Sadot Group Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Preliminary Note The following Management’s Discussion and Analysis (“MD&A”), prepared as of May 10, 2023, should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements of Muscle Maker, Inc., for the three months ended March 31, 2023 together with the audited financial statements of the Company for the year ended December 31, 2022 and the accompanying MD&A for that fiscal year appearing in our Annual Report on 2022 Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 21, 2023. Unless otherwise indicated or the context otherwise requires, all references to the terms “Company,” “company,” “Muscle Maker,” “we,” “us,” “our”, “Group” and similar terms refer to Muscle Maker, Inc., together with its consolidated subsidiaries. Our website address is http://musclemakerinc.com. The information on, or that can be accessed through, our website is not part of this Report. The SEC also maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our filings with the SEC are also available to the public through the SEC’s website at www.sec.gov. This MD&A is the responsibility of management. Prior to its release, the Company’s Board of Directors (the “Board”) approved this MD&A on the Audit Committee’s recommendation. The Company presents its financial statements in U.S. Dollars. Amounts in this MD&A are stated in U.S. Dollars unless otherwise indicated. Forward-Looking Statements This Report contains forward-looking statements as defined in the federal securities laws. Forward-looking statements generally relate to future events or our future financial or operating performance. These forward-looking statements are not guarantees of future performance, conditions, or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside of Muscle Maker’s management’s control. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “forecast,” “model,” “proposal,” “should,” “may,” “intend,” “estimate,” and “continue,” and similar expressions (or the negative versions of such words or expressions), are intended to identify forward-looking statements. These forward-looking statements include, without limitation, information concerning Muscle Maker’s possible or assumed future results of operations, business strategies, debt levels, competitive position, industry environment and possible growth opportunities . We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Reference is made to “Factors That May Affect Future Results and Financial Condition” in this Item 2 for a discussion of some of the uncertainties, risks and assumptions associated with these statements. OVERVIEW Muscle Maker, Inc. ("MMI") is our parent company and is headquartered in Ft. Worth, Texas. In late 2022, MMI began a transformation from a U.S.-centric restaurant business into a global, food-focused organization with two distinct business units. 1. Sadot LLC is an international agri-commodities company engaged in trading and shipping of food and feed (e.g., soybean meal, wheat and corn) via dry bulk cargo ships to/from markets such as Brazil, Canada, China, India, Japan, Malaysia, Philippines, Poland, Romania, Ukraine and Vietnam. Sadot competes with the ABCD commodity companies (ADM, Bunge, Cargill, Louis-Dreyfus) as well as many regional organizations. Sadot was formed as part of the Company’s diversification strategy to own and operate, through its subsidiaries, the business lines throughout the food value chain. Sadot is MMI's largest operating unit. 2. MMI Restaurant Group has three unique “healthier for you” concepts, including two fast casual restaurant concepts, Pokémoto and Muscle Maker Grill, plus one subscription-based fresh prep meal concept, SuperFit Foods. Our Company was founded on the belief of taking every-day menu options and converting them into “healthier for you” menu choices. Consumers are demanding healthier choices, customization, flavor and convenience. Each of our three concepts offers different menus that are tailored to specific consumer segments. We believe our concepts deliver highly differentiated customer experiences. As of March 31, 2023, the Company had a cash balance, a working capital surplus and an accumulated deficit of $6.4 million, $6.4 million and $80.4 million, respectively. During the three months ended March 31, 2023, the Company incurred a Pre-tax net loss of $1.1 million and Net cash used in operations of $3.3 million. The Company believes that our 36 Table of Contents existing cash on hand and future cash flows from our franchise operations, will be sufficient to fund our operations, anticipated capital expenditures and repayment obligations over the next 12 months. Key Financial Definitions We review a number of financial and operating metrics, including the following key metrics and non-GAAP measures, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. Governmental and other economic factors affecting our operations may vary. For the Three Months Ended March 31, 2023 2022 $’000 $’000 Revenues: Commodity sales 210,366 — Company restaurant sales, net of discounts 2,301 2,694 Franchise royalties and fees 284 208 Franchise advertising fund contributions 16 18 Total revenues 212,967 2,920 Operating Costs and Expenses: Commodity operating expenses: Commodity cost 205,055 — Labor 620 — Other commodity operating expenses 154 — Total commodity operating expenses 205,829 — Restaurant operating expenses: Food and beverage costs 839 1,026 Labor 880 1,073 Rent 274 340 Other restaurant operating expenses 472 650 Total restaurant operating expenses 2,465 3,089 Depreciation and amortization expenses 633 476 Franchise advertising fund expenses 16 18 Preopening expenses 36 — Post-closing expenses 94 — Stock-based consulting expenses 3,359 — Sales, general and administrative expenses 2,142 1,324 Loss from operations (1,607) (1,987) EBITDA (427) (1,426) Adjusted EBITDA 2,391 (1,547) The breakout of our main revenue streams by business segment is shown below: Three Months Ended March 31, 2023 2022 Sadot Division 98.8 % — Restaurant Division 1.2 % 100.0 % Our key business and financial metrics are explained in detail below. 37 Table of Contents Revenues Our revenues are derived from four primary sources: Physical Commodity sales, Company restaurant sales, Franchise revenues and vendor rebates from Franchisees. Franchise revenues are comprised of Franchise royalty revenues collected based on 2% to 6% 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. In addition, we have Other revenues which consists of gift card breakage, which is recognized when we determine that there is no further legal obligation to remit the unredeemed gift card balance. Commodity Operating Expenses Commodity Cost Commodity costs include the direct cost associated with purchasing the physical food commodities. The cost includes the cost of the inventory, insurance, shipping and other cost associated with transporting the physical food commodity. The components of Commodity cost are variable in nature, change with sales volume, logistics and are subject to fluctuations in Commodity costs. Labor Commodity labor cost consists of consulting fees paid for traders, logistics, and operations personnel to perform the purchases and sale of physical food commodities. Similar to other cost items, we expect total Commodity labor costs to increase as our Commodity sales revenues grows. Other Commodity Operating Expenses Other commodity operating expenses consist of food commodity purchase and sales expenses not inclusive of Commodity cost and Labor. These expenses are generally travel and office expenses. Restaurant Operating Expenses 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. Labor Restaurant labor costs, 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 total 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. Rent Restaurant rent 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 in some locations 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. 38 Table of Contents Other Restaurant Operating Expenses Other restaurant 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 Uber Eats, Grub Hub, DoorDash and others. The fees associated with these third-party delivery services can range up to 25% of the total order being delivered. Management believes delivery is a critical component of our business model and industry trends will continue to push consumers towards delivery. We have adjusted our cost structure to reflect different pricing models, portion sizes, menu offerings and other considerations to potentially partially offset these rising costs of delivery. Depreciation and Amortization Expenses Depreciation and amortization expenses primarily consist of the depreciation of property and equipment and amortization of intangible assets. Franchise Advertising Expenses Franchise advertising expenses are recognized sales-based advertising contributions from franchisees as franchise revenue when the underlying franchisee incurs the corresponding advertising expense. The Company records the related advertising expenses as incurred under Sales, general and administrative expenses. Pre-Opening Expenses Pre-opening expenses primarily consist of expenses associated with opening a Company-operated location and expenses related to Company-operated locations prior to the location opening. Post-Closing Expenses Post-closing expenses primarily consist of expenses associated with closing a Company-operated location and expenses related to Company-operated locations after the location has closed. Stock-based Consulting Expenses Stock-based consulting expenses are related to consulting fees due to Aggia for Sadot operations. Based on the servicing agreement with Aggia, the consulting fees are calculated at approximately 80.0% of the Net income generated by the Sadot business segment. For the three months ended March 31, 2023, $3.4 million is recorded as Stock-based consulting expense in the accompanying Unaudited Condensed Consolidated Statements of Operations and a corresponding liability is recorded as Accrued stock-based consulting expense in the accompanying Unaudited Condensed Consolidated Balance Sheets. This expense is expected to be paid in stock in 2023. Sales, General and Administrative Expenses Sales, 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, investor relations and other corporate costs. We incur incremental Sales, general and administrative expenses as a result of being a publicly listed company on the NASDAQ capital market. A certain portion of these expenses are related to the preparation of an initial stock offering and subsequent capital raises and should be considered one-time expenses. Other (Expense) / Income Other (expense) / income consists of amortization of debt discounts on the convertible notes, interest expense related to notes payable, Change in fair value of accrued compensation and gains on debt extinguishments in connection with the Paycheck Protection Program, (“PPP”) loan forgiveness. 39 Table of Contents Income Taxes Income taxes represent federal, state and local current and deferred income tax expenses. Non-GAAP Measures EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin are non-GAAP measures. We define EBITDA as Net loss, adjusted for depreciation, amortization, interest income / (expense), and income taxes. We define Adjusted EBITDA as Net loss, adjusted for depreciation, amortization, net interest (income) expense, income taxes, impairment expenses, stock-based consulting expense, derived from amounts presented in the Unaudited Condensed Consolidated Statement of Operations and the associated Notes to the Unaudited Condensed Consolidated Financial Statements. We believe that EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin, (collectively, the “Non-GAAP Measures”) are useful metrics for investors to understand and evaluate our operating results and ongoing profitability because they permit investors to evaluate our recurring profitability from our ongoing operating activities. EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin, have certain limitations, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under U.S. GAAP. We caution investors that amounts presented in accordance with our definitions of any of the Non-GAAP Measures may not be comparable to similar measures disclosed by other issuers, because some issuers calculate certain of the Non-GAAP Measures differently or not at all, limiting their usefulness as direct comparative measures. Reconciliations of EBITDA, Adjusted EBITDA and Other Non-GAAP Measures The following table presents a reconciliation of EBITDA and Adjusted EBITDA from the most comparable U.S. GAAP measure, Net loss, and the calculations of the Net loss Margin and Adjusted EBITDA Margin for the three months ended March 31, 2023 and 2022: For the Three Months Ended March 31, 2023 2022 $’000 $’000 Net loss (1,066) (1,886) Adjustments to EBITDA: Depreciation and amortization expenses 633 476 Interest expense, net 3 (18) Income tax 3 2 EBITDA (427) (1,426) Adjustments to Adjusted EBITDA: Other income / (expense) — 19 Change in fair value of accrued compensation (541) — Gain on debt extinguishment — (140) Stock-based consulting expenses 3,359 — Adjusted EBITDA 2,391 (1,547) Total revenue 212,967 2,920 Net loss Margin (0.5) % (64.6) % Adjusted EBITDA Margin 1.1 % (53.0) % 40 Table of Contents Unaudited Condensed Consolidated Results of Operations - Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022 The following table represents selected items in our Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022, respectively: Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Revenues: Commodity sales 210,366 — 210,366 NM Company restaurant sales, net of discounts 2,301 2,694 (393) (14.6) % Franchise royalties and fees 284 208 76 36.5 % Franchise advertising fund contributions 16 18 (2) (11.1) % Total revenues 212,967 2,920 210,047 7193.4 % Operating Costs and Expenses: Commodity operating expenses: Commodity cost 205,055 — 205,055 NM Labor 620 — 620 NM Other commodity operating expenses 154 — 154 NM Total commodity operating expenses 205,829 — 205,829 NM Restaurant operating expenses: Food and beverage costs 839 1,026 (187) (18.2) % Labor 880 1,073 (193) (18.0) % Rent 274 340 (66) (19.4) % Other restaurant operating expenses 472 650 (178) (27.4) % Total restaurant operating expenses 2,465 3,089 (624) (20.2) % Depreciation and amortization expenses 633 476 157 33.0 % Franchise advertising fund expenses 16 18 (2) (11.1) % Pre-opening expenses 36 — 36 NM Post-closing expenses 94 — 94 NM Stock-based consulting expenses 3,359 — 3,359 NM Sales, general and administrative expenses 2,142 1,324 818 61.8 % Total costs and expenses 214,574 4,907 209,667 4272.8 % Loss from operations (1,607) (1,987) 380 (19.1) % Other Income: Other income / (expense) — (19) 19 (100.0) % Interest income / (expense), net 3 (18) 21 (116.7) % Change in fair value of accrued compensation 541 — 541 NM Gain on debt extinguishment — 140 (140) (100.0) % Total other income, net 544 103 441 428.2 % Loss Before Income Tax (1,063) (1,884) 821 (43.6) % Income tax 3 2 1 50.0 % Net loss (1,066) (1,886) 820 (43.5) % NM= not meaningful 41 Table of Contents The following table sets forth our results of operations as a percentage of total revenue for each period presented preceding: Three Months Ended March 31, 2023 2022 $’000 $’000 Revenues: Commodity sales 98.8 % — Company restaurant sales, net of discounts 1.1 % 92.3 % Franchise royalties and fees 0.1 % 7.1 % Franchise advertising fund contributions — 0.6 % Total revenues 100.0 % 100.0 % Operating Costs and Expenses: Commodity operating expenses: Commodity cost 96.3 % — Labor 0.3 % — Other commodity operating expenses 0.1 % — Total commodity operating expenses 96.6 % — Restaurant operating expenses: Food and beverage costs 0.4 % 35.1 % Labor 0.4 % 36.7 % Rent 0.1 % 11.6 % Other restaurant operating expenses 0.2 % 22.3 % Total restaurant operating expenses 1.2 % 105.8 % Depreciation and amortization expenses 0.3 % 16.3 % Franchise advertising fund expenses — 0.6 % Pre-opening expenses — — Post-closing expenses — — Stock-based consulting expenses 1.6 % — Sales, general and administrative expenses 1.0 % 45.3 % Total costs and expenses 100.8 % 168.0 % Loss from operations (0.8) % (68.0) % Other Income: Other income / (expense) — (0.7) % Interest income / (expense), net — (0.6) % Change in fair value of accrued compensation 0.3 % — Gain on debt extinguishment — 4.8 % Total other income, net 0.3 % 3.5 % Loss Before Income Tax (0.5) % (64.5) % Income tax — % 0.1 % Net loss (0.5) % (64.6) % 42 Table of Contents Revenues Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Revenues: Commodity sales 210,366 — 210,366 NM Company restaurant sales, net of discounts 2,301 2,694 (393) (14.6) % Franchise royalties and fees 284 208 76 36.5 % Franchise advertising fund contributions 16 18 (2) (11.1) % Total revenues 212,967 2,920 210,047 7193.4 % NM= not meaningful Our revenues totaled $213.0 million for the three months ended March 31, 2023, compared to $2.9 million for the three months ended March 31, 2022. The $210.0 million increase is primarily attributed to an increase in Commodity sales as a direct result of the formation of Sadot and its added revenue. We generated Commodity sales of $210.4 million for the three months ended March 31, 2023. We did not have any Commodity sales for the three months ended March 31, 2022. This represented an increase of $210.4 million, which is attributable to Sadot sales generated from physical food related commodities. We generated Company restaurant sales, net of discounts, of $2.3 million for the three months ended March 31, 2023, compared to $2.7 million for the three months ended March 31, 2022. This represented an decrease of $0.4 million, or 14.6%, which is mainly attributable to the closures of certain unprofitable Muscle Maker Grill locations. Franchise royalties and fees for the three months ended March 31, 2023 totaled $0.3 million compared to $0.2 million for the three months ended March 31, 2022. This represents an increase of $0.1 million, or 36.5%. In 2023, the franchise fees were higher, primarily due to termination of one Muscle Maker Grill Franchise agreement, which corresponds to accelerating the recognition of initial franchise fees. Franchise advertising fund contributions for the three months ended March 31, 2023 totaled $16.0 thousand compared to $18.0 thousand for the three months ended March 31, 2022. The Company recognizes these sales-based advertising contributions from franchisees as franchise revenue when the underlying franchisee Company incurs the corresponding advertising expense. The decrease of $2.0 thousand or 11.1%, is a direct result of the decrease in Muscle Maker Grill franchises and the national advertising services to benefit the brand as a whole. Operating Costs and Expenses Operating costs and expenses primarily consist of Commodity costs, Restaurant food and beverage costs, Restaurant labor expense, Restaurant rent expense, Other restaurant operating expenses, Depreciation and amortization expenses and Sales, general and administrative expenses. Commodity Costs Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Commodity cost 205,055 — 205,055 NM Commodity costs for the three months ended March 31, 2023, totaled $205.1 million or 97.5% as a percentage of Commodity sales. There was no Commodity cost for the three months ended March 31, 2022. The $205.1 million increase resulted from a new line of business operated by Sadot. 43 Table of Contents Commodity Labor Cost Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Labor 620 — 620 NM Commodity labor costs for the three months ended March 31, 2023, totaled $0.6 million or 0.3% as a percentage of Commodity sales. There were no Commodity labor costs for the three months ended March 31, 2022. The $0.6 million increase resulted from a new line of business operated by Sadot. Other Commodity Operating Expenses Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Other commodity operating expenses 154 — 154 NM Other commodity operating expenses for the three months ended March 31, 2023 totaled $0.2 million or 0.1% as a percentage of Commodity sales There were no Other commodity operating expenses for the three months ended March 31, 2022. The $0.2 million increase resulted from a new line of business operated by Sadot. Restaurant Food and Beverage Costs Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Food and beverage costs 839 1,026 (187) (18.2) % Restaurant food and beverage costs for the three months ended March 31, 2023 totaled $0.8 million or 36.5% as a percentage of Company restaurant net sales, and $1.0 million or 38.1%, as a percentage of Company restaurant net sales, for the three months ended March 31, 2022. The $0.2 million decrease resulted from a decrease in sales due to the closures of certain unprofitable Muscle Maker Grill locations. Total restaurant food and beverage cost as a percentage of sales decreased by 1.6% as a result of higher commodity prices in 2023. Restaurant Labor Expense Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Labor 880 1,073 (193) (18.0) % Restaurant labor expense for the three months ended March 31, 2023 totaled $0.9 million, or 38.2%, as a percentage of Company restaurant net sales, and $1.1 million, or 39.8%, as a percentage of Company restaurant net sales, for the three months ended March 31, 2022. The $0.2 million decrease resulted from a reduction in Labor expense. 44 Table of Contents Restaurant Rent Expense Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Rent 274 340 (66) (19.4) % Restaurant rent expense for the three months ended March 31, 2023 totaled $0.3 million, or 11.9% as a percentage of restaurant sales, and $0.3 million, or 12.6%, as a percentage of restaurant sales, for the three months ended March 31, 2022. The decrease of $0.1 million is directly attributed to the closure of a nonperforming corporate location. The percentage of total sales decreased by 0.7% as sales decreased overall. Other Restaurant Operating Expenses Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Other restaurant operating expenses 472 650 (178) (27.4) % Other restaurant operating expenses for the three months ended March 31, 2023 totaled $0.5 million, or 20.5% as a percentage of restaurant sales, and $0.7 million, or 24.1% as a percentage of restaurant sales, for the three months ended March 31, 2022. The $0.2 million decrease is primarily due to a decrease in insurance costs resulting from a consolidation in insurance companies and a decrease in third party processing fees, partially offset by an increase in merchant processing fees. The Other restaurant operating expenses as a percent of total sales decreased by 3.6%. Depreciation and Amortization Expenses Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Depreciation and amortization expenses 633 476 157 33.0 % Depreciation and amortization expenses for the three months ended March 31, 2023 totaled $0.6 million compared to $0.5 million, for the three months ended March 31, 2022. The $0.2 million increase is mainly attributed to the accelerated depreciation of leasehold improvements for leases that were modified resulting in a shorter life. Franchise Advertising Fund Expenses Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Franchise advertising fund expenses 16 18 (2) (11.1) % Franchise advertising fund expenses for the three months ended March 31, 2023 totaled $16.0 thousand compared to $18.0 thousand , for the three months ended March 31, 2022. The $2.0 thousand decrease is mainly attributed to the decrease of $2.0 thousand or 11.1%, is a direct result of the decrease in Muscle Maker Grill franchises and the national advertising services to benefit the brand. 45 Table of Contents Pre-Opening Expenses Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Pre-opening expenses 36 — 36 NM Pre-opening expenses for the three months ended March 31, 2023 totaled $36.0 thousand . There were no Pre-opening expenses for the three months ended March 31, 2022. The increase in pre-opening expense resulted from expenses incurred prior to the opening of our new Company-owned stores. Post-Closing Expenses Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Post-closing expenses 94 — 94 NM Post-closing expenses for the three months ended March 31, 2023 totaled $0.1 million. There were no Post-closing expenses for the three months ended March 31, 2022. The increase in Post-closing expenses resulted from expenses incurred after the closing of underperforming Company-owned stores. Stock-Based Consulting Expenses Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Stock-based consulting expenses 3,359 — 3,359 NM Stock-based consulting expenses for the three months ended March 31, 2023, totaled $3.4 million. There were no Stock-based consulting expenses for the three months ended March 31, 2022. The increase in Stock-based consulting expenses is the result of consulting fees due to Aggia for Sadot operations. Based on the servicing agreement with Aggia, the consulting fees are calculated at approximately 80.0% of the Net income generated by the Sadot business segment. This expense is expected to be paid in stock in 2023. Sales, General and Administrative Expenses Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Sales, general and administrative expenses 2,142 1,324 818 61.8 % Sales, general and administrative expenses for the three months ended March 31, 2023 totaled $2.1 million, or 1.0% of total revenue, compared to $1.3 million, or 45.3% of total revenue, for the three months ended March 31, 2022. The $0.8 million increase was primarily attributable to an increase in professional and consulting fees and employee salaries and benefits. 46 Table of Contents Total Other Income, Net Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Total other income / (expense), net 544 103 441 428.2 % Total other income / (expense), net for the three months ended March 31, 2023 totaled $0.5 million compared to $0.1 million, for the three months ended March 31, 2022. The $0.4 million decrease in Total other income / (expense), net was primarily attributable to an increase in the Gain on extinguishment of debt of $0.1 million due to the forgiveness of our PPP loans, a decrease of $0.5 million in the Change in fair value of accrued compensation, partially offset by a $21.0 thousand decrease in Interest expense and a $19.0 thousand decrease in Other income. Income Tax Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Income tax 3 2 1 50.0 % Our Income tax for the three months ended March 31, 2023, was $3.0 thousand which was an increase of $1.0 thousand as compared to Income taxes of $2.0 thousand for the three months ended March 31, 2022 due to an increase in current state taxes. Net Loss Three Months Ended March 31, Variance 2023 2022 $ % $’000 $’000 $’000 Net loss (1,066) (1,886) 820 (43.5) % Our Net loss for the three months ended March 31, 2023, was $1.1 million which was a decrease of $0.8 million as compared to a Net loss of $1.9 million for the three months ended March 31, 2022, resulting from an increase of Total revenues of $210.0 million, partially offset by the increase in Total cost and expenses of $209.7 million and a $19.0 thousand decrease in Other income. 47 Table of Contents The following table represents selected items in our Condensed Consolidated Statements of Operations for the three months ended March 31, 2023, by our operating segments: Three Months Ended March 31, 2023 Restaurant division Sadot Division Corporate adj. Consolidated $’000 $’000 $’000 $’000 Revenues: Commodity sales — 210,366 — 210,366 Company restaurant sales, net of discounts 2,301 — — 2,301 Franchise royalties and fees 284 — — 284 Franchise advertising fund contributions 16 — — 16 Total revenues 2,601 210,366 — 212,967 Operating Costs and Expenses: Commodity operating expenses: Commodity cost — 205,055 — 205,055 Labor — 620 — 620 Other commodity operating expenses — 154 — 154 Total commodity operating expenses — 205,829 — 205,829 Restaurant operating expenses: Food and beverage costs 839 — — 839 Labor 880 — — 880 Rent 274 — — 274 Other restaurant operating expenses 472 — — 472 Total restaurant operating expenses 2,465 — — 2,465 Depreciation and amortization expenses 316 — 317 633 Franchise advertising fund expenses 16 — — 16 Preopening expenses 36 — — 36 Post-closing expenses 93 — 1 94 Stock-based consulting expenses — — 3,359 3,359 Sales, general and administrative expenses 82 286 1,774 2,142 Total costs and expenses 3,008 206,115 5,451 214,574 (Loss) / income from operations (407) 4,251 (5,451) (1,607) Other Income: Interest income , net 2 — 1 3 Change in fair value of accrued compensation — — 541 541 Total other income, net 2 — 542 544 (Loss) / Income Before Income Tax (405) 4,251 (4,909) (1,063) Income tax — — 3 3 Net (loss) / income (405) 4,251 (4,912) (1,066) 48 Table of Contents The following table represents selected items in our Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2022, by our operating segments: Three Months Ended March 31, 2022 Restaurant division Sadot Division Corporate adj. Consolidated $’000 $’000 $’000 $’000 Revenues: Company restaurant sales, net of discounts 2,694 — — 2,694 Franchise royalties and fees 208 — — 208 Franchise advertising fund contributions 18 — — 18 Total revenues 2,920 — — 2,920 Operating Costs and Expenses: Restaurant operating expenses: Food and beverage costs 1,026 — — 1,026 Labor 1,073 — — 1,073 Rent 340 — — 340 Other restaurant operating expenses 650 — — 650 Total restaurant operating expenses 3,089 — — 3,089 Depreciation and amortization expenses 119 — 357 476 Franchise advertising fund expenses 18 — — 18 Sales, general and administrative expenses 257 — 1,067 1,324 Total costs and expenses 3,483 — 1,424 4,907 Loss from operations (563) — (1,424) (1,987) Other Income: Other income 2 — (21) (19) Interest income/ (expense), net 3 — (21) (18) Gain on debt extinguishment 140 — — 140 Total other income, net 145 — (42) 103 Loss Before Income Tax (418) — (1,466) (1,884) Income tax — — 2 2 Net loss (418) — (1,468) (1,886) Liquidity and Capital Resources Liquidity We measure our liquidity in a number of ways, including the following: As of March 31, 2023 December 31, 2022 $’000 $’000 Cash 6,386 9,898 Working capital surplus 6,420 4,033 Notes payable 947 981 Availability of Additional Funds Although we have a working capital surplus of $6.4 million, we presently have an accumulated deficit of $80.4 million, as of December 31, 2022, and we utilized $3.3 million of cash in operating activities during the three months ended March 31, 2023. We believe that our existing cash on hand and future cash flows from our franchise operations and commodity 49 Table of Contents trading operations, will be sufficient to fund our operations, anticipated capital expenditures and repayment obligations over the next 12 months. In the event we are required to obtain additional financing, either through borrowings, private placements, public offerings, or some type of business combination, such as a merger, or buyout, and there can be no assurance that we will be successful in such pursuits. We may be unable to acquire the additional funding necessary to continue operating. Accordingly, 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 need 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 could dilute the ownership and control of your shares and could be at prices substantially below prices at which our shares currently trade. 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 occurrence 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. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Any failure to raise additional funds on favorable terms could have a material adverse effect on our liquidity and financial condition. Sources and Uses of Cash for the Three Months Ended March 31, 2023 and March 31, 2022 For the three months ended March 31, 2023, we used Net cash of $3.3 million compared to $0.9 million, for the three months ended March 31, 2022, in operations. Our Net cash used for the three months ended March 31, 2023, was primarily attributable to our Net loss of $1.1 million, adjusted for net non-cash income in the aggregate amount of $4.6 million offset by $6.8 million of Net cash provided by changes in the levels of operating assets and liabilities. Our Net cash used for the three months ended March 31, 2022, was primarily attributable to our Net loss of $1.9 million, adjusted for net non-cash income in the aggregate amount of $0.6 million, partially offset by $0.3 million of Net cash used in changes in the levels of operating assets and liabilities. For the three months ended March 31, 2023, Net cash used in investing activities was $0.2 million, of which $0.1 million was used to purchase Property and equipment. For the three months ended March 31, 2022, Net cash used in investing activities was $35.0 thousand, of which $35.0 thousand was used to purchase Property and equipment. For the three months ended March 31, 2023, Net cash used in financing activities was $34.0 thousand, consisting of repayments of various other notes payable of $34.0 thousand. For the three months ended March 31, 2022, Net cash provided by financing activities was $32.0 thousand, partially offset by repayments of various other notes payable of $32.0 thousand. Recently Issued Accounting Pronouncements In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), which requires companies to recognize lease liabilities and corresponding right-of-use leased assets on the Balance Sheets and to disclose key information about leasing arrangements. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2021, with early adoption permitted. Additionally, in 2018 and 2019, the FASB issued the following Topic 842–related ASUs: ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842, which clarifies the applicability of Topic 842 to land easements and provides an optional transition practical expedient for existing land easements; ASU 2018-10, Codification Improvements to Topic 842, Leases, which makes certain technical corrections to Topic 842; ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows companies to adopt Topic 842 without revising comparative period reporting or disclosures and provides an optional practical expedient to lessors to not separate lease and non-lease components of a contract if certain criteria are met; and 50 Table of Contents ASU 2019-01, Leases (Topic 842): Codification Improvements, which provides guidance for certain lessors on determining the fair value of an underlying asset in a lease and on the cash flow statement presentation of lease payments received; ASU No. 2019-01 also clarifies disclosures required in interim periods after adoption of ASU No. 2016-02 in the year of adoption. The Company adopted Topic 842 as of January 1, 2022 and recognized a cumulative-effect adjustment to the opening balance of accumulated deficit of $15.0 thousand as of the adoption date, and recognized an additional $7.8 thousand during the second quarter of 2022, based on updated information on two of our leases, for an aggregate cumulative-effect adjustment to accumulated deficit of $22.8 thousand. In October 2021, the FASB issued ASU 2021-08 Business Combinations (“Topic 805”): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, “Revenue from Contracts with Customers”, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities were recognized by the acquirer at fair value on the acquisition date. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s Unaudited Condensed Consolidated Financial Statements and related disclosures. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.