SADOT GROUP INC. The following discussion and analysis of the results of operations and financial
condition of
OVERVIEW
We operate under the name
We believe our healthier restaurant concept delivers a highly differentiated customer experience by combining the quality and hospitality that customers commonly associate with our full service and fast casual restaurant competitors with the convenience and value customers generally expect from traditional fast food restaurants. The foundation of our brand is based on our core values of quality, empowerment, respect, service and value.
As of
46 Key Financial Definitions Total Revenues
Our revenues are derived from three primary sources: company restaurant sales, franchise revenues and vendor rebates from Franchisees. Franchise revenues are comprised of franchise royalty revenues collected based on 5% of franchisee net sales and other franchise revenues which include initial and renewal franchisee fees. Vendor rebates are received based on volume purchases or services from franchise owned locations.
Food and Beverage Costs
Food and beverage costs include the direct costs associated with food, beverage and packaging of our menu items at company-operated restaurants partially offset by vendor rebates from company-owned stores. The components of food, beverages and supplies are variable in nature, change with sales volume, are affected by menu mix and are subject to fluctuations in commodity costs. The current management team has begun implementing multiple operational changes to lower food and paper costs.
Labor
Restaurant labor costs, including preopening labor, consists of company-operated restaurant-level management and hourly labor costs, including salaries, wages, payroll taxes, workers' compensation expense, benefits and bonuses paid to our company-operated restaurant-level team members. Like other cost items, we expect restaurant labor costs at our company-operated restaurants to increase due to inflation and as our company restaurant revenues grow. Factors that influence labor costs include minimum wage and employer payroll tax legislation, mandated health care costs and operational productivity established by the management team. The current management team has begun implementing operational changes to lower restaurant level labor costs overall.
Rent
Restaurant rent, including preopening rental charges, consist of company-operated restaurant-level rental or lease payments applicable to executed rental or lease agreements. In many cases these rental payments may include payments for common area maintenance as well as property tax assessments. Our rent strategy mostly consists of a variable rent structure calculated on net sales of the restaurant. While this can have a negative effect on higher volume locations where we cannot leverage a fixed rent, it provides downside protection for lower volume locations. While we cannot guarantee a favorable variable rent expense in all future leases, we have forecasted average rental costs as a percentage of total sales at 8%.
Other restaurant operating expenses
Other restaurant operating expenses, including preopening operating expenses,
consist of company-operated restaurant-level ancillary expenses not inclusive of
food and beverage, labor and rent expense. These expenses are generally
marketing, advertising, merchant and bank fees, utilities, leasehold and
equipment repairs, insurance and maintenance. A portion of these costs are
associated with third party delivery services such as
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Depreciation and Amortization
Depreciation and amortization primarily consist of the depreciation of property and equipment and amortization of intangible assets.
Other Expenses Incurred for Closed Locations
Other expenses incurred for closed locations consists primarily of restaurant operating expenses incurred subsequent to store closures, relating to ongoing obligations to vendors under signed agreements.
General and Administrative Expenses
General and administrative expenses include expenses associated with corporate and administrative functions that support our operations, including wages, benefits, travel expense, stock-based compensation expense, legal and professional fees, training, and other corporate costs. We expect to incur incremental general and administrative expenses as a result of the 2020 IPO and as a public company. A certain portion of these expenses are related to the preparation of an initial stock offering and should be considered one-time expenses.
Other (Expense) Income
Other (expenses) income consists of amortization of debt discounts on the
convertible notes, interest expense related to convertible notes payable,
inducement expense and warrant modification expense related to the conversion of
convertible notes payable which was incurred by the Company in order to induce
various note holders to convert approximately
Income Taxes
Income taxes represent federal, state, and local current and deferred income tax expense.
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Consolidated Results of Operations
The following table represents selected items in our consolidated statements of
operations for the years ended
For the Years Ended
December 31,
2019 2018
Revenues:
Company restaurant sales, net of discounts $ 3,466,553 $ 3,869,758
Franchise royalties and fees 1,352,944 1,908,278
Franchise advertising fund contributions 139,508 -
Other revenues - 244,633
Total Revenues 4,959,005 6,022,669
Operating Costs and Expenses:
Restaurant operating expenses:
Food and beverage costs 1,275,894 1,432,653
Labor 1,587,889 1,646,264
Rent 449,384 681,176
Other restaurant operating expenses 634,532 853,197
Total restaurant operating expenses 3,947,699 4,613,290
Costs of other revenues - 114,388
Depreciation and amortization 280,955 200,885
Other expenses incurred for closed locations - 321,821
Franchise advertising fund expenses 139,508 -
General and administrative expenses 4,244,848 4,358,131
Total Costs and Expenses 8,636,600 9,608,515
Loss from Operations (3,654,005 ) (3,585,846 )
Other (Expense) Income:
Other income 839 96,221
Interest expense, net (1,576,547 ) (983,499 )
Loss on sale of CTI - (456,169 )
Inducement expense (15,102,206 ) -
Warrant modification expense (5,405,770 ) -
Amortization of debt discount (2,647,355 ) (2,275,247 )
Total Other Expense, net (24,731,039 ) (3,618,694 )
Net Loss Before Income Tax (28,385,044 ) (7,204,540 )
Income tax provision - -
Net Loss (28,385,044 ) (7,204,540 )
Net loss attributable to the non-controlling interest - (2,071 )
Net Loss Attributable to Controlling Interest $ (28,385,044 ) $ (7,202,469 )
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Year Ended
Revenues
Our revenues totaled
We generated company restaurant sales, net of discounts, of
Franchise royalties and fees for the year ended
Other revenues decreased to
Operating Costs and Expenses
Operating costs and expenses consist of restaurant food and beverage costs, restaurant labor expense, restaurant rent expense, other restaurant operating expenses, cost of other revenues, depreciation and amortization expenses, impairment losses and general and administrative expenses.
Restaurant food and beverage costs for the year ended
Restaurant labor for the year ended
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Restaurant rent expense for the year ended
Other restaurant operating expenses for the year ended
Cost of other revenues for the years ended
Other Expenses incurred for closed locations for the year ended
Depreciation and amortization expense for the year ended
General and administrative expenses for the year ended
51 Loss from Operations
Our loss from operations for the year ended
Other (Expense) Income
Other expense for the year ended
Net Loss
Our net loss for the year ended
Liquidity and Capital Resources
Liquidity
We measure our liquidity in a number of ways, including the following:
December 31, 2019 December 31, 2018
Cash $ 478,854 $ 357,842
Working Capital Deficiency $ 3,707,541 $ 3,918,443
Convertible notes payable, including related
parties and Former Parent, net of debt discount
of $38,918 and $1,582,378 , respectively $ 693,540 $ 2,307,853
Other notes payable, including related parties $ 682,807 $ 560,000
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Availability of Additional Funds and Going Concern
Based upon our working capital deficiency and accumulated deficit of
On
As ofDecember 31, 2019 , our gross outstanding debt of$1,415,265 , together with interest at rates ranging between 10% - 15% per annum, was due on various dates throughOctober 10, 2024 . As ofDecember 31, 2019 , our outstanding debt was as follows: Principal Maturity Date Amount Past Due 182,4583/31/2020 487,4966/30/2020 303,7479/30/2020 113,00412/31/2020 13,26503/31/2021 88,533 Thereafter 226,762$ 1,415,265
Our principal source of liquidity to date has been provided by loans and convertible loans from related and unrelated third parties (ii) the sale of common stock through private placements and the (iii) and the recent closed public offering.
The pandemic novel coronavirus (COVID-19) outbreak, federal, state and local
government responses to COVID-19 and our Company's responses to the outbreak
have all disrupted and will continue to disrupt our business. In
On
We expect to have ongoing needs for working capital in order to fund operations
and expand operations by opening additional corporate-owned restaurants. To that
end, we intend to raise additional capital in 2020 and 2021 to raise additional
funds through equity or debt financing. The amount required will be dependent on
current operations, future investment and the execution of our business plan. We
estimate our cash needs for 2020 is approximately
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In addition, if we are unable to generate adequate cash from operations, and if we are unable to find sources of funding, it may be necessary for us to sell one or more lines of business or all or a portion of our assets, enter into a business combination, or reduce or eliminate operations. These possibilities, to the extent available, may be on terms that result in significant dilution to our shareholders or that result in our shareholders losing all of their investment in our Company.
If we are able to raise additional capital, we do not know what the terms of any such capital raising would be. In addition, any future sale of our equity securities would dilute the ownership and control of shares sold in this offering and could be at prices substantially below prices at which our shares currently trade. Our inability to raise capital could require us to significantly curtail or terminate our operations. We may seek to increase our cash reserves through the sale of additional equity or debt securities. The sale of convertible debt securities or additional equity securities could result in additional and potentially substantial dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties.
Our audited consolidated financial statements included elsewhere in this 10K
document have been prepared in conformity with accounting principles generally
accepted in
Sources and Uses of Cash for the Years Ended
For the year ended
During the year ended
Net cash provided by financing activities for the year ended
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Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant estimates include:
? the fair value of assets acquired and liabilities assumed in a business
combination;
? the assessment of recoverability of long-lived assets, including property and
equipment, goodwill and intangible assets;
? the estimated useful lives of intangible and depreciable assets;
? estimates and assumptions used to value warrants issued in connection with
notes payable;
? the recognition of revenue; and
? the recognition, measurement and valuation of current and deferred income
taxes
Estimates and assumptions are periodically reviewed, and the effects of any material revisions are reflected in the financial statements in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.
Intangible Assets
We account for recorded intangible assets in accordance with ASC 350
"Intangibles -
Other intangible assets include franchise agreements which are amortized on a straight-line basis over their estimated useful lives of 13 years.
Impairment of Long-Lived Assets
When circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, we perform an analysis to review the recoverability of the asset's carrying value, which includes estimating the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value. Any impairment losses are recorded as operating expenses, which reduce net income.
55 Deferred Revenue
Deferred revenue primarily includes initial franchise fees received by the Company, which are being amortized over the life of the Company's franchise agreements, as well as unearned vendor rebates
Revenue Recognition
During the first quarter 2019, we adopted Topic 606 "Revenue from Contracts with Customers" for revenue recognition related to contracts with customers and applied the guidance modified retrospectively. Under the new guidance, revenue is recognized in accordance with a five-step revenue model, as follows: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. In applying this five-step model, we have made significant judgments in identifying the promised goods or services in our contracts with franchisees that are distinct, and which represent separate performance obligations.
Restaurant Sales
Retail store revenue at Company operated restaurants is recognized when payment
is tendered at the point of sale, net of sales tax, discount and other sales
related taxes. The Company recorded retail store revenues of
The Company sells gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card balances. The Company recognize revenues form gift cards as restaurant revenues once the Company performs obligation to provide food and beverage to the customer simultaneously with the redemption of the gift card.
Franchise Royalties and Fees
Franchise revenues consists of royalties, franchise fees and rebates. Royalties
are based on a percentage of franchisee net sales revenue. The Company
recognizes the royalties as the underlying sales occur. The Company recorded
revenue from royalties of
The Company provides the franchisees with management expertise, training,
pre-opening assistance, and restaurant operating assistance in exchange for the
multi-unit development fees and franchise fees. The Company capitalizes these
fees upon collection from the franchisee, these fees are then recognized as
franchise fee revenue on a straight-line basis over the life of the related
franchise agreements and any exercised renewal periods. . Cash payments are due
upon the execution of the related franchise agreement. The Company's performance
obligation with respect to franchise fee revenues consists of a license to
utilize the Company's brand for a specified period of time, which is satisfied
equally over the life of each franchise agreement. The Company recorded revenue
from franchise fees of
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The Company has supply agreements with certain food and beverage vendors.
Pursuant to the terms of these agreements, rebates are provided to the Company
based upon the dollar volume of purchases for all company-owned and franchised
restaurants from these vendors. Rebates earned on purchases by franchise stores
are recorded as revenue during the period in which the related food and beverage
purchases are made. The Company recorded revenue from rebates of
Other Revenues
Through its subsidiary CTI which was sold in
Deferred Revenue
Deferred revenue primarily includes initial franchise fees received by us, which are being amortized over the life of our franchise agreements, as well as unearned vendor.
Franchise Advertising Fund Contributions
Under the Company's franchise agreements, the Company and its franchisees are
required to contribute a certain percentage of revenues to a national
advertising fund. The Company's national advertising services are provided on a
system-wide basis and, therefore, not considered distinct performance
obligations for individual franchisees. In accordance with Topic 606, the
Company recognizes these sales-based advertising contributions from franchisees
as franchise revenue when the Company incurs the corresponding advertising
expense. The Company records the related advertising expenses as incurred under
general and administrative expenses. When an advertising contribution fund is
over-spent at year end, advertising expenses will be reported on the
consolidated statement of operations in an amount that is greater than the
revenue recorded for advertising contributions. Conversely, when an advertising
contribution fund is under-spent at a period end, the Company will accrue
advertising costs up to advertising contributions recorded in revenue. The
Company recorded contributions from franchisees of
Income Taxes
We account for income taxes under Accounting Standards Codification ("ASC") 740 Income Taxes ("ASC 740"). Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
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ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
Tax benefits claimed or expected to be claimed on a tax return are recorded in our financial statements. A tax benefit from an uncertain tax position is only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
Our policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the consolidated statements of operations.
Recently Issued Accounting Pronouncements
See Note 3 to our consolidated financial statements for the year ended
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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