Business context and reporting period
This is a Form 10-Q for the three months ended March 31, 2020, filed June 30, 2020. The filing identifies the registrant as Muscle Maker, Inc. (Nasdaq: GRIL), a fast-casual restaurant operator and franchisor with 11 company-owned and 24 franchised locations at quarter-end. The request metadata names Sadot Group Inc.; that does not match the company identified in the filing and should be verified.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $1.44 million | $1.18 million; up 21.2% |
| Company restaurant sales | $1.24 million | $0.80 million; up 54.5% |
| Franchise royalties and fees | $176,031 | $344,712 |
| Operating loss | $5.36 million | $0.81 million loss |
| Net loss | $5.49 million | $1.48 million loss |
| Net loss per share | $0.84 | $1.17 |
| Cash used in operating activities | $2.54 million | $0.64 million |
| Cash at quarter-end | $3.71 million | $0.48 million at December 31, 2019 |
| Working capital | $874,473 surplus | $3.71 million deficiency at December 31, 2019 |
Restaurant operating costs were $1.53 million, exceeding company restaurant sales. General and administrative expense rose to $5.13 million from $1.10 million, largely reflecting approximately $3.2 million of offering-related one-time expenses, principally noncash stock compensation. Stock-based compensation totaled $3.35 million. The filing reports no income tax provision.
At March 31, total liabilities were $4.59 million. Notes payable included $82,458 owed to the former parent, a $100,000 convertible note, and $273,558 of other notes payable. The company raised $6.78 million net in its February public offering and repaid various notes during the quarter.
Material changes versus the prior comparable period
- Revenue increased, primarily because of more company-operated restaurants, including two locations acquired from franchisees. The company attributed about $193,000 of lost restaurant sales to temporary COVID-19 closures.
- Franchise royalties and fees fell by $168,681, reflecting fewer franchise locations, lower sales and temporary closures, fewer initial fees, and lower vendor rebates. The company paused its franchise program until Q2 2020.
- Operating loss and net loss widened substantially, mainly due to higher operating costs and one-time public-offering-related expenses. The weighted-average share count increased to 6.53 million from 1.27 million.
- Operating cash use increased year over year, while cash and working capital improved following the public offering.
Outlook, risks, contingencies and unusual items
- Going concern: Management reported substantial doubt about the company’s ability to continue as a going concern for at least one year. It said additional financing may be needed and that no further financing commitments were in place beyond the disclosed PPP loan.
- COVID-19: The pandemic disrupted operations and liquidity; five company-owned locations were temporarily closed and had not reopened by the filing date. Beginning in Q2, the company provided royalty relief to franchisees and executives deferred part of their salaries. Management said the ultimate effect was uncertain.
- Subsequent financing: The company received $866,300 under the Paycheck Protection Program on May 9, 2020, at 1% interest, with payments deferred until November 2020. Loan forgiveness was not assured.
- Controls and filing delay: Management concluded disclosure controls were ineffective because of material weaknesses involving undocumented control procedures, limited accounting resources and segregation of duties, information flow, and IT controls. The company said COVID-19 contributed to its late filing.
- Legal and tax matters: The company accrued $289,319 for past-due sales taxes, including interest and penalties, and reported several accrued legal or lease-related liabilities, including a $130,185 judgment tied to a closed location. It stated that certain payment plans were completed or under discussion.
- Other exposures: One supplier represented 85% of purchases in Q1 2020. A delivery-only kitchen agreement covered five initial locations and deposits for five additional locations, with monthly license fees of $3,000–$4,000 per initial location. A lease for a future military location was terminated in June due to the economic environment.
- The filing provides no quantified earnings or revenue guidance. Management described continuing working-capital needs and possible additional equity or debt financing, cost reductions, delayed liabilities, asset sales, or reduced operations if funding is unavailable.
Important facts for investors to verify
- Confirm the issuer: the filing is for Muscle Maker, Inc. (GRIL), not Sadot Group Inc.
- Reconcile the accumulated-deficit figure: the balance sheet reports $58,586,865, while MD&A cites $58,386,865 in one passage.
- Assess the company’s cash runway, operating cash burn, financing needs, and the status and forgiveness eligibility of the $866,300 PPP loan.
- Track reopening and sales recovery at closed locations, franchisee health, and the effects of royalty relief and deferred executive salaries.
- Review the material weaknesses, corrective actions, and any subsequent changes in disclosure controls and financial reporting.
- Verify resolution and payment status of sales-tax arrears, litigation-related accruals, and other recorded obligations.