Sadot Group Inc. (formerly Muscle Maker, Inc.) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 9, 2023. Financial amounts below are in U.S. dollars, millions, unless noted. The company changed its name to Sadot Group Inc. and ticker to SDOT on July 27, 2023.
Business context
The company was shifting from a U.S.-focused restaurant business to a food-focused group with two operating units: Sadot Agri-Foods, a global commodity trader, and its restaurant division, comprising Muscle Maker Grill, Pokémoto and SuperFit Foods. At June 30, the restaurant group had 19 company-owned locations, including its meal-prep kitchen, and 29 franchise locations. Sadot Agri-Foods generated nearly all reported revenue in the quarter and first half. Because commodity trading began after the prior-year comparison period, reported revenue growth is not like-for-like.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $160.3 | $2.9 | $373.3 | $5.9 |
| Operating income/(loss) | $(0.4) | $(1.7) | $(2.0) | $(3.7) |
| Net income/(loss) | $0.2 | $(1.8) | $(0.9) | $(3.7) |
| Basic and diluted EPS | $0.01 | $(0.06) | $(0.03) | $(0.13) |
| EBITDA (non-GAAP) | $0.7 | $(1.3) | $0.2 | $(2.7) |
| Adjusted EBITDA (non-GAAP) | $1.1 | $(1.2) | $3.5 | $(2.8) |
Q2 commodity sales were $157.6 million, with commodity operating expenses of $154.6 million; commodity cost alone was 97.3% of commodity sales. Sadot Agri-Foods reported operating income of $2.7 million for Q2 and $6.9 million for the first half, before corporate-level costs. Restaurant sales were $2.5 million in Q2, down 9.6%, and $4.8 million in the first half, down 12.1%. Franchise royalties and fees rose 46.0% in Q2 and 40.7% year to date, primarily reflecting Pokémoto franchise activity.
Consolidated Q2 operating margin was approximately negative 0.2%; net margin was approximately 0.1%. For the first half, net margin was approximately negative 0.2%. Management’s adjusted EBITDA excludes specified items and is a non-GAAP measure; it should not be treated as a substitute for GAAP results.
Cash, liquidity and debt
- Cash was $5.1 million at June 30, down from $9.9 million at December 31, 2022. Working capital surplus was $7.7 million; accumulated deficit was $80.2 million.
- Six-month operating cash outflow was $4.2 million, investing cash outflow $4.0 million, and financing cash inflow $3.4 million. Cash declined $4.8 million. Investing outflow included a $3.9 million farmland deposit.
- Accounts receivable was $47.5 million, while accounts payable and accrued expenses were $41.0 million, including $39.6 million of commodity payables.
- Notes payable totaled $4.4 million, including a $3.5 million bank line of credit bearing 3% interest and due in August 2023. The company reported that it repaid the line on August 1, 2023. Operating lease liabilities totaled $2.2 million.
Management said cash on hand and expected cash flows from commodity trading and franchise operations should fund operations, planned capital expenditures and repayment obligations for the next 12 months. It also cautioned that additional financing may not be available on acceptable terms and could cause dilution or constrain operations.
Changes, outlook and notable items
- The large revenue increase reflects the addition of commodity trading, not comparable growth in the legacy restaurant business. Commodity sales accounted for 98.3% of Q2 and 98.6% of first-half revenue.
- Restaurant company sales declined as certain unprofitable Muscle Maker Grill locations closed. Management said on August 4 that it planned to reduce restaurant costs by closing underperforming units and refranchising most remaining company-owned units, concentrating on a franchise and royalty model around Pokémoto.
- Aggia, a related party providing Sadot Agri-Foods advisory services, generated $4.4 million of stock-based consulting expense in the first half, including $1.1 million in Q2. The agreement was amended effective April 1 to reduce the compensation formula from 80% to 40% of Sadot Agri-Foods net income. In July, the company issued Aggia an additional 8.9 million shares under the amended arrangement; the filing says the agreement caps issuance at 14.4 million shares. Verify the share count and vesting terms, as the issuance occurred after quarter-end.
- The company had deposited $8.8 million toward a proposed acquisition of a 70% interest in developed Zambian farmland for approximately $8.5 million. Closing remained subject to government and regulatory approvals; $3.5 million was held in escrow pending closing.
- The company entered a five-year consulting agreement to expand commodity sourcing and trading in the Americas, with fixed fees of $0.5 million per year plus potential profit sharing.
- After quarter-end, the company raised approximately $2.2 million gross through a warrant exercise, reducing the exercise price from $1.385 to $1.00 and issuing an additional warrant for an equal number of shares. It also reported short-term convertible notes issued and repaid in July and August.
- Three largest commodity suppliers represented 96% of purchases in Q2; four largest represented 92% in the first half. The filing reports a $0.1 million accrued sales-tax liability; previously overdue 2017–2018 sales taxes had been paid. Management said ordinary-course legal matters were not expected to have a material financial impact. No specific quarterly financial guidance was provided.
Important facts for investors to verify
- Commodity trading’s thin cost spread, counterparty and supplier concentration, receivable collection, and related working-capital requirements.
- Whether the company can convert reported trading and segment income into operating cash, given the $4.2 million first-half operating cash outflow and substantial receivables and payables.
- Completion, approvals, funding and final economics of the Zambian farmland transaction and the associated $8.8 million deposit.
- Aggia’s related-party compensation, share issuance, vesting and dilution; the filing reports 35.9 million shares outstanding at June 30 and 46.1 million as of August 9.
- Execution and financial effects of the announced restaurant closures and refranchising strategy, as well as the company’s ability to fund operations and obligations without further dilutive or costly financing.