Sadot (SDOT) - 2020 Q3 - Quarterly Report

PART 1 – FINANCIAL INFORMATION Financial Statements Unaudited financial statements for September 30, 2020, reflect increased assets and equity from financing, but continued net losses and a going concern warning Condensed Consolidated Balance Sheets Balance Sheet Highlights | Balance Sheet Highlights | Sep 30, 2020 (unaudited) | Dec 31, 2019 | | :--- | :--- | :--- | | Cash | $6,063,811 | $478,854 | | Total Current Assets | $6,453,677 | $780,529 | | Total Assets | $12,117,088 | $6,260,710 | | Total Current Liabilities | $3,394,253 | $4,488,070 | | Total Liabilities | $5,066,836 | $6,014,948 | | Total Stockholders' Equity | $7,050,252 | $245,762 | - The company's financial position improved significantly as of September 30, 2020, compared to year-end 2019, with cash increasing by over $5.5 million and total stockholders' equity turning positive from a surplus of $245,762 to over $7 million, primarily driven by capital raised from stock offerings[11][15] Condensed Consolidated Statements of Operations Income Statement Highlights (unaudited) | Income Statement Highlights (unaudited) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $1,152,545 | $1,113,458 | $3,400,690 | $3,681,248 | | Loss from Operations | ($736,592) | ($1,396,092) | ($7,487,081) | ($2,770,390) | | Net Loss | ($662,080) | ($2,348,829) | ($7,655,768) | ($5,374,914) | | Net Loss Per Share (Basic and Diluted) | ($0.09) | ($1.56) | ($1.06) | ($3.59) | - For the nine months ended September 30, 2020, the net loss widened to $7.66 million from $5.37 million in the prior year, driven by a significant increase in general and administrative expenses, which rose from $3.58 million to $6.80 million[13] Condensed Consolidated Statements of Cash Flows Cash Flow Highlights (unaudited) | Cash Flow Highlights (unaudited) | For the Nine Months Ended Sep 30, 2020 | For the Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($5,462,173) | ($3,296,114) | | Net Cash Used in Investing Activities | ($559,924) | ($932,422) | | Net Cash Provided by Financing Activities | $11,607,054 | $5,854,000 | | Net Increase in Cash | $5,584,957 | $1,625,464 | - The company's cash balance increased significantly due to financing activities, which provided $11.6 million in cash, including $11.72 million from stock offerings and $866,300 from a PPP loan, offsetting the $5.46 million cash burn from operations[17] Notes to Unaudited Condensed Consolidated Financial Statements - As of September 30, 2020, the company operated fifteen company-owned restaurants and eighteen franchise restaurants, with three company-owned locations being delivery-only[25] - The COVID-19 pandemic negatively impacted operations, leading to temporary store closures, limited hours, royalty relief for franchisees, and deferred executive salaries, with the full magnitude and duration of the impact remaining uncertain[27] - The financial statements were prepared with a going concern warning, citing a significant accumulated deficit of $60.75 million and a pre-tax net loss of $7.66 million for the nine months ended September 30, 2020, indicating substantial doubt about the company's ability to continue operations for at least one year[29] - The company recognized an impairment charge of $100,000 on its franchise agreement intangible assets during the third quarter of 2020 due to failed recoverability tests based on projected future cash flows[81] - Subsequent to the quarter end, the company acquired two franchisee stores in New York and Pennsylvania, opened a new delivery-only location, and closed a public offering over-allotment for net proceeds of $764,399[139][143][145][146] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2020 revenue growth and widened nine-month operating losses due to increased G&A, noting improved liquidity from public offerings but reiterating going concern risks Consolidated Results of Operations Three Months Ended Sep 30, 2020 vs 2019 | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,152,545 | $1,113,458 | +$39,087 | | Loss from Operations | ($736,592) | ($1,396,092) | +$659,500 | | Net Loss | ($662,080) | ($2,348,829) | +$1,686,749 | - The decrease in Q3 2020 net loss was primarily due to a $1.06 million reduction in G&A expenses, largely from the reversal of stock-based compensation, and a $1.03 million positive swing in 'Other Income (Expense), Net' due to lower interest expense and amortization of debt discounts compared to the prior year[180][182] Nine Months Ended Sep 30, 2020 vs 2019 | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $3,400,690 | $3,681,248 | -$280,558 | | Loss from Operations | ($7,487,081) | ($2,770,390) | -$4,716,691 | | Net Loss | ($7,655,768) | ($5,374,914) | -$2,280,854 | - For the nine-month period, the operating loss increased by $4.7 million, driven by a $3.2 million increase in G&A expenses, attributed to higher salaries and bonuses ($500k), increased consulting expenses mainly from stock-based compensation ($2.1M), and one-time professional fees related to offerings (~$408k)[198][199] Liquidity and Capital Resources Liquidity Metric | Liquidity Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash | $6,063,811 | $478,854 | | Working Capital | $3,062,692 (Surplus) | ($3,707,541) (Deficiency) | - The company's liquidity position improved significantly, moving from a working capital deficiency to a surplus, primarily due to capital raised from public offerings and a PPP loan[203][205] - Despite the improved cash position, management states there is substantial doubt about the company's ability to continue as a going concern due to an accumulated deficit of $60.75 million and cash used in operations of $5.46 million for the nine-month period[204] - On May 9, 2020, the company received a PPP Loan of $866,300 under the CARES Act, and while the company has applied for forgiveness, there is no assurance it will be granted in whole or in part[207] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable to the company for this reporting period - The company has indicated that quantitative and qualitative disclosures about market risk are not applicable[238] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2020, due to ongoing material weaknesses in internal control over financial reporting, with no material changes made during the quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of September 30, 2020[240] - The ineffectiveness is due to ongoing material weaknesses, which include: lack of written documentation of internal control policies, insufficient resources and segregation of duties in the accounting function, inadequate controls for timely communication of financial information, and deficiencies in IT controls related to data center operations, access security, and change management[241] - No changes were made during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[243] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, including a settled rent dispute, an outstanding default judgment for a convertible note, and accrued liabilities for liens, contract breaches, and unpaid taxes - A settlement agreement with Crownhall and Limestone regarding $2.39 million in past damages for rent has been paid in full[250] - A default judgment was entered against the company for $171,035 related to a convertible note; as of September 30, 2020, a liability of $100,000 plus accrued interest of $22,039 remains[251] - The company has accrued for various other liabilities, including $98,005 for mechanics liens, $30,000 for a contractor dispute, and $130,185 for a lease breach judgment[252][254][255] - The company has accrued $248,721 as of September 30, 2020, for past-due state and local sales taxes, including penalties and interest[257] Risk Factors The ongoing COVID-19 pandemic is a significant risk, negatively impacting business operations through closures, reduced capacity, and financial adjustments, with its full impact remaining uncertain - The COVID-19 pandemic is identified as a significant risk that has adversely affected business, financial condition, and results of operations[260] - Specific impacts from the pandemic include: limiting hours of operation and reducing capacity, temporarily closing five company-owned locations during Q2 2020, providing royalty relief to franchisees through July 2020, and executive team deferring a portion of their salaries[261] Unregistered Sales of Equity Securities and Use of Proceeds The company issued unregistered equity securities, including common stock and options, primarily for services to consultants and board members, notably settling a dispute by issuing 300,000 shares, all exempt from registration - The company issued 300,000 shares of common stock to a consultant as part of a settlement agreement after a previous issuance of stock and warrants was rescinded due to not having enough equity authorized under the 2019 Incentive Stock Plan[262] - Various issuances of common stock were made to consultants and board of directors for services, including 10,000 shares for investor relations, 51,105 shares for accrued interest, and 53,571 shares to various consultants[262][264][266] - The company agreed to issue 200,000 non-qualified stock options to a consultant for investor outreach services, exercisable at $2.50 per share, upon shareholder approval of the 2020 Incentive Stock Plan[263] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None reported[268] Mine Safety Disclosures This section is not applicable to the company - Not applicable[269] Other Information The company disclosed settling a consultant dispute by issuing 300,000 shares and 100,000 options, and the executive team's cancellation of 216,783 restricted common shares - The company entered into a settlement agreement on August 11, 2020, to resolve a dispute with a consultant, agreeing to issue 300,000 shares of common stock and 100,000 stock options[270] - On August 11, 2020, the executive team agreed to cancel 216,783 shares of restricted common stock that had been issued in the first quarter of 2020[271] Exhibits This section lists the exhibits filed with the Form 10-Q, including the certificate of amendment to the Articles of Incorporation, CEO and CFO certifications, and XBRL data files