Business context and reporting period
This is Muscle Maker, Inc. and subsidiaries’ unaudited Form 10-Q for the quarter ended March 31, 2019, comparing the three months ended March 31, 2019 with the same period in 2018. The filing describes a fast-casual restaurant franchisor and operator. The request names Sadot Group Inc., but the filing identifies the registrant as Muscle Maker, Inc.; confirm the intended company and filing.
At March 31, 2019, the system had 33 franchised restaurants. The filing is inconsistent on company-operated locations: a note reports six, while MD&A reports seven. It also says one additional company-owned restaurant opened after quarter-end.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $1.184 million | $2.038 million |
| Operating loss | $813,196 | $1.550 million |
| Net loss | $1.483 million | $3.191 million |
| Net loss per share, basic and diluted | $0.14 | $0.41 |
| Cash used in operations | $639,657 | $595,234 |
- Revenue fell 41.9%, primarily reflecting four prior-period company restaurant closures and the May 2018 sale of CTI. Company restaurant sales declined 49.5% to $800,763; franchise royalties and fees rose to $344,712.
- Operating loss improved by $736,457 and net loss by $1.708 million. Lower operating costs and reduced interest and debt-discount amortization more than offset lower revenue. Operating loss was 68.7% of revenue, versus 76.0% in Q1 2018.
- Restaurant food and beverage costs were 36.1% of company restaurant sales (36.5% prior year); labor was 34.8% (48.2%); rent was 12.3% (20.1%); and other restaurant operating costs were 14.4% (26.5%). The filing attributes some reductions to closures and some to improved efficiencies.
- At March 31, cash was $843,009, up from $357,842 at year-end; current assets were $1.176 million and current liabilities $6.416 million, producing a $5.240 million working-capital deficit. Total liabilities were $9.229 million; stockholders’ deficit was $4.155 million.
- Recorded convertible notes, including related-party and former-parent notes, were $3.483 million net of debt discounts; other notes payable were $560,000. These figures are carrying values, not necessarily principal amounts due.
- Cash provided by financing was $1.235 million, primarily from convertible notes. Investing activities used $110,176, including $121,132 in property and equipment purchases.
Changes, outlook, risks and unusual items
- Management said substantial operating and net losses are expected to continue and identified substantial doubt about the company’s ability to continue as a going concern for at least one year. Additional debt or equity financing is needed; success and terms are uncertain. Failure to obtain funding could require cost cuts, delayed expansion, liability extensions, asset sales, a business combination, reduced operations or creditor protection.
- After quarter-end, the company disclosed $1.738 million of additional 15% senior secured convertible notes and a $3.175 million offering of 12% secured convertible notes, as well as other financing events. These are subsequent events, not Q1 operating results. The 12% notes are secured by substantially all of Muscle Maker USA’s assets and include conversion and warrant provisions that may dilute shareholders.
- The company adopted ASC 606 in Q1 using a modified retrospective approach, recording a $568,540 cumulative adjustment that increased deferred revenue and accumulated deficit. Management also disclosed that its ASC 606 implementation was incomplete and the quantitative impact could not be disclosed, a point to reconcile with the adjustment reported.
- Management described plans to improve food, labor and delivery economics and favor variable rent structures; it gave no quantified financial guidance. It noted third-party delivery fees can reach 25% of an order and that future public-company costs may increase.
- Disclosure controls were deemed ineffective due to material weaknesses, including lack of documented controls, limited accounting resources, inadequate communication of transaction information and IT-control deficiencies. Management stated the financial statements were fairly presented despite these weaknesses.
- Contingencies include accrued delinquent sales taxes of $289,170 and multiple landlord, contractor and other claims or settlements. Several past rent claims had large stated amounts, with settlements or payment plans described in the filing. The company states it accrued probable and estimable liabilities.
- One supplier accounted for 87% of food purchases in Q1 2019, versus 75% in Q1 2018. Stock-based compensation was $305,133, compared with $39,091 a year earlier.
Investor verification priorities
- Confirm the issuer and reporting period: the supplied filing is for Muscle Maker, Inc., not Sadot Group Inc.
- Resolve the conflicting company-owned restaurant counts and assess current store openings and closures.
- Verify cash runway, working-capital needs, subsequent financing proceeds and repayment terms, including collateral, conversion pricing and potential dilution.
- Reconcile ASC 606 adoption disclosures, including the $568,540 adjustment and the statement that implementation remained incomplete.
- Review remediation of material weaknesses, delinquent sales-tax balances, litigation and settlement obligations, and concentration with the principal food supplier.