Sadot Group Inc. — 2018 Q2 filing summary
Issuer and period: The supplied filing is Muscle Maker, Inc. and subsidiaries’ Form 10-Q for the quarter ended June 30, 2018, not a filing identified as Sadot Group Inc. The issuer discrepancy should be verified. The statements are unaudited and compare the three- and six-month periods ended June 30, 2018 with 2017.
Business context and financial results
Muscle Maker operated a healthy fast-casual restaurant business as both franchisor and restaurant owner. At June 30, 2018, its system had six company-owned and 34 franchised restaurants. The company sold its 70% interest in technology and POS subsidiary CTI in May 2018.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $1.54 million | $1.93 million | $3.58 million | $3.89 million |
| Operating loss | $1.17 million | $1.74 million | $2.71 million | $3.25 million |
| Net loss | $2.36 million | $1.80 million | $5.55 million | $6.99 million |
| Operating cash flow | Not separately provided | Not separately provided | $(1.31) million | $(1.46) million |
| Cash at period end | — | $284,000 | $231,000 |
Q2 revenue fell 20.2%; six-month revenue fell 8.1%. Management attributed the decline mainly to store closures. Q2 company restaurant sales dropped 34.1%, while franchise royalties and fees rose $134,000 to $503,000, partly due to recognition of deferred franchise fees and higher vendor rebates. Six-month franchise royalties and fees fell $131,000. The sale of CTI contributed to lower other revenue.
For Q2, food and beverage costs were 37.2% of company restaurant sales, labor 37.6%, rent 27.7%, and other restaurant operating expenses 21.3%. For the first half, those ratios were 36.7%, 44.2%, 22.9%, and 24.5%, respectively. Management reported improved labor efficiency, but higher other restaurant expenses in the half-year, including delivery-related costs. General and administrative expense declined year over year, though consulting expense increased by about $509,000 over the six-month period.
Liquidity, debt and balance sheet
At June 30, 2018, cash was $284,000, current assets $529,000, and current liabilities $5.31 million, resulting in a $4.78 million working-capital deficit. Total liabilities were $7.54 million against total assets of $4.31 million; stockholders’ deficit was $3.23 million. Reported debt included $1.09 million of convertible notes, net of debt discounts, and $1.20 million of other notes, including related-party notes. Accounts payable and accrued expenses were $3.17 million and deferred revenue was $1.49 million.
First-half operating cash use was $1.31 million; investing cash use was $12,000; financing provided $1.53 million, primarily through note proceeds. Cash increased by $205,000 from year-end. The filing states that the financial position and operating losses raise substantial doubt about the company’s ability to continue as a going concern for at least one year from issuance.
Material changes, outlook and risks
- Operating loss improved year over year, but Q2 net loss worsened to $2.36 million, primarily due to increased other expense, including $647,000 of debt-discount amortization and a $456,000 loss on the CTI sale. First-half net loss improved versus 2017, partly because debt-discount amortization was lower.
- Management gave no quantified revenue or earnings guidance. It expected continuing losses and ongoing working-capital needs, including possible funding for operations and restaurant expansion. It warned that financing might not be available on acceptable terms and that failure to obtain funding could require cost reductions, asset sales, reduced operations, or creditor protection.
- Subsequent financing disclosed in the filing included $5.14 million of 15% senior secured convertible notes and a $3.00 million offering of 12% secured convertible notes. These transactions occurred after the reporting date and involve conversion, warrant, security, and potential dilution provisions; they do not change the June 30, 2018 balances.
- The company disclosed delinquent sales-tax liabilities of $364,000, landlord and vendor disputes, and a note default that resulted in a $171,035 judgment, accrued at period end. Several disputes were later settled or paid, according to the filing.
- Management found disclosure controls ineffective and reported material weaknesses involving undocumented control procedures, limited accounting resources, and inadequate communication of transaction information. It described remediation plans but noted resource constraints.
- Management identified delivery-platform fees, which can reach 25% of an order, and dependence on a major food supplier (77% of purchases in the first half) as operating considerations. No off-balance-sheet arrangements material to investors were reported.
Important facts for investors to verify
- Confirm whether the filing is intended to summarize Muscle Maker, Inc. or Sadot Group Inc.; the supplied document names Muscle Maker throughout.
- Reconcile the going-concern disclosure with actual subsequent financing received, its terms, and the company’s cash runway.
- Review the convertible-note discounts, conversion prices, warrants, security interests, defaults, and potential dilution, including whether subsequent events are being mistaken for period-end facts.
- Check the status and payment terms of accrued sales taxes, lease settlements, judgments, and other contingencies.
- Assess whether restaurant closures, franchise openings, cost reductions, and delivery-related expenses support sustainable improvement in operating performance.
- Track remediation of the disclosed material weaknesses and the effect of the CTI sale on continuing revenue and operations.