Business context and reporting period
Sadot Group Inc. (formerly Muscle Maker, Inc.; Nasdaq: SDOT) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company is shifting from a U.S.-focused restaurant business to a global food group with agri-commodity trading, legacy food-service brands, and farming operations. Commodity trading was the dominant business during the period. In August, the company acquired approximately 5,000 acres of farmland in Zambia through a 70%-owned joint venture.
Unless otherwise noted, financial figures below are in U.S. dollars and millions.
Financial performance and position
| Metric | Q3 2023 | Nine months 2023 |
|---|---|---|
| Revenue | $182.2 | $555.5 |
| Operating loss | $(4.0) | $(5.9) |
| Net loss | $(5.3) | $(6.2) |
| Net loss per share | $(0.14) | $(0.18) |
| Gross profit / margin | $2.9 / 1.6% | $10.7 / 1.9% |
| Adjusted EBITDA (company-defined, non-GAAP) | $(0.8) | $2.8 |
- Commodity sales contributed $180.0 million, or 98.8% of Q3 revenue, and $547.9 million, or 98.7% of nine-month revenue. Commodity gross margins were thin: cost of goods sold was 98.4% of Q3 revenue and 98.1% year to date.
- Company restaurant sales were $1.9 million in Q3 and $6.7 million year to date. Franchise royalties and fees were $0.2 million and $0.8 million, respectively.
- Q3 operating expenses included $0.8 million of goodwill impairment and $0.8 million of intangible-asset impairment related to the restaurant restructuring, as well as $1.1 million of stock-based expense. Nine-month stock-based expense was $5.7 million, including $5.1 million related to Aggia.
- Cash was $2.4 million at September 30, down from $9.9 million at December 31, 2022. Working capital surplus was $9.0 million; accounts receivable were $61.2 million and accounts payable and accrued expenses were $57.7 million, including $55.8 million of commodity payables.
- Cash used in operations was $8.7 million for the nine months, compared with $3.4 million used in the prior-year period. Investing activities used $3.7 million and financing activities provided $4.9 million. Cash decreased by $7.5 million overall.
- Reported notes payable totaled $3.7 million, of which $3.1 million was current. Total liabilities were $65.3 million. The filing’s notes also describe a $3.0 million Yorkville advance received in September; the precise reconciliation of that advance to the reported debt balances is not clear in the filing text.
- Total assets were $90.7 million, including $13.2 million of property and equipment and a $6.4 million prepaid forward for carbon offsets. Stockholders’ equity was $25.4 million.
Material changes versus the prior comparable period
- Revenue rose from $2.8 million to $182.2 million in Q3 and from $8.7 million to $555.5 million for the nine months, primarily because commodity trading was added; the prior-year periods had no commodity sales.
- Net loss widened from $1.9 million to $5.3 million in Q3 and from $5.6 million to $6.2 million year to date. The year-to-date operating loss was broadly similar to the prior year, while impairment charges, higher stock-based and administrative expenses, and financing-related items affected 2023 results.
- Restaurant sales fell 26.3% in Q3 and 16.7% year to date, which management attributed mainly to closures of underperforming Muscle Maker Grill locations and conversion of company-owned Pokémoto locations to franchises. Franchise royalties and fees rose 44.1% in Q3 and 41.8% year to date.
- The company completed the Zambia farmland acquisition in August and recorded $11.8 million of land and land improvements at September 30. It also changed its name and trading symbol to Sadot Group Inc. and SDOT, effective July 27.
Outlook, risks, contingencies and unusual items
- Management said existing cash, receivables, and expected cash flows from trading, farming, and franchise operations should fund operations, anticipated capital expenditures, and repayment obligations for the next 12 months. It also cited a SEPA providing potential access to up to $25 million, subject to conditions. The filing cautions that additional financing may not be available on acceptable terms and could substantially dilute shareholders.
- The SEPA includes a $4.0 million convertible-note pre-paid advance, with $3.0 million disbursed in September and the remaining $1.0 million conditional on an effective resale registration statement. The notes bear 6% interest, may convert at a market-linked price subject to a $0.33 floor, and can trigger monthly $500,000 payments plus an 8% premium and interest under specified conditions. Yorkville also may require certain share issuances to offset note balances.
- Subsequent events included a further $1.0 million Yorkville cash advance on October 30 and a $3.0 million promissory note issued November 3, due February 6, 2024. These events occurred after the balance-sheet date.
- On November 7, Nasdaq notified the company that its share price had remained below $1.00 for 30 consecutive business days. The company had until May 6, 2024 to regain compliance, with delisting risk if it fails to satisfy applicable requirements.
- The company paid $6.4 million for 180,000 carbon credits expected to be delivered between 2025 and 2027 and entered a related forward sale agreement with stated proceeds of $8.0 million, payable upon future credit issuance. The forward sale was recorded as a derivative liability of $0.3 million at September 30; the prepaid purchase is a significant use of liquidity and the contracts expose the company to carbon-credit pricing and performance risks.
- Aggia, a related party and 26.9% shareholder at September 30, received stock-based consulting compensation tied to Sadot LLC net income. The arrangement includes substantial share awards and potential future debt payable to Aggia, up to a stated $71.5 million cap. Related-party governance, compensation calculations, and dilution are material considerations.
- Commodity supplier concentration was high: the largest supplier accounted for 99% of Q3 commodity purchases, while the four largest suppliers accounted for 94% of nine-month purchases. Management also identified transportation, supply, weather, geopolitical, trade, foreign-exchange, and international regulatory risks.
- Management reported disclosure controls and procedures were effective as of September 30. It said additional internal-control procedures and resources were being added as Sadot LLC is integrated.
Most important facts for investors to verify
- Reconcile the September Yorkville advance and other borrowings to the $3.7 million reported notes-payable balance; review the subsequent October and November financing and repayment terms.
- Assess whether thin commodity trading margins, receivable collection, and large commodity payables can support positive operating cash flow and the company’s stated 12-month liquidity outlook.
- Review the SEPA’s conversion, floor-price, exchange-cap, repayment-trigger, and registration conditions, and estimate potential dilution alongside outstanding warrants, Aggia awards, and shares issued after quarter-end.
- Evaluate the economics, delivery terms, valuation, and counterparties for the carbon-credit forward purchase and sale agreements.
- Track progress on restaurant closures and refranchising, the Zambia farm’s operating contribution, and any further impairment or capital requirements.
- Monitor Nasdaq bid-price compliance and the company’s ability to maintain its listing.