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 15, 2024, should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements of Sadot Group Inc. ("Sadot Group"), for the three months ended March 31, 2024 together with the audited financial statements of the Company for the year ended December 31, 2023 and the accompanying MD&A for that fiscal year appearing in our Annual Report on 2023 Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 20, 2024. 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.) is our parent company and is headquartered in Ft. Worth, Texas. In late 2022, Sadot Group began a transformation from a U.S.-centric restaurant business into a global organization focused on the Agri-foods supply-chain. Effective July 27, 2023, we changed our company name from Muscle Maker, Inc., to Sadot Group Inc. As of March 31, 2024, Sadot Group consisted of two distinct operating units. 1. Sadot LLC (“Sadot Agri-Foods”): Sadot Group’s largest operating unit is a global Agri-Foods company engaged in farming, commodity trading and shipping of food and feed (e.g., soybean meal, wheat and corn) via dry bulk cargo ships to/from markets such as Argentina, Australia, Bangladesh, Brazil, Canada, China, Columbia, Ecuador, Egypt, Guinea, Honduras, India, Indonesia, Ivory Coast, Japan, Kenya, Malaysia, Morocco, Mozambique, Nigeria, Philippines, Poland, Romania, Saudi Arabia, South Korea, Sri Lanka, Ukraine, United States and Vietnam, among others. Sadot Agri-Foods competes with the ABCD commodity companies (ADM, Bunge, Cargill, Louis-Dreyfus) as well as many regional organizations. Sadot Agri-Foods operates, through a majority owned subsidiary, a roughly 5,000 acre crop producing farm in Zambia with a focus on major commodities such as wheat, soy and corn alongside high-value tree crops such as avocado and mango. Sadot Agri-Foods 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 Agri-Foods seeks to diversify over time into a sustainable and forward-looking global agri-foods company. 2. Sadot Restaurant Group, LLC ("Sadot Food Services"): 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. The restaurants were founded on the belief of taking every-day menu options and 46 Table of Contents 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. This entire operating segment was identified as held for sale. Please see Note 3 – Assets held for sale for further details. 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 March 31, 2024 2023 $’000 $’000 Commodity sales 106,507 210,366 Company restaurant sales, net of discounts 1,157 2,301 Franchise royalties and fees 257 284 Franchise advertising fund contributions 15 16 Cost of goods sold (108,276) (208,294) Gross profit (340) 4,673 Depreciation and amortization expenses (280) (633) Franchise advertising fund expenses (15) (16) Pre-opening expenses — (36) Post-closing expenses (19) (94) Stock-based expenses (796) (3,359) Sales, general and administrative expenses (2,096) (2,142) Loss from operations (3,546) (1,607) Adjusted EBITDA (2,470) 2,385 Adjusted EBITDA attributable to Sadot Group Inc. (2,422) 2,385 The breakout of our main revenue streams by business segment is shown below: Three Months Ended March 31, 2024 2023 Sadot agri-foods 98.7 % 98.8 % Sadot food service 1.3 % 1.2 % Our key business and financial metrics are explained in detail below. Revenues Our revenues are derived from four primary sources: Commodity sales, Company restaurant sales, Franchise revenues and vendor rebates from Franchisees. Commodity sales revenues are comprised of revenues generated from the purchase and sales of physical food and feed commodities related to our trading and farming operations. 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. 47 Table of Contents Cost of Goods Sold Cost of goods sold includes commodity costs, labor, food and beverage cost, rent and other operating expenses. 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 In accordance with Topic 606, the Company recognizes 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 expense primarily consist of expenses associated with opening a Company-operated location and expenses related to Company-operated locations or new business operations prior to the location opening or the transaction is finalized. Post-closing Expenses Post-closing expense 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 Expenses Stock-based expenses include all expenses that are paid with stock. This includes stock-based consulting fees due to Aggia and other consultants, stock compensation paid to our board of directors, and stock compensation paid to employees. The consulting fees due to Aggia related to ongoing Sadot Agri-Foods and expansion of the global agri-foods commodities business. Based on the initial Services Agreement with Aggia LLC FZ, a Company formed under the laws of United Arab Emirates (“Aggia”), the consulting fees were calculated at approximately 80.0% of the Net Income generated by Sadot Agri-Foods through March 31, 2023. As of April 1, 2023 the consulting agreement was amended to calculate consulting fees on 40.0% of the Net income generated by Sadot LLC. For the three months ended March 31, 2024 and 2023, consulting fees were $0.8 million and $3.4 million, respectively, and are recorded as Stock-based expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss. 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, 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 listed below the Loss from operations in the accompanying Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss consists of Gain of fair value remeasurement, Change in fair value of stock-based compensation, Loss on sale of trading securities and Interest expense, net. Gain 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. Income Tax Benefit /(Expense) Income tax benefit / (expense) represent federal, state and local current and deferred income tax expense. Net Income Attributable to Non-controlling Interests 48 Table of Contents Net loss attributable to non-controlling interests was $48.0 thousand and nil for the three months ended March 31, 2024 and 2023. During the year ended December 31, 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 consulting expense, other income, change in fair value of stock-based compensation, gain on extinguishment, warrant modification expense, and gain on fair value remeasurement 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. 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, 2024 and 2023: Three Months Ended March 31, 2024 2023 $’000 $’000 Net income / (loss) (313) (1,066) Adjustments to EBITDA: Depreciation and amortization expenses 280 633 Interest (income) / expense, net 490 (3) Income tax expense 1 3 EBITDA 458 (433) Adjustments to Adjusted EBITDA: Change in fair value of stock-based compensation (476) (541) Gain on fair value remeasurement (3,259) — Stock-based consulting expenses 796 3,359 Loss on sale of trading securities 11 — Adjusted EBITDA (2,470) 2,385 Adjusted EBITDA attributable to non-controlling interest 48 — Adjusted EBITDA attributable to Sadot Group Inc. (2,422) 2,385 Gross Profit (340) 4,673 Gross Profit attributable to Sadot Group Inc. (292) 4,673 Net loss Margin attributable to Sadot Group Inc. (0.3) % (0.5) % Adjusted EBITDA Margin attributable to Sadot Group Inc. (2.2) % 1.1 % 49 Table of Contents Unaudited Condensed Consolidated Results of Operations - Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023 The following table represents selected items in our Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the three months ended March 31, 2024 and 2023, respectively: Three Months Ended March 31, Variance 2024 2023 $ % $’000 $’000 $’000 Commodity sales 106,507 210,366 (103,859) (49.4) % Company restaurant sales, net of discounts 1,157 2,301 (1,144) (49.7) % Franchise royalties and fees 257 284 (27) (9.5) % Franchise advertising fund contributions 15 16 (1) (6.3) % Cost of goods sold (108,276) (208,294) 100,018 (48.0) % Gross (loss) profit (340) 4,673 (5,013) (107.3) % Depreciation and amortization expenses (280) (633) 353 (55.8) % Franchise advertising fund expenses (15) (16) 1 (6.3) % Pre-opening expenses — (36) 36 (100.0) % Post-closing expenses (19) (94) 75 (79.8) % Stock-based expenses (796) (3,359) 2,563 (76.3) % Sales, general and administrative expenses (2,096) (2,142) 46 (2.1) % Loss from operations (3,546) (1,607) (1,939) 120.7 % Interest (expense) / income, net (490) 3 (493) (16433.3) % Change in fair value of stock-based compensation 476 541 (65) (12.0) % Gain on fair value remeasurement 3,259 — 3,259 NM Loss on sale of trading securities (11) — (11) NM Loss Before Income Tax (312) (1,063) 751 (70.6) % Income tax expense 1 3 (2) (66.7) % Net loss (313) (1,066) 753 (70.6) % NM= not meaningful 50 Table of Contents The following table sets forth our results of operations as a percentage of total revenue for each period presented preceding: Gross Profit Three Months Ended March 31, Variance 2024 2023 $ % $’000 $’000 $’000 Commodity sales 106,507 210,366 (103,859) (49.4) % Company restaurant sales, net of discounts 1,157 2,301 (1,144) (49.7) % Franchise royalties and fees 257 284 (27) (9.5) % Franchise advertising fund contributions 15 16 (1) (6.3) % Cost of goods sold (108,276) (208,294) 100,018 (48.0) % Gross (loss) profit (340) 4,673 (5,013) (107.3) % NM= not meaningful Our gross (loss) profit totaled $0.3 million loss for the three months ended March 31, 2024, compared to $4.7 million profit for the three months ended March 31, 2023. The $5.0 million decrease is primarily attributed to a decrease in Commodity sales which is attributable to a decline in global prices of staple commodities, market seasonality and the largest global consumer being out of the market for the beginning of 2024. We generated Commodity sales of $106.5 million for the three months ended March 31, 2024 compared to $210.4 million for the three months ended March 31, 2023. This represented a decrease of $103.9 million, which is attributable to a decline in global prices of staple commodities, market seasonality and the largest global consumer being out of the market for the beginning of 2024. We generated Company restaurant sales, net of discounts, of $1.2 million for the three months ended March 31, 2024, compared to $2.3 million for the three months ended March 31, 2023. This represented an decrease of $1.1 million, or 49.7%, which is mainly attributable to the conversion of certain corporate owned Pokemoto locations to franchise locations and closing underperforming locations. Franchise royalties and fees for the three months ended March 31, 2024 totaled $0.3 million compared to $0.3 million for the three months ended March 31, 2023. This represents a decrease of $27.0 thousand, or 9.5%. In 2024, the franchise fees were lower, primarily due to a termination of a Muscle Maker Grill development agreement in 2023 that escalated the revenue recognition. . Franchise advertising fund contributions for the three months ended March 31, 2024 totaled $15.0 thousand compared to $16.0 thousand for the three months ended March 31, 2023. 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 $1.0 thousand or 6.3%, is a direct result of the decrease in Muscle Maker Grill restaurant national advertising services. Cost of goods sold for the three months ended March 31, 2024 totaled $108.3 million compared to $208.3 million for the three months ended March 31, 2023. This represented a decrease of $100.0 million or 48.0% which is a direct result of the decrease in sales. 51 Table of Contents Depreciation and Amortization Expenses Three Months Ended March 31, Variance 2024 2023 $ % $’000 $’000 $’000 Depreciation and amortization expenses (280) (633) 353 (55.8) % Depreciation and amortization expenses for the three months ended March 31, 2024 totaled $0.3 million compared to $0.6 million, for the three months ended March 31, 2023. The $0.4 million decrease is mainly attributed to the closing and refranchising of corporate locations and the disposal of the corresponding assets. Franchise Advertising Fund Expenses Three Months Ended March 31, Variance 2024 2023 $ % $’000 $’000 $’000 Franchise advertising fund expenses (15) (16) 1 (6.3) % Franchise advertising fund expenses for the three months ended March 31, 2024 totaled $15.0 thousand compared to $16.0 thousand , for the three months ended March 31, 2023. The $1.0 thousand or 6.3% decrease is mainly attributed to the decrease in Muscle Maker Grill restaurant national advertising services. Pre-opening Expenses Three Months Ended March 31, Variance 2024 2023 $ % $’000 $’000 $’000 Pre-opening expenses — (36) 36 (100.0) % There were no Pre-opening expenses for the three months ended March 31, 2024, compared to $36.0 thousand for the three months ended March 31, 2023. The decrease in Pre-opening expenses resulted from no locations or operations that were open or preparing to open during the three months ended March 31, 2024. Post-Closing Expenses Three Months Ended March 31, Variance 2024 2023 $ % $’000 $’000 $’000 Post-closing expenses (19) (94) 75 (79.8) % Post-closing expenses for the three months ended March 31, 2024 totaled $19.0 thousand compared to $0.1 million for the three months ended March 31, 2023. The decrease in Post-closing expenses resulted from closing fewer corporate owned locations in 2024 compared to 2023. 52 Table of Contents Stock-Based Expenses Three Months Ended March 31, Variance 2024 2023 $ % $’000 $’000 $’000 Stock-based expenses (796) (3,359) 2,563 (76.3) % Stock-based expenses for the three months ended March 31, 2024, totaled $0.8 million compared to $3.4 million for the three months ended March 31, 2023. The $2.6 million decrease 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 which is a decrease from 80.0% in 2023. Thi s expense is paid in the vesting in restricted stock that was issued to Aggia in 2024. Sales, General and Administrative Expenses Three Months Ended March 31, Variance 2024 2023 $ % $’000 $’000 $’000 Sales, general and administrative expenses (2,096) (2,142) 46 (2.1) % Sales, general and administrative expenses for the three months ended March 31, 2024 totaled $2.1 million compared to $2.1 million for the three months ended March 31, 2023. The $46.0 thousand decrease was primarily attributable to a decrease in normal operating activities. Other Income / (Expense) Three Months Ended March 31, Variance 2024 2023 $ % $’000 $’000 $’000 Total other income / (expense), net 3,234 544 2,690 494 % Other income for the three months ended March 31, 2024 totaled $3.2 million compared to $0.5 million for the three months ended March 31, 2023. The $2.7 million increase was primarily attributable to a $3.3 million increase in the gain on the fair value remeasurement as a result of the mark to market adjustment of derivatives partially offset by a $0.5 million increase in interest expense, a $0.1 million decrease in change in fair value of stock-based compensation and a less than $0.1 million increase in loss on sale of trading securities. 53 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 March 31, 2024, by our operating segments: Three Months Ended March 31, 2024 Sadot food service Sadot agri-foods Corporate adj. Consolidated $’000 $’000 $’000 $’000 Revenues: Commodity sales — 106,507 — 106,507 Company restaurant sales, net of discounts 1,157 — — 1,157 Franchise royalties and fees 257 — — 257 Franchise advertising fund contributions 15 — — 15 Cost of goods sold (1,331) (106,945) — (108,276) Gross Profit (loss) 98 (438) — (340) Depreciation and amortization expenses (189) (91) — (280) Franchise advertising fund expenses (15) — — (15) Post-closing expenses (19) — — (19) Stock-based expenses — — (796) (796) Sales, general and administrative expenses (703) (731) (662) (2,096) Loss from operations (828) (1,260) (1,458) (3,546) Interest expense, net (262) (407) 179 (490) Change in fair value of stock-based compensation — — 476 476 Gain on fair value remeasurement — 3,259 — 3,259 Loss on sale of trading securities — (11) — (11) (Loss) / Income Before Income Tax (1,090) 1,581 (803) (312) Income tax (benefit) / expense — — 1 1 Net (loss) / income (1,090) 1,581 (804) (313) Total assets 6,950 142,673 904 150,527 54 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 March 31, 2023, by our operating segments: Three Months Ended March 31, 2023 Sadot food service Sadot agri-foods Corporate adj. Consolidated $’000 $’000 $’000 $’000 Revenues: Commodity sales — 210,366 — 210,366 Company restaurant sales, net of discounts 2301 — — 2,301 Franchise royalties and fees 284 — — 284 Franchise advertising fund contributions 16 — — 16 Cost of goods sold (2465) (205,829) — (208,294) Gross Profit 136 4,537 — 4,673 Depreciation and amortization expenses (633) — — (633) Franchise advertising fund expenses (16) — — (16) Pre-opening expenses (36) — — (36) Post-closing expenses (94) — — (94) Stock-based expenses — — (3,359) (3,359) Sales, general and administrative expenses (82) (286) (1,774) (2,142) (Loss) / income from operations (725) 4,251 (5,133) (1,607) Interest income, net 3 — — 3 Change in fair value of accrued compensation — — 541 541 (Loss) / income Before Income Tax (722) 4,251 (4,592) (1,063) Income tax (benefit) / expense 1 — 2 3 Net (loss) income (723) 4,251 (4,594) (1,066) Total assets 8,711 45,853 8,034 62,598 55 Table of Contents Liquidity and Capital Resources Working Capital We measure our liquidity in a number of ways, including the following: As of March 31, 2024 December 31, 2023 $’000 $’000 Cash 1,214 1,354 Accounts Receivable, net 23,095 52,920 Inventory 2,383 2,561 Other current assets (1) 58,584 56,016 Assets held for sale (5) 6,950 — Total current assets 92,226 112,851 Accounts payable and accrued expenses 23,342 50,167 Notes payable, net 3,640 6,531 Other current liabilities (2) 48,276 47,884 Liabilities held for sale (6) 3,752 — Total current liabilities 79,010 104,582 Working capital (3) 13,216 8,269 Current ratio (4) 1.17 1.08 (1) Consists of Prepaid expenses and other current assets, Prepaid forward on carbon offsets, Forward sales derivatives and Notes receivable, current (2) Consists of Operating lease liability, current, Deferred revenue, current and Other current liabilities (3) Working Capital is defined as Total current assets less Total current liabilities (4) Current ratio is defined as Total current assets divided by Total current liabilities (5) See Note 3 for additional information (6) See Note 3 for additional information Availability of Additional Funds Our main financial objectives are to prudently manage financial risk, ensure access to liquidity and minimize cost of capital in order to efficiently finance our business and maintain balance sheet strength. We generally finance our ongoing operations with cash flows generated from operations, borrowings under various credit facilities and term loans. At March 31, 2024, current ratio, which equals Total current assets divided by Total current liabilities, was 1.17, an increase of 0.09, compared to current ratio of 1.08 at December 31, 2023. The increase in current ratio was primarily due to a decrease in Accounts payable and accrued expenses partially offset by the decrease in Accounts receivable. At March 31, 2024, working capital, which equals Total current assets less Total current liabilities, was $13.2 million an increase of $4.9 million, compared to working capital of $8.3 million at December 31, 2023. The increase in working capital was primarily due to a decrease in Accounts payable and accrued expenses and Notes payable, current. In addition, the Company has access to additional liquidity if it is needed through an executed Standby Equity Purchase Agreement ("SEPA") for up to $25.0 million in capital whereby the Company, once the initial prepayment loan is fully paid off may submit advance requests to the lender and 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. 56 Table of Contents We will need to raise additional capital. Such additional capital may not be available nor may the terms of such capital be generally acceptable. 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 incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties. 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, 2024 and 2023 For the three months ended March 31, 2024, Net cash provided by operating activities was $2.6 million compared to a use of $3.3 million for the three months ended March 31, 2023. Our Net cash provided for the three months ended March 31, 2024, was primarily attributable to our Net loss of $0.3 million, adjusted for net non-cash income in the aggregate amount of $1.3 million offset by $1.6 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, 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, partially offset by $6.8 million of Net cash used in changes in the levels of operating assets and liabilities. For the three months ended March 31, 2024, Net cash provided by investing activities was $0.1 million, of which $11.0 thousand was used to purchase Property and equipment, $0.1 million was provided by the Disposal of property and equipment 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 and $0.1 million was used on the deposit of farmland. For the three months ended March 31, 2024, Net cash used in financing activities was $2.8 million, consisting of repayments of various other notes payable of $4.3 million and proceeds from notes payable of $1.5 million. 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. Critical Accounting Policies and Estimates Our accounting policies are more fully described in Note 2 – Significant accounting policies to our consolidated financial statements included as part of this Annual Report on Form 10-K. As disclosed in Note 2, the preparation of financial statements in conformity with U.S. GAAP requires management to make substantial judgment or estimation in their application that may significantly affect reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments. Recently Issued Accounting Pronouncements 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 57 Table of Contents 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. In November 2023, the FASB issued ASU 2023-07, Segment Reporting—Improvements to Reportable Segment Disclosures (Topic 280). The standard requires incremental disclosures related to reportable segments, including disaggregated expense information and the title and position of the company's chief operating decision maker ("CODM"), as identified for purposes of segment determination. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Entities must adopt the changes to the segment reporting guidance on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements. Seasonality There is a degree of seasonality in the growing cycles, procurement and transportation of crops. The farming industry in general historically experiences seasonal fluctuations in revenues and net income. Typically, the Company has lower sales and net income during the non-harvest seasons and higher sales and net income during the harvest season and as such, must have sufficient working capital to fund its operations at a reduced level. The failure to generate or obtain sufficient working capital during the winter may have a material adverse effect on the Company. 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.