Sadot (SDOT) - 2019 Q1 - Quarterly Report

PART 1 – FINANCIAL INFORMATION Financial Statements The company presents its unaudited Q1 2019 financial statements, noting a significant net loss and a going concern warning Condensed Consolidated Balance Sheets The balance sheet shows increased total assets and liabilities, widening the total stockholders' deficit to $4.15 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $5,074 | $4,487 | | Cash | $843 | $358 | | Total Liabilities | $9,229 | $7,330 | | Total Current Liabilities | $6,416 | $4,556 | | Total Stockholders' Deficit | $(4,155) | $(2,843) | Condensed Consolidated Statements of Operations Revenues decreased to $1.18 million in Q1 2019, though the net loss improved to $1.48 million from the prior year Statement of Operations Summary (in thousands) | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Total Revenues | $1,184 | $2,038 | | Company restaurant sales | $801 | $1,584 | | Franchise royalties and fees | $345 | $303 | | Loss from Operations | $(813) | $(1,550) | | Net Loss | $(1,483) | $(3,191) | | Net Loss Per Share (Basic & Diluted) | $(0.14) | $(0.41) | Condensed Consolidated Statements of Cash Flows Financing activities provided $1.24 million in cash, offsetting operational use and increasing the cash balance Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(640) | $(595) | | Net Cash Used in Investing Activities | $(110) | $(21) | | Net Cash Provided by Financing Activities | $1,235 | $600 | | Net Increase (Decrease) in Cash | $485 | $(16) | | Cash - End of Period | $843 | $63 | Notes to Unaudited Condensed Consolidated Financial Statements The notes disclose a 'Going Concern' warning, adoption of ASC 606, and significant debt financing activities - The company's financial statements were prepared with the assumption of it continuing as a 'going concern', but management notes there is substantial doubt about this ability due to a working capital deficiency of $5,239,742 and an accumulated deficit of $25,885,675 as of March 31, 2019[32] - The company adopted the new revenue recognition standard (Topic 606) in Q1 2019, applying it retrospectively, which resulted in a cumulative adjustment that increased the accumulated deficit by $568,540 as of January 1, 2019[61][75] - Between January 1 and March 31, 2019, the company raised $1,235,000 through the sale of 15% Senior Secured Convertible Promissory Notes[97] - Subsequent to the quarter's end, the company raised an additional $1,738,000 from 15% SPA Notes and entered into agreements for another $3,175,000 from 12% Secured Convertible Notes, highlighting its continued reliance on external financing[149][156] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes a 41.9% revenue decrease to store closures but notes improved operating loss due to cost cuts Overview The company operates a fast-casual restaurant system while facing a precarious financial position and a going concern warning - As of March 31, 2019, the restaurant system included seven Company-owned restaurants and thirty-three franchised restaurants[182] - The company had an accumulated deficit of $25,885,675 as of March 31, 2019, and its independent auditor's report for fiscal year 2018 included a going concern explanatory paragraph[185] Consolidated Results of Operations Q1 2019 saw a 41.9% revenue decline due to store closures, but cost reductions led to a smaller net loss - Total revenues for Q1 2019 decreased by 41.9% to $1,184,374 compared to Q1 2018, primarily due to four store closures and the sale of the CTI subsidiary in May 2018[200] - Restaurant labor costs decreased to 34.8% of restaurant sales in Q1 2019 from 48.2% in Q1 2018, reflecting improved efficiencies and store closures[205] - Loss from operations improved, decreasing by $736,457 to $813,196 in Q1 2019[212] - Net loss decreased by $1,707,504 to $1,483,479 in Q1 2019 compared to $3,190,983 in Q1 2018[214] Liquidity and Capital Resources The company's critical liquidity position, with a $5.24 million working capital deficiency, raises going concern doubts Liquidity Metrics (in thousands) | Metric | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash | $843 | $358 | | Working Capital Deficiency | $(5,240) | $(3,918) | - Management states that the company's working capital deficiency, accumulated deficit, and cash used in operations raise substantial doubt about its ability to continue as a going concern for at least one year[216] - The company has been funded through proceeds from 15% and 12% secured debt offerings, raising approximately $7.68 million as of the filing date of this report[217] Critical Accounting Policies Key policies involve significant estimates for asset valuation, impairment testing, and revenue recognition under ASC 606 - The company's critical accounting policies involve significant estimates regarding asset valuations, useful lives, revenue recognition, and income taxes[227][231] - Goodwill and trademarks are considered to have indefinite useful lives and are tested for impairment annually rather than being amortized[228] - Under the newly adopted ASC 606, the company recognizes franchise fee revenue on a straight-line basis over the life of the franchise agreement, rather than upon store opening[234][238] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, this section is not applicable and no disclosures are provided - This section is marked as 'Not applicable'[247] Controls and Procedures Management concluded disclosure controls were ineffective as of March 31, 2019, due to several material weaknesses - Management concluded that disclosure controls and procedures were not effective as of March 31, 2019[250] - Material weaknesses were identified in internal controls, including: lack of written policies, insufficient accounting resources, inadequate communication for financial reporting, and deficient IT controls[256] PART II - OTHER INFORMATION Legal Proceedings The company faces legal actions for non-payment of rent and notes, with significant settlements and accrued liabilities - The company settled litigation with Crownhall and Limestone for past damages of $2,391,330 by agreeing to pay $25,000 upfront and an additional $175,000 over 20 months[261] - A default judgment of $171,035 was entered against the company for failure to pay a $100,000 promissory note[262] - The company has accrued a liability of $289,170 as of March 31, 2019, for unpaid state and local sales taxes collected from customers[273] Risk Factors This section is not applicable and refers to the risk factors detailed in the 2018 Form 10-K - This section is marked as 'Not applicable' and refers to the company's 2018 Form 10-K[274] Unregistered Sales of Equity Securities and Use of Proceeds The company lists numerous unregistered equity issuances for cash and services, all claimed as exempt from registration - On March 31, 2019, the company issued 140,000 shares of common stock to a consultant for services[288] - Subsequent to the quarter, the company issued 290,000 restricted shares to a consultant in July 2019 and authorized 119,046 shares for board members in August 2019[288] - All listed sales and issuances of securities were deemed exempt from registration under Section 4(a)(2) of the Securities Act or Regulation D[288] Defaults Upon Senior Securities The company reports no defaults upon its senior securities during the period - The company reports 'None'[289] Mine Safety Disclosures This section is not applicable to the company's operations - This section is marked as 'Not applicable'[290] Other Information The company reports no other material information for the period - The company reports 'None'[291] Exhibits This section lists filed exhibits, including Sarbanes-Oxley certifications and XBRL data files - The report includes CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906[293] - Interactive Data Files (XBRL documents) are also filed as exhibits[293]