Sadot Group Inc. (then Muscle Maker, Inc.) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The filing is by Muscle Maker, Inc.; Sadot LLC is its newly established commodity-trading subsidiary and largest operating unit. Unless otherwise indicated, dollar figures below are U.S. dollars.
Business context
The company was transitioning from a U.S.-focused restaurant business to a food-focused group with two divisions: Sadot, which trades and ships agricultural commodities, and the legacy restaurant group, which includes Muscle Maker Grill, Pokémoto and SuperFit Foods. At quarter-end, the restaurant group had 19 company-operated locations, including its meal-prep kitchen, and 26 franchise restaurants.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $212.97 million | $2.92 million |
| Operating loss | $1.61 million | $1.99 million |
| Net loss | $1.07 million; $0.04 per share | $1.89 million; $0.07 per share |
| Net cash used in operating activities | $3.28 million | $0.93 million |
| Cash at period-end | $6.39 million | $14.77 million |
- Commodity sales were $210.37 million, or 98.8% of revenue; commodity operating expenses were $205.83 million, leaving approximately $4.54 million before other costs.
- Restaurant revenue was $2.30 million, down 14.6% year over year. Franchise royalties and fees rose 36.5% to $284,000.
- Reported non-GAAP EBITDA was negative $427,000; adjusted EBITDA was $2.39 million, including a $3.36 million add-back for stock-based consulting expense. Adjusted EBITDA is company-defined and should not be treated as GAAP profit.
- Current assets were $46.70 million and current liabilities $40.28 million, for reported working capital of approximately $6.42 million. Inventory was $35.15 million and accounts receivable $4.96 million, largely associated with commodity trading.
- Notes payable totaled approximately $947,000. Operating lease liabilities were $2.31 million. Accounts payable and accrued expenses included $34.83 million payable for commodities.
- Cash declined $3.51 million during the quarter. Investing cash use was $196,000, including an $87,000 additional farmland deposit; financing cash use was $34,000.
Changes versus prior period
- Revenue increased by $210.05 million, primarily because Sadot began commodity sales; the comparison is not like-for-like because Q1 2022 had no commodity revenue.
- Net loss narrowed by $820,000, while operating loss improved by $380,000. The new commodity business generated substantial sales but operates on a narrow spread.
- Company restaurant sales fell $393,000, which management attributed mainly to closing unprofitable Muscle Maker Grill locations. Restaurant operating expenses fell 20.2% to $2.47 million.
- Q1 2023 included $3.36 million of stock-based consulting expense under the Sadot/Aggia services arrangement; there was no comparable expense in Q1 2022.
Outlook, risks and unusual items
- Management stated that available cash and expected cash flows from franchise and commodity operations should fund operations, anticipated capital expenditures and repayment obligations for the next 12 months. This is an expectation, not formal numerical guidance. The filing also warns that additional financing may be unavailable or dilutive and that a funding shortfall could require asset sales, a business combination or reduced operations.
- A $5.0 million deposit relates to an intended purchase of undeveloped farmland in Africa. The company remained in final negotiations and intended to finalize an agreement by the end of Q2 2023.
- Under the Aggia services agreement, consulting fees are calculated at approximately 80% of Sadot segment net income and are expected to be settled in stock. The agreement permits up to 14.4 million shares, subject to its terms and shareholder approval; shareholders approved the agreement in February 2023. The company issued approximately 2.8 million shares to Aggia in March for Q4 2022 consulting fees.
- Commodity-supplier concentration is high: the three largest commodity suppliers accounted for 98% of commodity purchases during the quarter. Commodity trading also produced large inventory, receivable and payable balances.
- Potential dilution is material: at March 31, 2023, 18.0 million warrants and 1.2 million options were outstanding; these were excluded from diluted loss per share as anti-dilutive. Common shares outstanding were approximately 32.2 million at quarter-end.
- Subsequent to quarter-end, the board authorized a share repurchase program of up to $2.0 million. The filing also reports that disclosure controls were effective; the company was adding controls and resources while integrating Sadot.
- The company reported accrued liabilities for specified legal matters and a $57,000 sales-tax payable at quarter-end; management said ordinary-course legal matters were not expected to materially affect the financial statements.
Investor verification points
- Assess whether Sadot can sustain trading volumes and margins, and how supplier concentration and working-capital demands affect cash conversion.
- Verify the status and terms of the proposed farmland acquisition and the recoverability or use of the $5.0 million deposit.
- Review the Aggia fee calculation, related-party governance, stock settlement and resulting dilution against the agreement’s share limits.
- Reconcile the company’s 12-month liquidity expectation with the $3.28 million quarterly operating cash outflow and the large commodity-related working-capital balances.
- Confirm the share count, warrant and option overhang, and whether the announced repurchase program was implemented after quarter-end.