Filing summary
Registrant and period: The supplied filing is Muscle Maker, Inc. and subsidiaries’ unaudited Form 10-Q for the quarter and six months ended June 30, 2020, not a Sadot Group Inc. filing. It describes a fast-casual restaurant franchisor and operator. At quarter-end, the system had 11 company-owned and 20 franchised restaurants.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $834,686 | $1,383,416 | $2,269,740 | $2,567,790 |
| Operating loss | $(1,393,936) | $(561,102) | $(6,750,489) | $(1,374,298) |
| Net loss | $(1,501,425) | $(1,542,606) | $(6,993,688) | $(3,026,085) |
| Net loss per share | $(0.21) | $(1.03) | $(1.01) | $(2.02) |
- Q2 operating loss was 167% of revenue, versus 40.6% in the prior-year quarter; first-half operating loss was 297.4% of revenue, versus 53.5%.
- Q2 company restaurant sales were $659,939, down from $815,837. Restaurant operating expenses were $838,308, exceeding company restaurant sales. Labor and rent were 51.9% and 21.2% of restaurant sales, respectively.
- First-half revenue declined 11.6%. Company restaurant sales rose 17.4% to $1.90 million, but franchise royalties and fees fell by $555,473 to $318,324.
- First-half general and administrative expense increased to $6.34 million from $2.07 million, largely due to one-time stock compensation, consulting, offering-related and other costs. Stock-based compensation was $3.63 million for the half-year.
- First-half operating cash use was $3.83 million, compared with $2.01 million in 2019. Investing cash use was $164,000; financing provided $6.68 million. Cash at June 30 was $3.16 million, versus $479,000 at year-end.
- Working capital was positive at $214,643, compared with a $3.71 million deficit at December 31, 2019. Total liabilities were $5.09 million; notes payable included $182,458 of convertible notes and $1.13 million of other notes. The balance sheet reported total stockholders’ equity of $3.83 million.
Material changes and unusual items
- Q2 revenue fell 39%, which management attributed mainly to COVID-19-related restaurant closures and reduced operations, fewer franchise locations and lower franchisee sales. Five company-owned locations were temporarily closed; one had reopened by the filing date. The company deferred half of franchise royalties earned through July and executives deferred part of their salaries.
- The February 2020 public offering raised $6.78 million net of offering costs. The company also received an $866,300 Paycheck Protection Program loan at 1% interest, with payments deferred until November 2020. Loan forgiveness was uncertain.
- Management identified substantial doubt about the company’s ability to continue as a going concern for at least one year from issuance. It said additional financing may be required and was not committed; failure to obtain capital could lead to cost reductions, asset sales, curtailed operations or creditor protection.
- Other Q2 expense was substantially lower year over year, largely because prior-year debt-discount amortization and interest expense declined. This partly offset the deterioration in operating results and explains why quarterly net loss was slightly lower year over year even as operating loss worsened.
- After quarter-end, executives agreed to cancel 216,783 restricted shares. Separately, a consultant settlement required the company to issue 300,000 shares and, subject to approval of the 2020 equity plan, 100,000 options. The filing reports 7,473,861 shares outstanding as of August 19, versus 7,958,534 issued and outstanding on June 30.
Outlook, risks and contingencies
The filing provides no quantified revenue or earnings guidance. Management said the duration and financial effects of COVID-19 were uncertain, noted ongoing working-capital needs and stated the company may need additional debt or equity financing. Potential equity financing could dilute shareholders; borrowing could increase debt-service obligations and impose restrictive covenants. The company also cited delivery costs, labor and commodity expenses, and reliance on a major food supplier; that supplier represented 84.4% of purchases for the first half of 2020.
- Accrued sales taxes, including penalties and interest, were $253,831 at June 30; the company was pursuing or discussing payment plans.
- Disclosed legal matters included a $100,000 convertible-note liability and accrued interest, a contractor claim with a $30,000 accrual, a $130,185 lease judgment, and mechanics liens totaling $98,005. Management said ordinary-course matters were not expected to materially affect the financial statements.
- Disclosure controls were deemed ineffective due to material weaknesses, including inadequate written control procedures, limited accounting resources and segregation of duties, deficiencies in communication of transaction information, and IT-control deficiencies.
Important facts for investors to verify
- Confirm the issuer: this document is Muscle Maker, Inc.’s 2020 Q2 filing and does not identify Sadot Group Inc. as the registrant.
- Track cash burn, financing availability and the company’s going-concern status, including repayment obligations on the PPP loan and other notes.
- Reconcile the June 30 and August 19 share counts and confirm completion and registration of the consultant settlement shares and any subsequent option issuance.
- Assess the duration and operational effects of pandemic-related closures, franchise royalty relief, and any subsequent restaurant reopenings.
- Monitor accrued taxes, litigation and settlement obligations, and progress in addressing the disclosed material weaknesses in internal controls.