Sadot Group Inc. quarterly report, Q3 FY2021

Business context and reporting period

Muscle Maker, Inc. (the registrant named in this filing; not Sadot Group Inc.) filed this unaudited Form 10-Q for the quarter ended September 30, 2021. It operated Muscle Maker Grill, Healthy Joe’s, Pokemoto and SuperFit Foods businesses. At quarter-end, its system included 25 company-owned restaurants, 19 franchised restaurants and one meal-prep business. The company acquired SuperFit Foods in March and Pokemoto in May 2021, materially expanding its operated business.

Financial performance and position

• Revenue and margins: Nine-month revenue increased 117%, mainly from acquired businesses and new or additional company-operated locations. Company restaurant food and beverage costs were 37.8% of restaurant sales for the nine months, versus 38.3% a year earlier; labor was 43.1%, versus 48.5%. The company reported a nine-month operating loss equal to 104% of revenue.
• Cash flow: For the nine months, operating cash use was $4.94 million, investing cash use was $3.50 million and financing provided $7.86 million. Cash declined $0.58 million to $3.62 million.
• Liquidity and debt: Working capital surplus was $2.13 million. Other notes payable totaled $1.35 million, and convertible notes totaled $182,458. Total liabilities were $5.20 million at September 30, 2021.
• Balance sheet: Total assets were $18.36 million, including $7.77 million of net intangible assets and $2.66 million of goodwill. Stockholders’ equity was $13.17 million.

Material changes and unusual items

• The April private placement generated approximately $10 million gross proceeds; the filing reports $9.18 million net proceeds. It included common stock and warrants, creating potential dilution. The company reported 6.61 million warrants outstanding at quarter-end.
• Q3 net loss improved despite a larger operating loss, helped by $1.20 million of total other income, including employee-retention tax credit-related income and a $200,000 debt-extinguishment gain. For the nine months, other income included a $875,974 PPP-loan forgiveness gain and a $1.08 million total gain on debt extinguishment, as well as employee retention credits and a grant.
• Acquisition-related amortization increased: depreciation and amortization expense was $838,447 for the nine months, versus $288,615 in 2020. The Pokemoto acquisition included $4.56 million of identifiable intangible assets and $1.72 million of goodwill.
• The company recorded a $998,758 receivable for employee retention tax credits. Its collectability and timing are relevant to liquidity.

Outlook, risks and contingencies

Management gave no quantified financial guidance. It expected continuing operating losses and ongoing working-capital needs, including for expansion. The filing states there was substantial doubt about the company’s ability to continue as a going concern for at least one year from issuance; no new financing commitment was in place. Management said additional debt or equity may be needed and warned that failure to obtain capital could lead to cost reductions, foregone opportunities, creditor protection or reduced operations.

• COVID-19 remained an uncertain risk, with potential effects on demand, supply chains, food costs, labor availability, operations and liquidity. Management cited industry labor shortages and supply disruptions.
• Past-due state and local sales taxes were accrued at $228,323, including penalties and interest. The filing also describes pending or settled litigation, including a $100,000 convertible note balance related to a judgment, contractor claims and a lease judgment.
• Disclosure controls were deemed ineffective due to material weaknesses involving accounting staffing and segregation of duties, timely communication of transaction information, and IT controls. Management reported no material changes to internal control during the quarter.
• Subsequent to quarter-end, the company disclosed a Saudi Arabia master-franchise agreement covering development rights for up to 40 Muscle Maker Grill restaurants, and four Pokemoto franchise agreements for future locations. These are plans or agreements, not evidence that locations have opened.

Important facts for investors to verify

• Whether the company can raise capital and address the stated going-concern uncertainty, given operating cash burn and the absence of committed financing.
• Whether the $998,758 employee-retention-credit receivable is collectible and when cash will be received.
• The terms, potential dilution and registration status of outstanding warrants and other equity awards.
• Progress on sales-tax payment plans, litigation liabilities and other acquired or assumed debt.
• Whether acquisitions and planned franchise openings translate into sustainable sales, improved operating margins and lower cash usage.
• Remediation of the disclosed material weaknesses and improvement in disclosure controls and financial reporting processes.