total debt, net

 

$

884,958

 

 

$

845,439

 

Less current portion

 

 

(17,297

)

 

 

(16,792

)

Total long-term debt, net

 

$

867,661

 

 

$

828,647

 

 

Financing agreement with a syndicate of banks led by Capital One, National Association

GPMP has a revolving credit facility with a syndicate of banks led by Capital One, National Association with an aggregate principal amount of availability of $800 million (the “Capital One Line of Credit”). At GPMP's request, availability under the Capital One Line of Credit can be increased up to $1.0 billion, subject to obtaining additional financing commitments from current lenders or from other banks, subject to certain other terms as detailed in the Capital One Line of Credit. On March 26, 2024, GPMP, Capital One and the guarantors and lenders party thereto entered into an amendment to the Capital One Line of Credit, which facilitated the borrowing and use of up to $36.5 million of the Capital One Line of Credit for the settlement of the Installment Payments as provided for in the TEG Purchase Agreement Amendment as defined in Note 4. The other material terms of the Capital One Line of Credit remain unchanged.

 

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M&T Bank Credit Agreement

On January 31, 2024, GPM entered into an additional term loan under the credit agreement with M&T Bank for the purchase of real estate for $5.1 million, resulting in an aggregate original principal amount of real estate loans of $49.5 million as of March 31, 2024 (the “M&T Term Loans”). The Company has granted a mortgage in the real estate of 50 sites and certain fixtures at these and other sites as collateral to support the M&T Term Loans.

6. Leases

As of March 31, 2024, the Company leased 1,266 of the convenience stores that it operates, 207 dealer locations, 155 cardlock locations and certain office and storage spaces, including land and buildings in certain cases. Most of the lease agreements are for long-term periods, ranging from 15 to 20 years, and generally include several renewal options for extension periods for five to 25 years each. Additionally, the Company leases certain store equipment, office equipment, automatic tank gauges and fuel dispensers.

The components of lease cost recorded on the condensed consolidated statements of operations were as follows:

 

 

 

For the Three Months
Ended March 31,

 

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Finance lease cost:

 

 

 

 

 

 

Depreciation of right-of-use assets

 

$

2,452

 

 

$

2,853

 

Interest on lease liabilities

 

 

4,300

 

 

 

4,162

 

Operating lease costs included in site operating expenses

 

 

46,675

 

 

 

41,584

 

Operating lease costs included in general and administrative
   expenses

 

 

538

 

 

 

534

 

Lease cost related to variable lease payments, short-term
   leases and leases of low value assets

 

 

628

 

 

 

690

 

Right-of-use asset impairment charges and loss (gain) on
  disposals of leases

 

 

1,536

 

 

 

(540

)

Total lease costs

 

$

56,129

 

 

$

49,283

 

 

7. Financial Derivative Instruments

The Company makes limited use of derivative instruments (futures contracts) to manage certain risks related to diesel fuel prices. The Company does not hold any derivatives for speculative purposes, and it does not use derivatives with leveraged or complex features. The Company currently uses derivative instruments that are traded primarily over national exchanges such as the New York Mercantile Exchange (“NYMEX”). For accounting purposes, the Company has designated its derivative contracts as fair value hedges of firm commitments.

As of March 31, 2024 and December 31, 2023, the Company had fuel futures contracts to hedge approximately 1.3 million gallons and 1.2 million gallons, respectively, of diesel fuel for which the Company had a firm commitment to purchase. As of March 31, 2024 and December 31, 2023, the Company had an asset derivative with a fair value of approximately $0.1 million and $0.1 million, respectively, recorded in other current assets and a firm commitment with a fair value of approximately $0.1 million and $0.1 million, respectively, recorded in other current liabilities on the condensed consolidated balance sheets.

As of March 31, 2024 and December 31, 2023, there was $3.0 thousand and $0, respectively, of cash collateral provided to counterparties that was classified as restricted cash on the condensed consolidated balance sheet. All cash flows associated with purchasing and selling fuel derivative instruments are classified as other operating activities, net in the condensed consolidated statements of cash flows.

8. Equity

The Company’s board of directors (the “Board”) declared, and the Company paid, dividends of $0.03 per share of common stock on March 21, 2024, totaling approximately $3.6 million. The amount and timing of dividends payable on the common stock are within the sole discretion of the Board, which will evaluate dividend payments within the context of the Company’s overall capital allocation strategy on an ongoing basis, giving consideration to its current and forecasted earnings, financial condition, cash requirements and other factors. As a result of the aggregate amount of dividends paid on the common stock through March 31, 2024, the conversion price of the Company’s Series A convertible preferred stock has been adjusted from $12.00 to $11.76 per share, as

 

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were the threshold share prices in the Deferred Shares agreement (as defined in Note 17 to the annual financial statements). The Board declared a quarterly dividend of $0.03 per share of common stock, to be paid on May 31, 2024 to stockholders of record as of May 20, 2024.

In February 2022, the Board authorized a share repurchase program, which was later increased in May 2023, for up to an aggregate of $100.0 million of outstanding shares of common stock. In May 2024, the Board increased the size of the share repurchase program to $125.0 million. The share repurchase program does not have an expiration date. During the three months ended March 31, 2024, inclusive of the repurchase of the First Installment Shares from TEG, the Company repurchased approximately 4.8 million shares of common stock under the share repurchase program for approximately $28.3 million, or an average share price of $5.89. As of March 31, 2024, there was $0.7 million remaining under the share repurchase program.

9. Share-Based Compensation

The Compensation Committee of the Board has approved the grant of non-qualified stock options, restricted stock units (“RSUs”), and shares of common stock to certain employees, non-employees and members of the Board under the ARKO Corp. 2020 Incentive Compensation Plan (the “Plan”). Stock options granted under the Plan expire no later than ten years from the date of grant and the exercise price may not be less than the fair market value of the underlying shares on the date of grant. Vesting periods are assigned to stock options and RSUs on a grant-by-grant basis at the discretion of the Board. The Company issues new shares of common stock upon exercise of stock options and vesting of RSUs.

Additionally, a non-employee director may receive RSUs in lieu of up to 100% of his or her cash fees, which are vested immediately and which RSUs will be settled in common stock upon the director’s departure from the Board or an earlier change in control of the Company.

Stock Options

During the three months ended March 31, 2024, 447 thousand stock options vested. There was no other activity related to stock options during the three months ended March 31, 2024.

As of March 31, 2024, total unrecognized compensation cost related to unvested stock options was approximately $1.3 million, which is expected to be recognized over a weighted average period of approximately 1.6 years.

Restricted Stock Units

The following table summarizes share activity related to RSUs:

 

 

 

Restricted Stock Units

 

 

Weighted Average Grant Date Fair Value

 

 

 

(in thousands)

 

 

 

 

Nonvested RSUs, December 31, 2023

 

 

3,869

 

 

$

8.65

 

Granted

 

 

2,621

 

 

 

6.48

 

Released

 

 

(1,426

)

 

 

9.16

 

Forfeited

 

 

(79

)

 

 

4.80

 

Nonvested RSUs, March 31, 2024

 

 

4,985

 

 

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