Filing identity and reporting period
The supplied filing is Muscle Maker, Inc. and subsidiaries’ Form 10-Q for the quarter ended September 30, 2018, signed July 26, 2019. It does not identify Sadot Group Inc.; the company name in the request metadata does not match the filing.
Muscle Maker operated the Muscle Maker Grill restaurant and franchise system. At quarter-end it reported five company-owned and 35 franchised restaurants; two additional company-owned locations opened afterward.
Financial results and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2018 (2017) | $1.045 million ($2.355 million) | $4.621 million ($6.246 million) |
| Operating loss, 2018 (2017) | $0.848 million ($5.164 million) | $3.563 million ($8.419 million) |
| Net loss, 2018 (2017) | $1.144 million ($5.382 million) | $6.699 million ($12.376 million) |
| Loss per share, basic and diluted | $(0.14) ($(0.84)) | $(0.81) ($(1.81)) |
- Revenue declined 55.6% for the quarter and 26.0% for the nine-month period. Management attributed the declines mainly to eight restaurant closures; franchise fees and rebates also fell, and CTI technology revenue ended after its sale.
- Operating loss improved year over year, reflecting lower expenses, including the absence of 2017 goodwill and intangible-asset impairments. The company remained loss-making.
- Restaurant food and beverage costs were 37.0% of restaurant sales in Q3 and 36.8% for nine months; labor was 37.0% and 42.6%, respectively. Rent was 35.1% and 25.7%. Management cited improved food-cost and labor efficiencies, while noting high rent burden relative to sales.
- Nine-month net cash used in operations was $1.753 million, compared with $2.640 million in 2017. Investing activities used $33,000; financing activities provided $2.474 million. Cash increased to $767,000 from $79,000 at year-end 2017.
- At September 30, 2018, current assets were $1.017 million versus current liabilities of $5.426 million; working capital deficiency was $4.409 million. Total liabilities were $8.579 million and stockholders’ deficit was $3.802 million. Carrying values included approximately $3.213 million of current and long-term notes payable, including related-party and former-parent debt.
- Deferred revenue was $1.437 million, largely franchise fees for locations not yet open. Accounts payable and accrued expenses totaled $3.275 million.
Material changes, outlook, risks and unusual items
- The company sold its 70% interest in CTI in May 2018 for $1 and recorded a $456,000 loss. The sale removed CTI’s technology sales from subsequent results.
- Management and the filing’s notes stated that recurring losses, a working capital deficit, and operating cash use raised substantial doubt about the company’s ability to continue as a going concern. The company expected ongoing working-capital needs and said additional financing might be required; no assurance of financing on acceptable terms was given.
- Subsequent-event disclosures describe additional financing after quarter-end, including senior secured convertible notes and a separate $3 million offering of 12% secured convertible notes in 2019. These financings were not cash on hand at September 30, 2018 and carry conversion, warrant, security, and potential dilution terms.
- Legal and payment exposures included a $322,573 accrual for delinquent sales taxes and multiple landlord, creditor, and contractor matters. Later settlements and payment plans are described in the filing; verify amounts paid and remaining obligations.
- Management reported disclosure controls were not effective because of material weaknesses, including missing written control procedures, limited accounting resources, and inadequate timely communication of financial information. The company also said it had not completed implementation of ASC 606 and could not quantify its impact.
- Other unusual items include $1.914 million of nine-month debt-discount amortization and substantial equity issuance: shares outstanding increased to 9.477 million from 7.638 million at year-end 2017. Convertible debt and warrants could add further dilution.
- The filing reports an accumulated deficit of $23.328 million in the balance sheet and financial statements, but MD&A also gives a conflicting figure of $22.938 million. The filing does not explain this discrepancy.
Key facts for investors to verify
- Confirm the issuer: this document is for Muscle Maker, Inc., not Sadot Group Inc.
- Reconcile the accumulated-deficit discrepancy and check the filed financial statements against subsequent amendments or later filings.
- Review the going-concern assessment, cash runway, subsequent financing proceeds, repayment terms, collateral, conversion prices, warrants, and resulting dilution.
- Assess whether restaurant closures, new openings, franchise activity, and cost improvements translated into sustainable revenue and unit-level profitability.
- Verify the status of delinquent sales taxes, litigation settlements, accrued liabilities, and other payment plans.
- Review remediation of the disclosed internal-control weaknesses and the eventual accounting impact of ASC 606 implementation.