Filing summary
Entity and period: The supplied filing is a Muscle Maker, Inc. and subsidiaries Form 10-Q for the quarter ended March 31, 2018, filed June 3, 2019. This does not match the request metadata naming Sadot Group Inc.; the filing itself identifies Muscle Maker, Inc.
Business context
Muscle Maker operated and franchised Muscle Maker Grill restaurants and also reported technology/POS sales and services through CTI. At March 31, 2018, the filing reported eight company-owned and 36 franchised restaurants. The filing describes the company as loss-making and dependent on external financing.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $2.038 million | $1.966 million |
| Operating loss | $1.550 million | $1.515 million |
| Net loss | $3.191 million | $5.190 million |
| Net loss attributable to controlling interest | $3.184 million | $3.843 million |
| Basic and diluted loss per share | $0.41 | $0.83 |
| Cash used in operating activities | $595,234 | $703,596 |
Revenue rose 3.7%. Company restaurant sales increased 28.7% to $1.584 million, while franchise royalties and fees fell to $303,000 from $569,000, primarily due to lower recognition of deferred franchise fees and fewer open or continuing locations. Other revenue decreased 9.1% to $151,000.
Restaurant operating expenses were $2.079 million, exceeding company restaurant sales of $1.584 million. Food and beverage, labor, and other restaurant expenses increased; reported costs as a percentage of restaurant sales were 36.5%, 48.2%, and 26.5%, respectively. Operating loss widened slightly, while net loss improved mainly because debt-discount amortization declined substantially year over year. Debt-discount amortization was $999,000 versus $3.644 million; net interest expense was $643,000 versus net interest income of $283,000.
Financial position and liquidity
- Cash was $62,567 at March 31, 2018, down from $78,683 at year-end 2017.
- Current assets were $376,513 and current liabilities were $5.486 million, resulting in a $5.110 million working capital deficiency.
- Total liabilities were $6.742 million; total stockholders’ deficit was $2.514 million. Accumulated deficit was $20.236 million.
- Operating cash outflow of $595,234 and investing cash outflow of $21,048 were largely offset by $600,166 of financing inflows. Financing included notes, IPO proceeds, and repayments.
- The company issued $85,576 net proceeds in a small offering before terminating its Regulation A+ offering. Convertible notes totaling $899,340 converted into 553,425 shares during the quarter.
Outlook, risks, and unusual items
- Going concern: Management and the auditor’s referenced prior-year report identify substantial doubt about the company’s ability to continue as a going concern. The filing says further financing may be needed and is not assured; potential responses include cost reductions, delaying development, extending liabilities, asset or business sales, or creditor protection. No quantified operating guidance is provided.
- Operations: Management described food, labor, and rent costs as high and discussed operational changes to reduce costs. It also noted delivery-platform fees can reach 25% of an order. The filing reports subsequent restaurant closures and two subsequent openings; it says eight of 13 corporate locations were closed from March through July 2018 as a cost-saving measure.
- Debt and dilution: The company defaulted on a $511,765 note issued in January 2018; default provisions increased the amount due and triggered additional warrants. The note was later converted into secured convertible notes. Significant post-quarter financings and note conversions are disclosed, including later secured notes with conversion-price adjustments and warrants.
- Contingencies: The filing describes landlord and contractor claims, a default judgment of $171,035 related to a note, and approximately $432,927 of accrued delinquent sales taxes at March 31, 2018. Several lease disputes were later settled or remained unresolved in the filing’s subsequent-event disclosures.
- Other material matters: The company agreed in May 2018 to sell its 70% interest in CTI for $1. The filing also reports ineffective disclosure controls due to material weaknesses, including limited accounting resources, lack of written control procedures, and inadequate communication of financial information.
Key facts for investors to verify
- Confirm the issuer: this filing is for Muscle Maker, Inc., not Sadot Group Inc., and relates to Q1 2018 despite being signed in June 2019.
- Reconcile the cash-flow discussion: the financial statements report $595,234 of operating cash used, while MD&A elsewhere cites $746,144.
- Review the going-concern disclosures, financing raised after quarter-end, debt defaults, conversion terms, and resulting potential dilution.
- Verify the status and ultimate cost of sales-tax arrears, lease settlements, litigation, and restaurant closures.
- Assess restaurant-level economics, especially labor and food costs relative to sales, the steep decline in franchise fees, and the subsequent sale of CTI.