Sadot (SDOT) - 2018 Q3 - Quarterly Report

PART 1 – FINANCIAL INFORMATION Financial Statements The company's September 30, 2018 financial statements indicate a significant net loss, working capital deficiency, and accumulated deficit, raising substantial doubt about going concern Condensed Consolidated Balance Sheets As of September 30, 2018, the company reported total assets of $4.78 million, liabilities of $8.58 million, and a stockholders' deficit of $3.80 million Condensed Consolidated Balance Sheet Highlights (Unaudited) | Metric | September 30, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Total Assets | $4,776,906 | $4,247,649 | | Total Liabilities | $8,579,250 | $7,449,444 | | Total Stockholders' Deficit | $(3,802,344) | $(3,201,795) | | Cash | $766,801 | $78,683 | | Total Current Assets | $1,017,079 | $376,844 | | Total Current Liabilities | $5,426,265 | $4,683,791 | Unaudited Condensed Consolidated Statements of Operations The company reported significant net losses for Q3 and nine months ended September 30, 2018, with declining revenues but improved loss from operations due to lower impairment charges Statement of Operations Summary (Unaudited) | Metric | Q3 2018 | Q3 2017 | Nine Months 2018 | Nine Months 2017 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $1,045,380 | $2,355,233 | $4,620,646 | $6,246,055 | | Loss from Operations | $(848,388) | $(5,164,151) | $(3,563,227) | $(8,418,564) | | Net Loss | $(1,144,468) | $(5,382,484) | $(6,699,275) | $(12,375,639) | | Net Loss Attributable to Controlling Interest | $(1,144,468) | $(4,863,934) | $(6,697,204) | $(10,039,025) | | Basic and Diluted EPS | $(0.14) | $(0.84) | $(0.81) | $(1.81) | Unaudited Condensed Consolidated Statements of Changes in Stockholders' Deficit The stockholders' deficit increased to $3.80 million by September 30, 2018, driven by net losses, partially offset by capital-raising activities - The accumulated deficit grew from $(17,052,086) at the end of 2017 to $(23,328,391) by September 30, 2018, reflecting the ongoing net losses[16] - The company raised capital through various means, including issuing 180,000 shares for $180,000, recognizing a $2.7 million beneficial conversion feature on convertible notes, and converting $899,340 of convertible notes into common stock[16] Unaudited Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2018, net cash used in operations was $1.75 million, offset by $2.47 million from financing activities, increasing the cash balance Cash Flow Summary (Nine Months Ended September 30) | Cash Flow Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(1,752,878) | $(2,639,623) | | Net Cash Used in Investing Activities | $(33,121) | $(529,496) | | Net Cash Provided by Financing Activities | $2,474,117 | $2,976,796 | | Net Increase (Decrease) in Cash | $688,118 | $(192,323) | Notes to Unaudited Condensed Consolidated Financial Statements Notes disclose a 'going concern' warning, CTI subsidiary sale, extensive financing activities, ongoing legal proceedings, and subsequent capital raises - The company's financial condition raises substantial doubt about its ability to continue as a going concern, with a working capital deficiency of $4.4 million and an accumulated deficit of $23.3 million as of September 30, 2018[36] - On May 24, 2018, the company sold its 70% ownership in its technology subsidiary, CTI, for $1.00, resulting in a recorded loss of $456,169[30][88] - The company is involved in numerous litigation claims, primarily with landlords for unpaid rent, and has entered into several settlement agreements[125][126][129] - Subsequent to the reporting period, the company raised an additional $4.3 million through 15% Senior Secured Convertible Notes and $3.0 million through 12% Secured Convertible Notes to fund operations[174][185] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant revenue decline due to store closures and subsidiary sale, improved operating loss, and critical liquidity issues raising going concern doubts Results of Operations Revenues significantly declined for Q3 and nine months ended September 30, 2018, due to store closures and subsidiary sale, while loss from operations improved due to reduced expenses and absence of impairment charges Q3 Revenue Comparison (in thousands) | Revenue Source | Q3 2018 | Q3 2017 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Company restaurant sales | $721.3 | $1,300.6 | $(579.3) | -44.5% | | Franchise royalties and fees | $324.1 | $791.7 | $(467.6) | -59.1% | | Other revenues | $0.0 | $262.9 | $(262.9) | -100.0% | | Total Revenues | $1,045.4 | $2,355.2 | $(1,309.8) | -55.6% | Nine-Month Revenue Comparison (in thousands) | Revenue Source | Nine Months 2018 | Nine Months 2017 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Company restaurant sales | $3,246.0 | $3,958.7 | $(712.7) | -18.0% | | Franchise royalties and fees | $1,130.0 | $1,728.9 | $(598.9) | -34.6% | | Other revenues | $244.6 | $558.5 | $(313.9) | -56.2% | | Total Revenues | $4,620.6 | $6,246.1 | $(1,625.5) | -26.0% | - The decrease in loss from operations for the nine months ended Sep 30, 2018 was primarily due to a $2.1 million reduction in G&A expenses and the absence of $2.9 million in impairment charges that were recorded in the prior year[250] Liquidity and Capital Resources The company faces severe liquidity constraints with a $4.4 million working capital deficiency and $23.3 million accumulated deficit, necessitating additional financing Liquidity Metrics | Metric | September 30, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Cash | $766,801 | $78,683 | | Working Capital Deficiency | $(4,409,186) | $(4,306,947) | - The company's financial state raises substantial doubt about its ability to continue as a going concern for at least one year from the filing date[255] - Net cash provided by financing activities for the nine months ended Sep 30, 2018 was $2.47 million, primarily from the issuance of convertible notes and common stock[264] Critical Accounting Policies Critical accounting policies involve significant estimates for intangible asset valuation, long-lived asset impairment, revenue recognition, and income tax accounting - The company's goodwill and trademarks are deemed to have indefinite lives and are not amortized but are tested for impairment at least annually[268] - Revenue recognition involves multiple streams: restaurant sales are recognized at the point of sale, initial franchise fees are recognized upon store opening, and royalties are based on franchisee sales[273][274][275] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable for the current reporting period - The company has indicated that this item is not applicable[285] Controls and Procedures Disclosure controls and procedures were ineffective due to material weaknesses in internal control over financial reporting, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of September 30, 2018[287] - Material weaknesses identified include: lack of written internal control policies, insufficient accounting resources restricting timely analysis and proper segregation of duties, and inadequate controls for timely communication of financial information[291][293] - Remediation plans involve appointing new financial leadership, implementing standardized accounting policies, restructuring processes, and strengthening financial review controls[292][293] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various legal actions, primarily rent disputes, with several settlements reached and a liability accrued for unpaid sales taxes - The company settled litigation with Crownhall Realty and Limestone Associates, who were seeking a total of $2,391,330, by agreeing to pay $200,000 over 20 months plus forfeiture of security deposits[299][300] - A lawsuit from a California landlord seeking $531,594 was settled with a payment plan[296] - The company accrued a liability of $322,573 as of September 30, 2018, for unpaid past state and local sales taxes[312] Risk Factors This section is not applicable for this quarterly report, with risk factors detailed in the Annual Report on Form 10-K - This item is not applicable. The company directs readers to its 10-K filing from February 27, 2019 for risk factors[313] Unregistered Sales of Equity Securities and Use of Proceeds The company details numerous unregistered equity sales from 2015 through September 2018, including common stock issuances for cash, services, and debt conversions - During the nine months ended September 30, 2018, the company issued 553,425 shares of common stock upon automatic conversion of convertible notes with a principal amount of $899,340[324] - During the same period, the company sold 180,000 shares of common stock to various investors at $1.00 per share, raising $180,000[324] - All described offers and sales of securities were deemed exempt from registration under the Securities Act, relying on Section 4(a)(2) or Regulation D[325] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[326] Mine Safety Disclosures This section is not applicable to the company - Not applicable[327] Other Information The company reported no other information for this period - None[328] Exhibits This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO and CFO certifications and XBRL interactive data files[330]