Business context and reporting period
This is Muscle Maker, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The filing describes a franchisor and operator of Muscle Maker Grill restaurants, with eight company-owned and 31 franchised locations at quarter-end. The request identifies Sadot Group Inc., but the filing itself names Muscle Maker, Inc.; verify the issuer and filing match.
Key financial metrics
| Metric | Three months ended September 30, 2019 | Nine months ended September 30, 2019 |
|---|---|---|
| Revenue | $1.11 million | $3.68 million |
| Operating loss | $1.40 million | $2.77 million |
| Net loss | $2.35 million | $5.37 million |
| Net loss per share, basic and diluted | $0.22 | $0.50 |
| Operating cash flow | Not separately stated for the quarter | $(3.30) million |
At September 30, 2019, cash was $1.98 million, current assets $2.29 million, current liabilities $7.77 million, and the disclosed working-capital deficiency was $5.48 million. Total liabilities were $13.47 million and stockholders’ deficit was $6.49 million. Management reported $8.88 million of convertible notes, net of discounts, and $91,000 of other notes payable. No income-tax provision was recorded.
Restaurant operating costs were 80.7% of company restaurant sales in Q3, compared with 91.5% in the first nine months. Overall operating and net margins were negative; the filing does not present these margins directly.
Changes versus prior comparable periods
- Q3 revenue rose 6.5% year over year, led by company restaurant sales up 13.9%; franchise royalties and fees declined.
- Q3 operating loss widened to $1.40 million from $848,000, while net loss increased to $2.35 million from $1.14 million. General and administrative expense rose to $1.51 million, including consulting and stock compensation, and bad-debt expense related to forgiven franchise royalties.
- Nine-month revenue fell 20.3% to $3.68 million. Company restaurant sales declined 24.9%; the filing attributes the decrease mainly to store closures and the 2018 sale of CTI, whose technology revenue was absent in 2019.
- Nine-month net loss improved to $5.37 million from $6.70 million, and operating loss narrowed to $2.77 million from $3.56 million. Lower operating costs and the absence of the prior-year CTI sale loss contributed, while interest expense increased.
- Cash increased from $358,000 at December 31, 2018, primarily due to financing proceeds. Operating cash use increased from $1.75 million in the prior-year nine-month period to $3.30 million.
Outlook, risks, contingencies and unusual items
- Going concern: Management and the financial statements state that substantial doubt exists about the company’s ability to continue as a going concern for at least one year. The company expects ongoing working-capital needs and says additional financing may be required; no further financing commitment was in place at the financial-statement issuance date. Failure to raise capital could lead to cost cuts, delayed liabilities, asset sales, reduced operations or creditor protection.
- Financing and dilution: The company issued secured convertible notes bearing 12% and 15% interest, generally maturing 18 months after issuance, with conversion and warrant provisions that may dilute shareholders. Notes are secured by substantially all of Muscle USA’s assets under the disclosed agreements. Management reported approximately $8.00 million raised through these offerings as of the filing date.
- Acquisitions: In August, the company acquired a Midtown, New York franchise store for $121,464, including $86,348 recorded as goodwill. Subsequent to quarter-end, it acquired a Bronx location for $600,000, partly funded by a five-year promissory note at 8%.
- Legal and tax matters: Accrued liabilities include $224,717 for past-due sales taxes, a $30,000 accrual for a contractor dispute, and obligations under landlord settlements and other claims. Management says ordinary-course matters are not expected to have a material financial-statement impact, but several settlements and payment plans remain relevant.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing a material weakness. Reported issues include inadequate written procedures, limited accounting resources, insufficient communication of transaction information, and deficiencies in IT controls.
- Other items: Adoption of revenue standard Topic 606 increased deferred revenue and accumulated deficit by $568,540 through an opening balance adjustment. The filing provides no formal numerical revenue or earnings guidance. It discusses intended restaurant expansion and financing needs, without a quantified outlook.
Most important facts to verify
- Confirm the filing’s issuer identity: the supplied filing is for Muscle Maker, Inc., not Sadot Group Inc.
- Reconcile the filing’s inconsistent Q3 MD&A narrative about net loss with the financial statements, which show the loss increased year over year; also verify its misstated comparison of other expense.
- Reconcile reported operating cash use: the cash-flow statement shows $3,296,114, while MD&A cites $3,296,216.
- Review near-term liquidity, financing availability, debt maturities, security interests, conversion terms and potential dilution, given the going-concern warning and working-capital deficiency.
- Assess the status and payment requirements of sales-tax liabilities, landlord settlements and other legal claims.
- Confirm share-count disclosures: the balance sheet reports 11,585,256 shares at September 30, while another balance-sheet passage states 11,585,226; the filing reports 11,836,425 outstanding as of November 19.