Filing identity and reporting period
The supplied filing is Muscle Maker, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, filed February 27, 2019. It is not identified in the filing as a Sadot Group Inc. report; the company-name discrepancy with the request metadata should be verified. Although the metadata says “2017 Q4,” this is an annual report, not a standalone quarterly filing.
Muscle Maker operated a healthy-inspired fast-casual restaurant and franchise business. At year-end 2017, its system had 53 restaurants: 13 company-operated and 40 franchised. The filing also includes later developments through early 2019.
Key financial results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $7,929,137 | $4,953,205 | Up 60% |
| Company restaurant sales | $5,215,285 | $2,735,222 | Up 91% |
| Franchise royalties and fees | $1,988,167 | $1,660,877 | Up $327,290 |
| Operating loss | $(11,931,024) | $(3,966,149) | Loss increased $7,964,875 |
| Net loss | $(15,567,751) | $(4,219,687) | Loss increased $11,348,064 |
| Net cash used in operating activities | $(3,676,999) | $(2,110,702) | Cash use increased $1,566,297 |
| Cash at year-end | $78,683 | $335,724 | Down $257,041 |
| Working capital deficit | $4,306,947 | $1,723,852 | Deficit worsened $2,583,095 |
2017 restaurant operating expenses were $6,792,269. As a share of company restaurant sales, food and beverage costs were 37%, labor 51%, rent 18%, and other restaurant operating expenses 25%. The company reported total costs and expenses of $19,860,161, or approximately 251% of revenue, and a net loss margin of approximately 196% (calculated from reported figures).
Cash used in investing activities was $843,169, including $968,831 for property and equipment purchases. Financing activities provided $4,263,127, primarily from convertible and other notes. At year-end, reported convertible notes totaled $2,349,340 and other notes payable totaled $555,000; the balance sheet showed total liabilities of $7,449,444, against assets of $4,247,649.
Changes, unusual items, and management commentary
- Revenue growth principally reflected additional company-owned restaurants, including locations opened during 2016 and 2017. Franchise revenue also rose, partly because the company recognized deferred fees on terminated franchise agreements.
- Net loss widened substantially. Notable 2017 charges included $4,307,483 in combined goodwill, fixed-asset, and intangible-asset impairments, and $3,956,792 in amortization of debt discounts. General and administrative expense rose to $7,983,673, including costs attributed to corporate buildout and preparation for a contemplated offering.
- Management said food, labor, and rent costs were too high and described plans to reduce operating costs. It favored company-operated growth in non-traditional sites, particularly military bases, and variable rent arrangements; the filing cites an approximately 8% rent level in forecasts, not a guarantee.
- The filing stated plans for 2019 to open 6–8 company-operated and 4–6 U.S. franchised locations, with a Kuwait franchisee expected to open 1–2 locations. These are plans, not assured results. The company was not actively selling franchises at the filing date and anticipated restarting sales in Q2 2019.
- After year-end, the company closed 8 of its 13 company-operated locations as a cost-saving measure. It also disclosed multiple landlord and creditor disputes and settlements, and approximately $356,000 of accrued unpaid state and local sales taxes at December 31, 2017.
Outlook, liquidity, and principal risks
The auditor issued an unmodified opinion on the financial statements but included a going-concern explanatory paragraph, citing the working capital deficit, recurring losses, and need for additional funding. The filing says the statements contain no adjustments that might result if the company cannot continue as a going concern. Management anticipated further losses and negative operating cash flow. It said at least $2 million would be needed to fund monthly expenses through December 31, 2019, and at least $5 million to fully implement the 2019 business plan; financing was not assured and could dilute shareholders or add debt-service burdens.
Key risks include insufficient liquidity and access to capital; execution and profitability of new locations; franchisee financial and operating performance; dependence on a major food distributor; food, labor, and occupancy costs; competition and changing consumer preferences; military-site and troop-deployment exposure; long-term lease obligations; litigation and tax liabilities; and the limited liquidity of the company’s unlisted common stock. Management reported a material weakness in internal control over financial reporting, including insufficient accounting resources, lack of written control documentation, and inadequate communication of information needed for financial reporting.
Important facts for investors to verify
- Confirm the issuer’s identity: the filing names Muscle Maker, Inc., not Sadot Group Inc., and covers fiscal 2017 rather than a standalone fourth quarter.
- Review subsequent financing, debt maturities and conversions, cash balances, and whether the company obtained sufficient funding to address the disclosed going-concern risk.
- Verify the status and terms of restaurant closures, lease settlements, sales-tax payment plans, and other litigation or creditor claims.
- Assess whether the planned cost reductions and restaurant openings were implemented and whether company-operated locations became profitable.
- Check whether the identified internal-control material weakness was remediated and whether later filings clarify the company’s operating and financial condition.