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 November 14, 2023, should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements of Sadot Group Inc. (f/k/a Muscle Maker, Inc.), for the three and nine months ended September 30, 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,” "Sadot", “Muscle Maker,” “we,” “us,” “our”, “Group” and similar terms refer to Sadot Group, Inc., together with its consolidated subsidiaries. Our website address is http://sadotgroupinc.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 Sadot Group Inc'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 Sadot’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 Sadot Group Inc. (f/k/a Muscle Maker, Inc.) ("SGI") is our parent company and is headquartered in Ft. Worth, Texas. In late 2022, SGI began a transformation from a U.S.-centric restaurant business into a global, food-focused organization with three distinct business units. Effective July 27, 2023, SGI changed its name to Sadot Group Inc. 1. Sadot Agri-Foods is an international agri-commodities company engaged in the trading and shipping of food and feed (e.g., soybean meal, wheat and corn) via dry bulk cargo ships to/from markets across the globe. Sadot Agri-Foods executes agri-commodity trades between producing geographies such as the Americas, Africa, and the Black Sea to consumer markets in Southeast Asia, China, Latin America and the Middle East/North Africa (MENA) region. Sadot Agri-Foods was formed as part of our diversification strategy to own and operate, through its subsidiaries, business lines throughout the food value chain and is our largest operating unit. 2. Sadot Food Service Operations has three unique concepts, including two fast casual restaurant concepts, Pokémoto and Muscle Maker Grill, plus one subscription-based fresh prep meal concept, SuperFit Foods. Following our strategic pivot to the global food supply chain sector, we are fully engaged in the restructuring of these legacy restaurant operations. By refranchising company-owned units and closing underperforming locations while growing Pokémoto through franchising, we will continue our restructuring efforts with the goal of reducing annualized restaurant operating expenses and overhead while potentially increasing franchise royalty revenue at Pokémoto. 47 Table of Contents 3. Sadot Farm Operations includes approximately 5,000 acres of farmland in the Mkushi Region of Zambia which was acquired in August of 2023. Farm operations are expected to provide a reliable supply of grains and tree crops (mango and avocado). As of September 30, 2023, we had a cash balance, a working capital surplus and an accumulated deficit of $2.4 million, $9.0 million and $85.4 million, respectively. During the three and nine months ended September 30, 2023, we incurred a Pre-tax net income / loss of $5.3 million and $6.2 million, respectively. Net cash used in operations of $8.7 million for the nine months ended September 30, 2023. We believe that our existing cash on hand, current accounts receivable and future cash flows from our commodity trading, farming and franchise operations, will be sufficient to fund our operations, anticipated capital expenditures and repayment obligations over the next 12 months. In addition, we have access to additional liquidity if it is needed through an executed Standby Equity Purchase Agreement ("SEPA") for up to $25 million in capital whereby we may submit advance requests to the lender whereby the lender will provide cash in consideration of shares of common stock subject to certain limitations and conditions set forth in the SEPA. 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. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 $’000 $’000 $’000 $’000 Revenues: Commodity sales 179,975 — 547,900 — Company restaurant sales, net of discounts 1,937 2,630 6,725 8,075 Franchise royalties and fees 245 170 767 541 Franchise advertising fund contributions 16 24 52 58 Other revenues — — 13 — Total revenues 182,173 2,824 555,457 8,674 Operating Costs and Expenses: Cost of goods sold 179,268 2,710 544,803 8,834 Impairment of goodwill 828 — 828 — Impairment of intangible assets 810 — 810 — Depreciation and amortization expenses 443 525 1,517 1,490 Franchise advertising fund expenses 16 24 52 58 Preopening expenses 335 117 371 117 Post-closing expenses 60 159 173 159 Stock-based expenses 1,075 32 5,667 82 Sales, general and administrative expenses 3,310 1,219 7,175 3,620 Loss from operations (3,972) (1,962) (5,939) (5,686) EBITDA (4,564) (1,386) (4,352) (4,067) Adjusted EBITDA (842) (1,409) 2,847 (4,146) The breakout of our main revenue streams by business segment is shown below: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Sadot food service 1.2 % 100.0 % 1.4 % 100.0 % Sadot agri-foods 98.5 % — 98.5 % — Sadot farming operations 0.3 % — 0.1 % — 48 Table of Contents Our key business and financial metrics are explained in detail below. Revenues Our revenues are derived from two primary sources: Commodity sales revenue and revenue generated from Sadot Food service operations. Commodity sales revenue is generated by our Sadot Agri-Foods and Farming operating units and is recognized with the commodity is delivered and invoiced. Sadot Food service revenue consist of sales from Company restaurant sales, Franchise revenues, vendor rebates from Franchisees and other revenues generated by gift card breakage. Operating Costs and Expenses Cost of Goods Sold Cost of goods sold includes commodity costs, labor, other commodity operating expenses, food and beverage costs, restaurant labor, rent and other operating expenses. Impairment of Goodwill Impairment of goodwill consist of an amount by which the carry amount of the goodwill assets exceeds its fair value. This is recognized by us when the carry amount of goodwill is greater than the projected future discounted cash flows, as the asset is not fully recoverable. Impairment of Intangible Assets Impairment of intangible assets consist of an amount by which the carry amount of the intangible assets exceeds its fair value. This is recognized by us when the carry amount of an intangible asset is greater than the projected future undiscounted cash flows, as the asset is not fully recoverable. 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. We record 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 or selling a Company-operated location and expenses related to Company-operated locations after the location has closed. Stock-Based Expenses Stock-based expenses consist of expenses that are paid with stock. This includes stock-based consulting fees due to Aggia and other consultants, stock compensation paid to the Company's board of directors, and stock compensation paid to employees. Stock-based expenses are related to consulting fees due to Aggia for Sadot Agri-Foods and Farming operations. Based on the servicing agreement with Aggia, the consulting fees are calculated at approximately 40.0% of the Net income generated by Sadot LLC. For the three and nine months ended September 30, 2023, $1.1 million and $5.7 million respectively, are recorded as Stock-based expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss and a corresponding liability is recorded as Accrued stock-based consulting expense in the accompanying Unaudited Condensed Consolidated Balance Sheets. This expense was paid in stock. 49 Table of Contents 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. Income Taxes Income taxes represent federal, state and local current and deferred income tax expenses. Warrant Modification Expense Warrant modification expense consists of the expense incurred and the issuance of new warrants. Gain / (loss) on Fair Value Remeasurement Gain / (loss) on fair value remeasurement consists of the fair value remeasurement recorded on a recurring basis on the forward sales contract which was deemed to be a derivative within the scope of ASC 815. Net Income Attributable to Non-controlling Interests Net loss attributable to non-controlling interests was $0.1 million and $0.1 million for the three and nine months ended September 30, 2023. During the three and nine months ended September 30, 2023 the Company created a joint-venture in which the Company has a 70% interest and the third-party equity ownership has a 30% Non-controlling interest. 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 expenses, derived from amounts presented in the Unaudited Condensed Consolidated Statement of Operations and Other Comprehensive Loss 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. 50 Table of Contents 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 and nine months ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 $’000 $’000 $’000 $’000 Net income / (loss) (5,295) (1,898) (6,171) (5,558) Adjustments to EBITDA: Depreciation and amortization expenses 443 525 1,517 1,490 Interest (income) / expense, net 301 (11) 320 17 Income tax (13) (2) (18) (16) EBITDA (4,564) (1,386) (4,352) (4,067) Adjustments to Adjusted EBITDA: Impairment of goodwill 828 — 828 — Impairment of intangible assets 810 — 810 — Other income (1) (55) (252) (21) Change in fair value of accrued compensation (297) — (1,161) — Gain on debt extinguishment — — — (140) Warrant modification expense 958 — 958 — Loss on fair value remeasurement 349 — 349 — Stock-based expenses 1,075 32 5,667 82 Adjusted EBITDA (842) (1,409) 2,847 (4,146) Total revenue 182,173 2,824 555,457 8,674 Net income / (loss) Margin (2.9) % (67.2) % (1.1) % (64.1) % Adjusted EBITDA Margin (0.5) % (49.9) % 0.5 % (47.8) % 51 Table of Contents Unaudited Condensed Consolidated Results of Operations - Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022 The following table represents selected items in our Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the three months ended September 30, 2023 and 2022, respectively: Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Revenues: Commodity sales 179,975 — 179,975 NM Company restaurant sales, net of discounts 1,937 2,630 (693) (26.3) % Franchise royalties and fees 245 170 75 44.1 % Franchise advertising fund contributions 16 24 (8) (33.3) % Total revenues 182,173 2,824 179,349 6350.9 % Operating Costs and Expenses: Cost of goods sold 179,268 2,710 176,558 6515.1 % Impairment of goodwill 828 — 828 NM Impairment of intangible assets 810 — 810 NM Depreciation and amortization expenses 443 525 (82) (15.6) % Franchise advertising fund expenses 16 24 (8) (33.3) % Pre-opening expenses 335 117 218 186.3 % Post-closing expenses 60 159 (99) (62.3) % Stock-based expenses 1,075 32 1,043 3259.4 % Sales, general and administrative expenses 3,310 1,219 2,091 171.5 % Total costs and expenses 186,145 4,786 181,359 3789.4 % Loss from operations (3,972) (1,962) (2,010) 102.4 % Other Income / (Expense): Other income 1 55 (54) (98.2) % Interest income / (expense), net (301) 11 (312) (2836.4) % Change in fair value of accrued compensation 297 — 297 NM Warrant modification expense (958) — (958) NM Loss on fair value remeasurement (349) — (349) NM Total other income / (expense), net (1,310) 66 (1,376) (2084.8) % Loss Before Income Tax (5,282) (1,896) (3,386) 178.6 % Income tax 13 2 11 550.0 % Net loss (5,295) (1,898) (3,397) 179.0 % NM= not meaningful 52 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 September 30, 2023 2022 Revenues: Commodity sales 98.8 % — Company restaurant sales, net of discounts 1.1 % 93.1 % Franchise royalties and fees 0.1 % 6.1 % Franchise advertising fund contributions — 0.8 % Other revenues — — Total revenues 100.0 % 100.0 % Operating Costs and Expenses: Cost of goods sold 98.4 % 96.0 % Impairment of goodwill 0.5 % — Impairment of intangible assets 0.4 % — Depreciation and amortization expenses 0.2 % 18.6 % Franchise advertising fund expenses — 0.8 % Pre-opening expenses 0.2 % 4.1 % Post-closing expenses — 5.6 % Stock-based expenses 0.6 % 1.1 % Sales, general and administrative expenses 1.8 % 43.2 % Total costs and expenses 102.2 % 169.5 % Loss from operations (2.2) % (69.5) % Other Income / (Expense): Other income — 1.9 % Interest income / (expense), net (0.2) % 0.4 % Change in fair value of accrued compensation 0.2 % — Warrant modification expense (0.5) % — Loss on fair value remeasurement (0.2) % — Gain on debt extinguishment — — Total other income / (expense), net (0.7) % 2.3 % Loss Before Income Tax (2.9) % (67.1) % Income tax — 0.1 % Net loss (2.9) % (67.2) % 53 Table of Contents Revenues Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Revenues: Commodity sales 179,975 — 179,975 NM Company restaurant sales, net of discounts 1,937 2,630 (693) (26.3) % Franchise royalties and fees 245 170 75 44.1 % Franchise advertising fund contributions 16 24 (8) (33.3) % Total revenues 182,173 2,824 179,349 6350.9 % NM= not meaningful Our revenues totaled $182.2 million for the three months ended September 30, 2023, compared to $2.8 million for the three months ended September 30, 2022. The $179.3 million increase is primarily attributed to an increase in Commodity sales as a direct result of the formation of Sadot Agri-Foods and its added revenue. We generated Commodity sales of $180.0 million for the three months ended September 30, 2023. We did not have any Commodity sales for the three months ended September 30, 2022. This represented an increase of $180.0 million, which is attributable to Sadot Agri-Foods sales generated from physical food related commodities. We generated Company restaurant sales, net of discounts, of $1.9 million for the three months ended September 30, 2023, compared to $2.6 million for the three months ended September 30, 2022. This represented an decrease of $0.7 million, or 26.3%, which is mainly attributable to the closures of certain unprofitable Muscle Maker Grill locations and the conversion of certain corporate owned Pokemoto locations to franchise locations. Franchise royalties and fees for the three months ended September 30, 2023 totaled $0.2 million compared to $0.2 million for the three months ended September 30, 2022. This represents an increase of $0.1 million, or 44.1%. In 2023, the franchise fees were higher, primarily due to the sales and opening of new Pokemoto franchises. Franchise advertising fund contributions for the three months ended September 30, 2023 totaled $16.0 thousand compared to $24.0 thousand for the three months ended September 30, 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 $8.0 thousand or 33.3%, is a direct result of the decrease in Muscle Maker Grill national advertising services. Operating Costs and Expenses Operating costs and expenses primarily consist of Cost of goods sold, Impairment of goodwill, Impairment of intangible assets, Depreciation and amortization expenses, Franchise advertising fund expenses, Pre-opening expenses, Post-closing expenses, Stock-based expenses and Sales, general and administrative expenses. 54 Table of Contents Cost of Good Sold Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Cost of goods sold 179,268 2,710 176,558 6515.1 % Cost of goods sold for the three months ended September 30, 2023, totaled $179.3 million or 98.4% as a percentage of revenue. The Cost of goods sold for the three months ended September 30, 2022 was $2.7 million. The $176.6 million change was primarily due to adding Sadot Agri-Foods and entering into the new vertical. Impairment of Goodwill Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Impairment of goodwill 828 — 828 NM We had an Impairment of goodwill for the three months ended September 30, 2023 of $0.8 million. There was no Impairment of goodwill for the three months ended September 30, 2022. The increase in Impairment of goodwill was due to the structural change of the company's operations and the closing or marketing for sale our company owned restaurant stores. Impairment of Intangible Assets Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Impairment of intangible assets 810 — 810 NM We had an Impairment of intangible assets for the three months ended September 30, 2023 of $0.8 million. There was no Impairment of goodwill for the three months ended September 30, 2022. The increase in Impairment of intangible assets was due to the structural change of the company's operations and the closing or marketing for sale our company owned restaurant stores. Depreciation and Amortization Expenses Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Depreciation and amortization expenses 443 525 (82) (15.6) % Depreciation and amortization expenses for the three months ended September 30, 2023 totaled $0.4 million compared to $0.5 million, for the three months ended September 30, 2022. The $0.1 million decrease is mainly attributed to the closing of nonperforming locations and the disposal of the corresponding assets. 55 Table of Contents Franchise Advertising Fund Expenses Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Franchise advertising fund expenses 16 24 (8) (33.3) % Franchise advertising fund expenses for the three months ended September 30, 2023 totaled $16.0 thousand compared to $24.0 thousand , for the three months ended September 30, 2022. The $8.0 thousand or 33.3% decrease is mainly attributed to the decrease in Muscle Maker Grill national advertising services. Pre-Opening Expenses Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Pre-opening expenses 335 117 218 186.3 % Pre-opening expenses for the three months ended September 30, 2023 totaled $0.3 million compared to $0.1 million for the three months ended September 30, 2022. The increase in Pre-opening expenses resulted from expenses incurred at the farm from the time that the purchase documents were signed and local government approval was obtained. Post-Closing Expenses Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Post-closing expenses 60 159 (99) (62.3) % Post-closing expenses for the three months ended September 30, 2023 totaled $0.1 million compared to $0.2 million for the three months ended September 30, 2022. The decrease in Post-closing expenses resulted from expenses incurred after the closing of underperforming Company-owned stores. Stock-Based Expenses Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Stock-based expenses 1,075 32 1,043 3259.4 % Stock-based expenses for the three months ended September 30, 2023, totaled $1.1 million compared to $32.0 thousand for the three months ended September 30, 2022. The $1.0 million increase in Stock-based expenses is primarily the result of consulting fees due to Aggia for Sadot Agri-Foods and Farming operations. Based on the servicing agreement with Aggia, the consulting fees are calculated at approximately 40.0% of the Net income generated by Sadot LLC. Thi s expense is paid in the vesting in restricted stock that was issued to Aggia in 2023. 56 Table of Contents Sales, General and Administrative Expenses Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Sales, general and administrative expenses 3,310 1,219 2,091 171.5 % Sales, general and administrative expenses for the three months ended September 30, 2023 totaled $3.3 million, or 1.8% of total revenue, compared to $1.2 million, or 43.2% of total revenue, for the three months ended September 30, 2022. The $2.1 million increase was primarily attributable to an increase in investor relations due to an investor relations program initiated in July, and increase in professional and consulting fees and stock based consulting fees related to a warrant exchange and new debt and equity agreements. Total Other Income, Net Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Total other (expense) / income, net (1,310) 66 (1,376) (2084.8) % Total other (expense) / income, net for the three months ended September 30, 2023 totaled $1.3 million expense compared to $0.1 million income, for the three months ended September 30, 2022. The $1.4 million decrease in Total other (expense) / income, net was primarily attributable to a $1.0 million increase in Warrant modification expense, a $0.3 million decrease in Interest (expense) / income, a decrease of $0.3 million in Loss on fair value remeasurement and a $0.1 million decrease in Other income, partially offset by an increase of $0.3 million in the Change in fair value of accrued compensation. Income Tax Three Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Income tax 13 2 11 550.0 % Our Income tax for the three months ended September 30, 2023, was $13.0 thousand which was an increase of $11.0 thousand as compared to Income taxes of $2.0 thousand for the three months ended September 30, 2022 due to an increase in current state taxes. 57 Table of Contents The following table represents selected items in our Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the three months ended September 30, 2023, by our operating segments: Three Months Ended September 30, 2023 Sadot food service Sadot agri-foods Sadot farm operations Corporate adj. Consolidated $’000 $’000 $’000 $’000 $’000 Revenues: Commodity sales — 179,464 511 — 179,975 Company restaurant sales, net of discounts 1,937 — — — 1,937 Franchise royalties and fees 245 — — — 245 Franchise advertising fund contributions 16 — — — 16 Other revenues — — — — — Total revenues 2,198 179,464 511 — 182,173 Operating Costs and Expenses: Cost of goods sold 2,167 176,617 484 — 179,268 Impairment of goodwill 828 — — — 828 Impairment of intangible assets 810 — — — 810 Depreciation and amortization expenses 382 — 61 — 443 Franchise advertising fund expenses 16 — — — 16 Pre-opening expenses — — 335 — 335 Post-closing expenses 60 — — — 60 Stock-based expenses — — — 1,075 1,075 Sales, general and administrative expenses 278 549 4 2,479 3,310 Total costs and expenses 4,541 177,166 884 3,554 186,145 (Loss) / income from operations (2,343) 2,298 (373) (3,554) (3,972) Other Income / (Expense): Other income 1 — — — 1 Interest expense, net (2) (5) — (294) (301) Change in fair value of accrued compensation — — — 297 297 Warrant modification expense — — — (958) (958) Loss on fair value remeasurement — (349) — — (349) Total other income, net (1) (354) — (955) (1,310) (Loss) / Income Before Income Tax (2,344) 1,944 (373) (4,509) (5,282) Income tax — — — 13 13 Net (loss) / income (2,344) 1,944 (373) (4,522) (5,295) 58 Table of Contents The following table represents selected items in our Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the three months ended September 30, 2022, by our operating segments: Three Months Ended September 30, 2022 Sadot food service Sadot agri-foods Sadot farm operations Corporate adj. Consolidated $’000 $’000 $’000 $’000 $’000 Revenues: Company restaurant sales, net of discounts 2,630 — — — 2,630 Franchise royalties and fees 170 — — — 170 Franchise advertising fund contributions 24 — — — 24 Total revenues 2,824 — — — 2,824 Operating Costs and Expenses: Cost of goods sold 2,710 — — — 2,710 Depreciation and amortization expenses 525 — — — 525 Franchise advertising fund expenses 24 — — — 24 Pre-opening expenses 117 — — — 117 Post-closing expenses 159 — — — 159 Stock-based expenses — — — 32 32 Sales, general and administrative expenses 76 — — 1,143 1,219 Total costs and expenses 3,611 — — 1,175 4,786 Loss from operations (787) — — (1,175) (1,962) Other Income / (Expense): Other income 43 — — 12 55 Interest income / (expense), net 12 — — (1) 11 Total other income, net 55 — — 11 66 Loss Before Income Tax (732) — — (1,164) (1,896) Income tax — — — 2 2 Net loss (732) — — (1,166) (1,898) 59 Table of Contents Unaudited Condensed Consolidated Results of Operations - Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 The following table represents selected items in our Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the nine months ended September 30, 2023 and 2022, respectively: Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Revenues: Commodity sales 547,900 — 547,900 NM Company restaurant sales, net of discounts 6,725 8,075 (1,350) (16.7) % Franchise royalties and fees 767 541 226 41.8 % Franchise advertising fund contributions 52 58 (6) (10.3) % Other revenues 13 — 13 NM Total revenues 555,457 8,674 546,783 6303.7 % Operating Costs and Expenses: Cost of goods sold 544,803 8,834 535,969 6067.1 % Impairment of goodwill 828 — 828 NM Impairment of intangible assets 810 — 810 NM Depreciation and amortization expenses 1,517 1,490 27 1.8 % Franchise advertising fund expenses 52 58 (6) (10.3) % Pre-opening expenses 371 117 254 217.1 % Post-closing expenses 173 159 14 8.8 % Stock-based expenses 5,667 82 5,585 6811.0 % Sales, general and administrative expenses 7,175 3,620 3,555 98.2 % Total costs and expenses 561,396 14,360 547,036 3809.4 % Loss from operations (5,939) (5,686) (253) 4.4 % Other Income / (Expense): Other income 252 21 231 1100.0 % Interest income / (expense), net (320) (17) (303) 1782.4 % Change in fair value of accrued compensation 1,161 — 1,161 NM Warrant modification expense (958) — (958) NM Loss on fair value remeasurement (349) — (349) NM Gain on debt extinguishment — 140 (140) (100.0) % Total other income / (expense), net (214) 144 (358) (248.6) % Loss Before Income Tax (6,153) (5,542) (611) 11.0 % Income tax 18 16 2 12.5 % Net loss (6,171) (5,558) (613) 11.0 % NM= not meaningful 60 Table of Contents The following table sets forth our results of operations as a percentage of total revenue for each period presented preceding: Nine Months Ended September 30, 2023 2022 Revenues: Commodity sales 98.7 % — Company restaurant sales, net of discounts 1.2 % 93.1 % Franchise royalties and fees 0.1 % 6.2 % Franchise advertising fund contributions — 0.7 % Other revenues — — Total revenues 100.0 % 100.0 % Operating Costs and Expenses: Cost of goods sold 98.1 % 101.8 % Impairment of goodwill 0.1 % — Impairment of intangible assets 0.1 % — Depreciation and amortization expenses 0.3 % 17.2 % Franchise advertising fund expenses — 0.7 % Pre-opening expenses 0.1 % 1.3 % Post-closing expenses — 1.8 % Stock-based expenses 1.0 % 0.9 % Sales, general and administrative expenses 1.3 % 41.7 % Total costs and expenses 101.1 % 165.6 % Loss from operations (1.1) % (65.6) % Other Income / (Expense): Other income / (expense) — 0.2 % Interest income / (expense), net (0.1) % (0.2) % Change in fair value of accrued compensation 0.2 % — Warrant modification expense (0.2) % — Loss on fair value remeasurement (0.1) % — Gain on debt extinguishment — 1.6 % Total other income, net — 1.7 % Loss Before Income Tax (1.1) % (63.9) % Income tax — 0.2 % Net loss (1.1) % (64.1) % 61 Table of Contents Revenues Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Revenues: Commodity sales 547,900 — 547,900 NM Company restaurant sales, net of discounts 6,725 8,075 (1,350) (16.7) % Franchise royalties and fees 767 541 226 41.8 % Franchise advertising fund contributions 52 58 (6) (10.3) % Other revenues 13 — 13 NM Total revenues 555,457 8,674 546,783 6303.7 % NM= not meaningful Our revenues totaled $555.5 million for the nine months ended September 30, 2023, compared to $8.7 million for the nine months ended September 30, 2022. The $546.8 million increase is primarily attributed to an increase in Commodity sales as a direct result of the formation of Sadot Agri-Foods and its added revenue. We generated Commodity sales of $547.9 million for the nine months ended September 30, 2023. We did not have any Commodity sales for the nine months ended September 30, 2022. This represented an increase of $547.9 million, which is attributable to Sadot Agri-Foods sales generated from physical food related commodities. We generated Company restaurant sales, net of discounts, of $6.7 million for the nine months ended September 30, 2023, compared to $8.1 million for the nine months ended September 30, 2022. This represented an decrease of $1.4 million, or 16.7%, which is mainly attributable to the closures of certain unprofitable Muscle Maker Grill locations and the conversion of certain corporate owned Pokemoto locations to franchise locations. Franchise royalties and fees for the nine months ended September 30, 2023 totaled $0.8 million compared to $0.5 million for the nine months ended September 30, 2022. This represents an increase of $0.2 million, or 41.8%. In 2023, the franchise fees were higher, primarily due to an increase in Pokemoto franchise sales and store openings and the termination of one Muscle Maker Grill franchise agreement, which corresponds to accelerating the recognition of initial franchise fees. Franchise advertising fund contributions for the nine months ended September 30, 2023 totaled $0.1 million compared to $0.1 million for the nine months ended September 30, 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 $6.0 thousand or 10.3%, is a direct result of the decrease in Muscle Maker Grill national advertising services. Other revenues for the nine months ended September 30, 2023 totaled $13.0 thousand. There were no Other revenues for the nine months ended September 30, 2022. Other revenues consisted of gift card breakage recognized. Operating Costs and Expenses Operating costs and expenses primarily consist of Cost of goods sold, Impairment of goodwill, Impairment of intangible assets, Depreciation and amortization expenses, Franchise advertising fund expenses, Pre-opening expenses, Post-closing expenses, Stock-based expenses and Sales, general and administrative expenses. 62 Table of Contents Cost of Goods Sold Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Cost of goods sold 544,803 8,834 535,969 6067.1 % Cost of goods sold for the nine months ended September 30, 2023, totaled $544.8 million or 98.1% as a percentage of total revenue. The Cost of goods sold for the nine months ended September 30, 2022 was $8.8 million. The $536.0 million change is primarily due to a new line of business operated by Sadot Agri-Foods and entering into the new vertical. Impairment of Goodwill Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Impairment of goodwill 828 — 828 NM Impairment of goodwill for the nine months ended September 30, 2023 totaled $0.8 million. There was no Impairment of goodwill for the nine months ended September 30, 2022. The increase in Impairment of goodwill was due to the structural change of the company's operations and the closing or marketing for sale our company owned restaurant stores. Impairment of Intangible Assets Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Impairment of intangible assets 810 — 810 NM Impairment of intangible assets for the nine months ended September 30, 2023 totaled $0.8 million. There was no Impairment of goodwill for the nine months ended September 30, 2022. The increase in Impairment of intangible assets was due to the structural change of the company's operations and the closing or marketing for sale our company owned restaurant stores. Depreciation and Amortization Expenses Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Depreciation and amortization expenses 1,517 1,490 27 1.8 % Depreciation and amortization expenses for the nine months ended September 30, 2023 totaled $1.5 million compared to $1.5 million, for the nine months ended September 30, 2022. The $27.0 thousand increase is mainly attributed to the new assets purchased in conjunction with the farm asset acquisition and accelerated depreciation of leasehold improvements for leases that were modified resulting in a shorter life. Franchise Advertising Fund Expenses Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Franchise advertising fund expenses 52 58 (6) (10.3) % Franchise advertising fund expenses for the nine months ended September 30, 2023 totaled $0.1 million compared to $0.1 million , for the nine months ended September 30, 2022. The $6.0 thousand decrease or 10.3% is mainly attributed to the decrease in Muscle Maker Grill national advertising services. 63 Table of Contents Pre-Opening Expenses Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Pre-opening expenses 371 117 254 217.1 % Pre-opening expenses for the nine months ended September 30, 2023 totaled $0.4 million a $0.3 million increase when compared to $0.1 million for the nine months ended September 30, 2022. The increase in pre-opening expense resulted from expenses incurred at the farm from the time that the purchase documents were signed and local government approval was obtained and expenses incurred prior to the opening of our new Company-owned stores. Post-Closing Expenses Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Post-closing expenses 173 159 14 8.8 % Post-closing expenses for the nine months ended September 30, 2023 totaled $0.2 million. a $14.0 thousand increase when compared to $0.2 million for the nine months ended September 30, 2022. The increase in Post-closing expenses resulted from expenses incurred after the closing of underperforming Company-owned stores. Stock-Based Expenses Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Stock-based expenses 5,667 82 5,585 6811.0 % Stock-based expenses for the nine months ended September 30, 2023, totaled $5.7 million compared to $0.1 million for the nine months ended September 30, 2022. The $5.6 million increase in Stock-based expenses is primarily the result of consulting fees due to Aggia for Sadot Agri-Foods and Farming operations. Based on the servicing agreement with Aggia, the consulting fees are calculated at approxim ately 80.0% and 40.0% of the Net income generated by Sadot LLC for the first quarter of 2023 and the second and third quarter of 2023, respectively. Sales, General and Administrative Expenses Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Sales, general and administrative expenses 7,175 3,620 3,555 98.2 % Sales, general and administrative expenses for the nine months ended September 30, 2023 totaled $7.2 million, or 1.3% of total revenue, compared to $3.6 million, or 41.7% of total revenue, for the nine months ended September 30, 2022. The $3.6 million increase was primarily attributable to an increase in investor relations, professional and consulting fees and employee salaries and benefits. 64 Table of Contents Total Other Income, Net Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Total other income / (expense), net (214) 144 (358) (248.6) % Total other income / (expense), net for the nine months ended September 30, 2023 totaled $0.2 million compared to $0.1 million, for the nine months ended September 30, 2022. The $358.0 thousand decrease in Total other income / (expense), net was attributable to an decrease in the Gain on extinguishment of debt of $0.1 million due to the forgiveness of our PPP loans, a increase of $1.2 million in the Change in fair value of accrued compensation, partially offset by a $0.3 million increase in Interest expense, a $0.2 million increase in Other income, a $0.3 million decrease in Loss on fair value remeasurement and a $1.0 million increase in Warrant modification expense. Income Tax Nine Months Ended September 30, Variance 2023 2022 $ % $’000 $’000 $’000 Income tax 18 16 2 12.5 % Our Income tax for the nine months ended September 30, 2023, was $18.0 thousand which was an increase of $2.0 thousand as compared to Income taxes of $16.0 thousand for the nine months ended September 30, 2022 due to an increase in current state taxes. 65 Table of Contents The following table represents selected items in our Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the nine months ended September 30, 2023, by our operating segments: Nine Months Ended September 30, 2023 Sadot food service Sadot agri-foods Sadot farm operations Corporate adj. Consolidated $’000 $’000 $’000 $’000 $’000 Revenues: Commodity sales — 547,389 511 — 547,900 Company restaurant sales, net of discounts 6,725 — — — 6,725 Franchise royalties and fees 767 — — — 767 Franchise advertising fund contributions 52 — — — 52 Other revenues 13 — — — 13 Total revenues 7,557 547,389 511 — 555,457 Operating Costs and Expenses: Cost of goods sold 7,295 537,023 485 — 544,803 Impairment of goodwill 828 — — — 828 Impairment of intangible assets 810 — — — 810 Depreciation and amortization expenses 1,456 — 61 — 1,517 Franchise advertising fund expenses 52 — — — 52 Pre-opening expenses 36 — 335 — 371 Post-closing expenses 172 — — 1 173 Stock-based expenses — — — 5,667 5,667 Sales, general and administrative expenses 449 1,136 4 5,586 7,175 Total costs and expenses 11,098 538,159 885 11,254 561,396 (Loss) / income from operations (3,541) 9,230 (374) (11,254) (5,939) Other Income / (Expense): Other income 1 — — 251 252 Interest income , net — (27) — (293) (320) Change in fair value of accrued compensation — — — 1,161 1,161 Warrant modification expense — — — (958) (958) Loss on fair value remeasurement — (349) — — (349) Total other income, net 1 (376) — 161 (214) (Loss) / Income Before Income Tax (3,540) 8,854 (374) (11,093) (6,153) Income tax 2 — — 16 18 Net (loss) / income (3,542) 8,854 (374) (11,109) (6,171) 66 Table of Contents The following table represents selected items in our Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the nine months ended September 30, 2022, by our operating segments: Nine Months Ended September 30, 2022 Sadot food service Sadot agri-foods Sadot farm operations Corporate adj. Consolidated $’000 $’000 $’000 $’000 $’000 Revenues: Company restaurant sales, net of discounts 8,075 — — — 8,075 Franchise royalties and fees 541 — — — 541 Franchise advertising fund contributions 58 — — — 58 Total revenues 8,674 — — — 8,674 Operating Costs and Expenses: Cost of goods sold 8,834 — — — 8,834 Depreciation and amortization expenses 1,490 — — — 1,490 Franchise advertising fund expenses 58 — — — 58 Pre-opening expenses 117 — — — 117 Post-closing expenses 159 — — — 159 Stock-based expenses — — — 82 82 Sales, general and administrative expenses 362 — — 3,258 3,620 Total costs and expenses 11,020 — — 3,340 14,360 Loss from operations (2,346) — — (3,340) (5,686) Other Income / (Expense): Other income / (expense) 55 — — (34) 21 Interest income / (expense), net 10 — — (27) (17) Gain on debt extinguishment 140 — — — 140 Total other income / (expense), net 205 — — (61) 144 Loss Before Income Tax (2,141) — — (3,401) (5,542) Income tax — — — 16 16 Net loss (2,141) — — (3,417) (5,558) Liquidity and Capital Resources Liquidity We measure our liquidity in a number of ways, including the following: As of September 30, 2023 December 31, 2022 $’000 $’000 Cash 2,422 9,898 Working capital surplus 8,959 4,033 Notes payable 3,701 981 67 Table of Contents Availability of Additional Funds Although we have a working capital surplus of $9.0 million, we presently have an accumulated deficit of $85.4 million, as of September 30, 2023, and we utilized $8.7 million of cash in operating activities during the nine months ended September 30, 2023. We believe that our existing cash on hand, current accounts receivable and future cash flows from our commodity trading, farming and franchise operations, will be sufficient to fund our operations, anticipated capital expenditures and repayment obligations over the next 12 months. In addition, we have access to additional liquidity if it is needed through an executed Standby Equity Purchase Agreement ("SEPA") for up to $25 million in capital whereby we may submit advance requests to the lender whereby the lender will provide cash in consideration of shares of common stock subject to certain limitations and conditions set forth in the SEPA. 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 Nine Months Ended September 30, 2023 and 2022 For the nine months ended September 30, 2023, we used Net cash of $8.7 million compared to $3.4 million, for the nine months ended September 30, 2022, in operations. Our Net cash used for the nine months ended September 30, 2023, was primarily attributable to our Net loss of $6.2 million, adjusted for net non-cash income in the aggregate amount of $9.0 million offset by $11.5 million of Net cash provided by changes in the levels of operating assets and liabilities. Our Net cash used for the nine months ended September 30, 2022, was primarily attributable to our Net loss of $5.6 million, adjusted for net non-cash income in the aggregate amount of $1.6 million, partially offset by $0.5 million of Net cash used in changes in the levels of operating assets and liabilities. For the nine months ended September 30, 2023, Net cash used in investing activities was $3.7 million, of which $12.4 million was used to purchase Property and equipment, $0.2 million was used on the Disposal of property and equipment and $4.9 million was provided by the purchase farmland closing out of the deposit account and an Investment in a non-controlling interest of $3.7 million for the farm. For the nine months ended September 30, 2022, Net cash used in investing activities was $0.5 million, of which $0.6 million was used to purchase Property and equipment. For the nine months ended September 30, 2023, Net cash provided by financing activities was $4.9 million, consisting of repayments of various other notes payable of $5.0 million, proceeds from notes payable of $7.7 million and proceeds from exercise of warrants of $2.2 million. For the nine months ended September 30, 2022, Net cash used in financing activities was $0.2 million, partially offset by repayments of various other notes payable of $0.2 million. 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. 68 Table of Contents 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 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 $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. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended subsequently by ASUs 2018-19, 2019-04, 2019-05, 2019-10, 2019-11 and 2020-03. The guidance in the ASUs requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used. The standard also establishes additional disclosures related to credit risks. This standard is effective for fiscal years beginning after December 15, 2022. The adoption of this guidance on January 1, 2023 did not have a material impact on the Company's Unaudited Condensed Consolidated Financial Statements and related disclosures. In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06 Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity. Among other changes, ASU 2020-06 removes the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share and updates the disclosure requirements in ASC 470-20, making them easier to understand for financial statement preparers and improving the decision-usefulness and relevance of the information for financial statement users. The Company early adopted the new guidance from January 1, 2023, noting no material impact. In April 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” (“ASU 2021-04”) to clarify the accounting by issuers for modifications or exchanges of equity-classified warrants. The new ASU is effective for all entities in fiscal years starting after December 15, 2021. Early adoption is permitted. The Company adopted the new guidance from January 1, 2023, noting no material impact. 69 Table of Contents 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.