Business Context and Reporting Period
This Form 8-K filing by Muscle Maker, Inc. (not Sadot Group Inc.) covers events occurring between September 12, 2018, and October 26, 2018, with the report filed on November 6, 2018. The Company is an emerging growth company incorporated in California, operating in the restaurant sector. The filing details a significant private placement financing, the settlement of material litigation, and the execution of new executive employment agreements.
Key Financial Metrics and Obligations
- Debt Financing: The Company raised $1,915,000 in aggregate principal through the sale of 15% Senior Secured Convertible Promissory Notes. This amount includes $635,000 of existing debt converted into the new Notes.
- Equity Dilution Potential: Investors received Warrants to purchase 957,500 shares of common stock at an exercise price of $1.20 per share.
- Interest and Maturity: The Notes bear interest at 15% per annum, payable quarterly, and mature 18 months from issuance.
- Litigation Settlement: The Company agreed to settle lawsuits filed by Crownhall Realty, LLC, and Limestone Associates LLC. The settlement requires an upfront payment of $25,000 and an additional $175,000 to be paid over 20 months, resolving claims totaling approximately $2.39 million.
- Executive Compensation: New agreements were signed with CEO Michael Roper (base salary $250,000, increasing to $350,000 upon IPO) and Chief Investment Officer Kevin Mohan (base salary $156,000, increasing to $175,000 upon IPO).
Material Changes and Agreements
The primary material change is the entry into a Securities Purchase Agreement for the September 2018 Offering. This financing includes two potential additional closings of $1,000,000 each, contingent upon the Company achieving specific business milestones. The Notes are secured by substantially all of the Company's assets. Additionally, the Company resolved significant legal contingencies regarding two closed locations, reducing potential liability from over $2.3 million to a fixed settlement of $200,000.
Guidance, Risks, and Management Commentary
- Conversion Terms: The Notes convert at a fixed price of $1.00 per share. However, if a public offering occurs at a price where 60% of the offering price is less than $1.00, the conversion price resets to that discounted amount. If a lock-up agreement is required, the fixed price drops to $0.75.
- Liquidity Event: Upon a Listing Event or sale of substantially all assets, the Notes automatically convert in full. If the Notes are not repaid or converted by maturity, the principal increases by 30%.
- Restrictions: Until a Listing Event, the Company is restricted from incurring new indebtedness, entering variable priced transactions, or increasing officer compensation. Proceeds must be used for specific corporate purposes.
- Board Composition: Catalytic Capital LLC holds the right to designate one director and one observer to the Board until the Listing Event.
- Risks: The Company faces risks related to meeting the milestones for additional funding, the potential for significant dilution upon conversion or warrant exercise, and the cash flow impact of the litigation settlement payments.
Investor Verification Checklist
- Verify the Company's ability to achieve the business milestones required to unlock the two additional $1,000,000 closings.
- Confirm the current status of the $200,000 litigation settlement payments and ensure no further legal exposure remains regarding the closed locations.
- Assess the impact of the 15% interest rate and potential 30% default penalty on the Company's liquidity and cash flow.
- Review the dilution impact of the 957,500 Warrants and the potential conversion of $1,915,000 in Notes at the $1.00 (or lower) conversion price.
- Monitor the Company's progress toward a Listing Event (IPO), which triggers automatic conversion of debt and salary increases for executives.