Notes
to Condensed Consolidated Financial Statements
NOTE
1 – BUSINESS ORGANIZATION AND NATURE OF OPERATIONS, GOING CONCERN AND MANAGEMENT’S PLANS
Muscle
Maker, Inc. (“MMI”), a Nevada corporation was incorporated in Nevada on October 25, 2019. MMI was a wholly owned subsidiary
of Muscle Maker, Inc (“MMI-Cal”), a California corporation incorporated on December 8, 2014, but the two merged on
November 13, 2019 with MMI as the surviving entity. MMI wholly owns Muscle Maker Development, LLC (“MMD”), Muscle
Maker Corp, LLC (“MMC”) and Muscle Maker USA, Inc (“Muscle USA”). MMD was formed on July 18, 2017, in
the State of Nevada for the purpose of running our existing franchise operations and continuing to franchise the Muscle Maker
Grill name and business system to qualified franchisees. MMC was formed on July 18, 2017, in the State of Nevada for the purpose
of developing new corporate stores and operating new and existing corporate stores of MMI. Muscle USA was formed on March 14,
2019 in the State of Texas for the purpose of opening additional new corporate stores.
MMI
is a fast-casual restaurant concept that specializes in preparing healthy-inspired, high-quality, fresh, made-to-order lean, protein-based
meals featuring chicken, seafood, pasta, hamburgers, wraps and flat breads. In addition, our restaurants feature freshly prepared
entrée salads and an appealing selection of sides, protein shakes and fruit smoothies. MMI operates in the fast-casual
restaurant segment.
MMI
is the owner of the trade name and service mark Muscle Maker Grill®, Healthy Joe’s and other trademarks and intellectual
property we use in connection with the operation of Muscle Maker Grill® restaurants. We license the right to use the Muscle
Maker Grill® and Healthy Joe’s trademarks and intellectual property to our wholly-owned subsidiaries, MMD, MMC and Muscle
USA, and to further sublicense them to our franchisees for use in connection with Muscle Maker Grill® and Healthy Joe’s
restaurants.
MMI
and its subsidiaries are hereinafter referred to as the “Company”.
The
Company operates under the name Muscle Maker Grill and is a franchisor and owner operator of Muscle Maker Grill and Healthy Joe’s
restaurants. As of September 30, 2020, the Company’s restaurant system included fifteen company-owned restaurants,
and eighteen franchise restaurants. Three of the company-owned restaurants are delivery-only locations. A Muscle
Maker Grill restaurant offers quality food freshly prepared with the Company’s proprietary recipes created with the guest’s
health in mind. The menu is protein based, and features various supplements, health food snacks, along with a nutritious children’s
menu and meal plans.
COVID-19
In
March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues
to spread throughout the United States. In response to the COVID-19 outbreak, “shelter in place” orders and other
public health measures have been implemented across much of the United States.
The COVID-19 global pandemic continues
to rapidly evolve. The Company is continually monitoring the outbreak of COVID-19 and the related business and travel restrictions
and changes to behavior intended to reduce its spread, and its impact on operations, financial position, cash flows, inventory,
supply chains, purchasing trends, customer payments, and the industry in general, in addition to the impact on its employees.
The pandemic has resulted in a negative impact on the Company’s operations during the three and nine months ended
September 30, 2020. However, due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic
and its impact on the Company’s operations and liquidity is uncertain as of the date of this report. While there could ultimately
be an additional material impact on operations and liquidity of the Company, the full impact could not be determined, as of the
date of this report. As a result of the pandemic the Company has limited its operations through limiting hours of operations,
reduced its capacity and utilized a delivery only concept as mandated by each state and has temporarily closed five of
our Company owned locations during the second quarter of 2020. In addition, the Company opened two new locations at the end of
the third quarter on university campuses that were subsequently temporarily closed due to the impact of COVID-19 on students returning
to campuses. Commencing in the second quarter of 2020 the Company provided royalty relief to its franchisees by deferring
half of their royalties earned by the Company through July 2020 and the executive team has deferred a portion of their salaries
which is still in effect as of date of the filing of this report. In addition, various franchisee locations had to take similar
actions by temporarily closing their locations and limiting their operations as mandated by each state. As of the date of the
filing of this report the Company re-opened three of the seven temporarily closed locations and closed down one
location permanently.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
1 – BUSINESS ORGANIZATION AND NATURE OF OPERATIONS, GOING CONCERN AND MANAGEMENT’S PLANS, continued
Going
Concern and Management’s Plans
As of September 30, 2020, the Company had
a cash balance, a working capital surplus and an accumulated deficit of $6,063,811, $3,062,692, and $60,750,370,
respectively. During the three and nine months ended September 30, 2020, the Company incurred a pre-tax net loss of $662,080 and $7,655,768,
respectively. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a
going concern for at least one year from the date of the issuance of these condensed consolidated financial statements.
Although
management believes that the Company has access to capital resources, there are no commitments in place for new financing as of
the date of the issuance of these condensed consolidated financial statements and there can be no assurance that the Company will
be able to obtain funds on commercially acceptable terms, if at all. The Company expects to have ongoing needs for working capital
in order to (a) fund operations; plus (b) expand operations by opening additional corporate-owned restaurants. To that end, the
Company may be required to raise additional funds through equity or debt financing. However, there can be no assurance that the
Company will be successful in securing additional capital. If the Company is unsuccessful, the Company may need to (a) initiate
cost reductions; (b) forego business development opportunities; (c) seek extensions of time to fund its liabilities, or (d) seek
protection from creditors.
The
accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“U.S. GAAP”), which contemplate continuation of the Company as a going concern
and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets
and liabilities presented in the condensed consolidated financial statements do not necessarily purport to represent realizable
or settlement values. The condensed consolidated financial statements do not include any adjustment that might result from the
outcome of this uncertainty.
NOTE
2 – REVERSE STOCK SPLIT
Effective
December 11, 2019, pursuant to authority granted by the board of directors of the Company, the Company implemented a 1-for-7 reverse
split of the Company’s issued common stock (the “Third Reverse Split”). All share and per share information
has been retroactively adjusted to reflect the Third Reverse Split for all periods presented.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do
not include all of the information and disclosures required by accounting principles generally accepted in the United States of
America for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only
of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial
statements of the Company as of September 30, 2020, and for the three and nine months ended September 30, 2020 and 2019. The results
of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the operating results for
the full year. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 2019. The balance sheet as of December 31, 2019 has been
derived from the Company’s audited financial statements.
Principles
of Consolidation
The
accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
Any intercompany transactions and balances have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily
apparent from other sources. Significant estimates include:
|
●
|
the
assessment of recoverability of long-lived assets, including property and equipment, goodwill and intangible assets;
|
|
●
|
the
estimated useful lives of intangible and depreciable assets;
|
|
●
|
estimates
and assumptions used to value warrants and options;
|
|
●
|
the
recognition of revenue; and
|
|
●
|
the
recognition, measurement and valuation of current and deferred income taxes.
|
Estimates
and assumptions are periodically reviewed, and the effects of any material revisions are reflected in the financial statements
in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Cash
and Cash Equivalents
The
Company considers all highly-liquid instruments with an original maturity of three months or less when purchased to be cash equivalents.
There were no cash equivalents as of September 30, 2020 and December 31, 2019.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires
an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also
require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the
amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December
15, 2020, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its condensed consolidated
financial statements and disclosures.
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718),” (“ASU 2018-07”).
ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments.
Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different.
ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based
payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting
for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity
— Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier
than a Company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company is currently evaluating
ASU 2018-07 and its impact on the condensed consolidated financial statements.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Recent
Accounting Pronouncements, continued
In
July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”).
The amendments in ASU 2018-10 provide additional clarification and implementation guidance on certain aspects of the previously
issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) and have the same effective and transition requirements
as ASU 2016-02. Upon the effective date, ASU 2018-10 will supersede the current lease guidance in ASC Topic 840, Leases. Under
the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability,
which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently,
lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use,
or control the use of, a specified asset for the lease term. ASU 2018-10 is effective for emerging growth companies for interim
and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The guidance is required to be
applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the
earliest comparative periods presented in the financial statements. The Company is currently assessing the impact this guidance
will have on its condensed consolidated financial statements.
In
July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” (“ASU 2018-11”).
The amendments in ASU 2018-11 related to transition relief on comparative reporting at adoption affect all entities with lease
contracts that choose the additional transition method and separating components of a contract affect only lessors whose lease
contracts qualify for the practical expedient. The amendments in ASU 2018-11 are effective for emerging growth companies for fiscal
years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently assessing the
impact this guidance will have on its condensed consolidated financial statements.
In
March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“Topic 842”)
(“ASU 2019-01”). These amendments align the guidance for fair value of the underlying asset by lessors that are not
manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease
commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse
of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in Topic 820,
Fair Value Measurement) should be applied. (Issue 1). The ASU also requires lessors within the scope of Topic 942, Financial Services—Depository
and Lending, to present all “principal payments received under leases” within investing activities. (Issue 2). Finally,
the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company
adopts the new leases standard. (Issue 3). The transition and effective date provisions apply to Issue 1 and Issue 2. They do
not apply to Issue 3 because the amendments for that Issue are to the original transition requirements in Topic 842. This amendment
will be effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December
15, 2020. Early adoption is permitted. The Company is currently evaluating ASU 2019-01 and its impact on its unaudited condensed
consolidated financial statements and financial statement disclosures.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Revenue
Recognition
During
the first quarter of 2019, the Company adopted Topic 606 “Revenue from Contracts with Customers” for revenue
recognition related to contracts with customers and applied the guidance modified retrospectively. Under the new guidance, revenue
is recognized in accordance with a five-step revenue model, as follows: (1) identifying the contract with the customer; (2) identifying
the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the
performance obligations; and (5) recognizing revenue when (or as) the entity satisfies a performance obligation. In applying this
five-step model, we have made significant judgments in identifying the promised goods or services in our contracts with franchisees
that are distinct, and which represent separate performance obligations. The change between Topic 605 and Topic 606, primarily
impacted the way the Company recognized franchise fees. Under Topic 605 franchise fees were recognized upon opening of a restaurant
or granting of a new franchise term at a point in time while under Topic 606 franchise fees are recognized on a straight-line
basis over the life of the related franchise agreements and any exercised renewal periods. The impact of the adoption of Topic
606 resulted in an adjustment of $875,902 in accumulated deficit and deferred revenues.
Restaurant
Sales
Retail
store revenue at Company operated restaurants is recognized when payment is tendered at the point of sale, net of sales tax, discount
and other sales related taxes. The Company recorded retail store revenues of $887,922 and $2,785,288 during the three and nine
months ended September 30, 2020, respectively. The Company recorded retail store revenues of $821,684 and $2,438,284 during the
three and nine months ended September 30, 2019, respectively.
The
Company sells gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card
balances. The Company recognizes revenues from gift cards as restaurant revenues once the Company performs its obligation
to provide food and beverage to the customer simultaneously with the redemption of the gift card or through gift card breakage,
as discussed in Other Revenues below.
Franchise
Royalties and Fees
Franchise
revenues consists of royalties, franchise fees and rebates. Royalties are based on a percentage of franchisee net sales revenue.
The Company recognizes the royalties as the underlying sales occur. The Company recorded revenue from royalties of $88,059 and
$261,838 during the three and nine months ended September 30, 2020, respectively, which is included in franchise royalties and
fees on the accompanying condensed consolidated statements of operations. The Company recorded revenue from royalties of $165,412
and $563,772 during the three and nine months ended September 30, 2019, respectively, which is included in franchise royalties
and fees on the accompanying condensed consolidated statements of operations.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Franchise
Royalties and Fees, continued
The
Company provides the franchisees with management expertise, training, pre-opening assistance, and restaurant operating assistance
in exchange for the multi-unit development fees and franchise fees. The Company capitalizes these fees upon collection from the
franchisee, these fees are then recognized as franchise fee revenue on a straight-line basis over the life of the related franchise
agreements and any exercised renewal periods. Cash payments are due upon the execution of the related franchise agreement. The
Company’s performance obligation with respect to franchise fee revenues consists of a license to utilize the Company’s
brand for a specified period of time, which is satisfied equally over the life of each franchise agreement. The Company recorded
revenues from franchise fees of $125,710 and $215,340, respectively, during the three and nine months ended September 30, 2020,
which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. The Company
recorded revenues from franchise fees of $16,132 and $342,649, respectively, during the three and nine months ended September
30, 2019, which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations.
The
Company has supply agreements with certain food and beverage vendors. Pursuant to the terms of these agreements, rebates are provided
to the Company based upon the dollar volume of purchases for all company-owned and franchised restaurants from these vendors.
Rebates earned on purchases by franchise stores are recorded as revenue during the period in which the related food and beverage
purchases are made. The Company recorded revenue from rebates of $37,722 and $92,637 during the three and nine months ended September
30, 2020, respectively, which is included in franchise royalties and fees on the accompanying consolidated statements of operations.
The Company recorded revenue from rebates of $71,200 and $220,120 during the three and nine months ended September 30, 2019, respectively,
which is included in franchise royalties and fees on the accompanying condensed consolidated statements of operations. Rebates
earned on purchases by Company owned stores are recorded as a reduction of food and beverage costs during the period in which
the related food and beverage purchases are made.
Other
Revenues
Gift
card breakage is recognized when the likelihood of a gift card being redeemed by the customer is remote and the Company determines
there is not a legal obligation to remit the unredeemed gift card balance to the relevant jurisdiction. The determination of the
gift card breakage rate is based upon the Company’s specific historical redemption patterns. The Company recognizes gift
card breakage by applying its estimate of the rate of gift card breakage on a pro rata basis over the period of estimated redemption.
Gift card liability is recorded in other current liabilities on the condensed consolidated balance sheet. For the three
and nine months ended September 30, 2020, the Company determined that no gift card breakage is necessary based on current redemption
rates.
Deferred
Revenue
Deferred
revenue primarily includes initial franchise fees received by the Company, which are being amortized over the life of the Company’s
franchise agreements, as well as unearned vendor rebates. Deferred revenue is recognized in income over the life of the franchise
agreements and vendor rebates are recognized in income as performance obligations are satisfied.
Franchise
Advertising Fund Contributions
Under
the Company’s franchise agreements, the Company and its franchisees are required to contribute a certain percentage of revenues
to a national advertising fund. The Company’s national advertising services are provided on a system-wide basis and, therefore,
not considered distinct performance obligations for individual franchisees. In accordance with Topic 606, the Company recognizes
these sales-based advertising contributions from franchisees as franchise revenue when the underlying franchisee Company incurs
the corresponding advertising expense. The Company records the related advertising expenses as incurred under general and administrative
expenses. When an advertising contribution fund is over-spent at year end, advertising expenses will be reported on the consolidated
statement of operations in an amount that is greater than the revenue recorded for advertising contributions. Conversely, when
an advertising contribution fund is under-spent at a period end, the Company will accrue advertising costs up to advertising contributions
recorded in revenue. The Company recorded contributions from franchisees of $13,132 and $45,587, respectively, during the three
and nine months ended September 30, 2020, respectively, which are included in franchise advertising fund contributions on the
accompanying condensed consolidated statements of operations. The Company recorded contributions from franchisees of $39,030 and
$116,423, respectively, during the three and nine months ended September 30, 2019, which is included in franchise advertising
fund contributions on the accompanying condensed consolidated statements of operations.
Impacts
on Financial Statements
The
following table summarized the impact of the adoption of the new revenue standard on the Company’s previously reported consolidated
financial statements:
|
|
December 31,
2018
|
|
|
New Revenue
Standard
Adjustment
|
|
|
January 1,
2019
|
|
Deferred revenues
|
|
$
|
907,948
|
|
|
$
|
875,902
|
|
|
$
|
1,783,850
|
|
Accumulated deficit
|
|
|
23,833,656
|
|
|
|
875,902
|
|
|
|
24,709,588
|
|
Advertising
Advertising
costs are charged to expense as incurred. Advertising costs were approximately $26,001 and $154,736 for the three and nine months
ended September 30, 2020, and approximately $14,624 and $18,237 for the three and nine months ended September 30, 2019 respectively,
and are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES, continued
Net
Loss per Share
Basic
loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholders
by the weighted average number of common shares outstanding, plus the impact of potential common shares, if dilutive, resulting
from the exercise of warrants, options or the conversion of convertible notes payable.
The
following securities are excluded from the calculation of weighted average diluted common shares at September 30, 2020 and 2019,
respectively, because their inclusion would have been anti-dilutive:
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
Warrants
|
|
|
2,582,857
|
|
|
|
756,578
|
|
Options
|
|
|
-
|
|
|
|
4,821
|
|
Convertible
debt
|
|
|
32,350
|
|
|
|
1,120,264
|
|
Total
potentially dilutive shares
|
|
|
2,615,207
|
|
|
|
1,881,663
|
|
Major
Vendor
The
Company engages various vendors to distribute food products to their Company-owned restaurants. Purchases from the Company’s
largest supplier totaled 85% and 84% of the Company’s purchases for the three and nine months ended September 30, 2020,
respectively. Purchases from the Company’s largest supplier totaled 75% and 81% of the Company’s purchases for the
three and nine months ended September 30, 2019, respectively.
Fair
Value of Financial Instruments
The
Company measures the fair value of financial assets and liabilities based on the guidance of the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures”
(“ASC 820”).
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
Level
1 — quoted prices in active markets for identical assets or liabilities
Level
2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The
carrying amounts of accrued liabilities approximate fair value due to the short-term nature of these instruments. The carrying
amounts of our short–term credit obligations approximate fair value because the effective yields on these obligations, which
include contractual interest rates, taken together with other features such as concurrent issuance of common stock and warrants,
are comparable to rates of returns for instruments of similar credit risk.
See
Note 12 – Equity – Warrant and Options Valuation for details related to a accrued compensation liability being fair
valued using Level 1 inputs.
Reclassifications
Certain
amounts in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no
effect on previously reported net loss.
Subsequent
Events
The
Company evaluated events that have occurred after the balance sheet date but before the financial statements are issued. Based
upon the evaluation and transactions, the Company did not identify any subsequent events that would have required adjustment or
disclosure in the financial statements, except as disclosed in Note 13 – Subsequent Events.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
4 - LOANS RECEIVABLE
At
September 30, 2020 and December 31, 2019, the Company’s loans receivable consists of the following:
|
|
September
30,
2020
|
|
|
December
31,
2019
|
|
Loans
receivable, net
|
|
$
|
128,580
|
|
|
$
|
137,389
|
|
Less:
current portion
|
|
|
(35,911
|
)
|
|
|
(38,712
|
)
|
Loans
receivable, non-current
|
|
$
|
92,669
|
|
|
$
|
98,677
|
|
Loans receivable includes loans to franchisees
and a former franchisee totaling, in the aggregate, $128,580 and $137,389, net of reserves for uncollectible loans of $46,900
and $55,000 at September 30, 2020 and December 31, 2019, respectively. The loans have original terms ranging up to 10 years, earn
interest at rates ranging from 2% to 12%, and are being repaid on a weekly or monthly basis.
NOTE
5 – PROPERTY AND EQUIPMENT, NET
As
of September 30, 2020 and December 31, 2019 property and equipment consists of the following:
|
|
September
30,
2020
|
|
|
December
31,
2019
|
|
|
|
|
|
|
|
|
Furniture
and equipment
|
|
$
|
882,208
|
|
|
$
|
617,712
|
|
Leasehold
improvements
|
|
|
1,671,419
|
|
|
|
1,518,293
|
|
|
|
|
2,553,627
|
|
|
|
2,136,005
|
|
Less:
accumulated depreciation and amortization
|
|
|
(620,211
|
)
|
|
|
(489,126
|
)
|
Property
and equipment, net
|
|
$
|
1,933,416
|
|
|
$
|
1,646,879
|
|
Depreciation
expense amounted to $64,030 and $240,716 for the three and nine months ended September 30, 2020, respectively. Depreciation
expense amounted to $42,950 and $142,914 for the three and nine months ended September 30, 2019, respectively. During the nine
months ended September 30, 2020, the Company wrote off property and equipment with an original cost value of $151,111
related to a closed location and a future location that was terminated due to the economic environment as a result of COVID-19
and recorded a loss on disposal of $41,480 after accumulated depreciation of $109,631 in the unaudited condensed consolidated
statement of operations.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
6 – GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The
Company’s intangible assets include a trademark with an indefinite useful life as well as franchise agreements which are
amortized over useful lives of thirteen years.
A
summary of the intangible assets is presented below:
Intangible Assets
|
|
Trademark
|
|
|
Franchise Agreements
|
|
|
Total
|
|
Intangible assets, net at December 31, 2019
|
|
$
|
2,524,000
|
|
|
$
|
514,815
|
|
|
$
|
3,038,815
|
|
Amortization expense
|
|
|
|
|
|
|
(47,899
|
)
|
|
|
(47,899
|
)
|
Impairment of intangible assets
|
|
|
-
|
|
|
|
(100,000
|
)
|
|
|
(100,000
|
)
|
Intangible assets, net at September 30, 2020
|
|
$
|
2,524,000
|
|
|
$
|
366,916
|
|
|
$
|
2,890,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining amortization period at September 30, 2020 (in years)
|
|
|
|
|
|
|
7.3
|
|
|
|
|
|
Amortization
expense related to intangible assets amounted to $16,083 and $47,899 for the three and nine months ended September 30, 2020, respectively.
Amortization expense related to intangible assets amounted to $16,083 and $47,723 for the three and nine months ended September
30, 2019, respectively.
The
Company sustained operating and cash flow losses from inception which formed a basis
for performing an impairment test of its Intangible Assets. The Company performed a recoverability
test on the franchise agreements based on its projected future undiscounted cashflows.
As a result of a failed recoverability test the Company proceeded to measure the fair
value of those assets based on the future discounted cash flows and recorded an impairment
charge in the amount of $100,00 during the three and nine months ended September 30,
2020. The key assumptions used in the estimates of projected cash flows utilized in both
the test and measurement steps of the impairment analysis were projected revenues and
royalty payments. These forecasts were based on actual revenues and take into account
recent developments as well as the Company’s plans and intentions.
NOTE
7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payables and accrued expenses consist of the following:
|
|
September
30,
2020
|
|
|
December
31, 2019
|
|
Accounts
payable
|
|
$
|
821,140
|
|
|
$
|
857,846
|
|
Accrued
payroll
|
|
|
108,388
|
|
|
|
139,320
|
|
Accrued
professional fees
|
|
|
257,972
|
|
|
|
329,826
|
|
Accrued
board members fees
|
|
|
47,608
|
|
|
|
59,864
|
|
Accrued
rent expense
|
|
|
200,434
|
|
|
|
269,644
|
|
Accrued
compensation expense(1)
|
|
|
233,000
|
|
|
|
-
|
|
Sales
taxes payable (2)
|
|
|
248,721
|
|
|
|
329,089
|
|
Accrued
interest
|
|
|
24,930
|
|
|
|
520,682
|
|
Accrued
interest, related parties
|
|
|
-
|
|
|
|
79,523
|
|
Other
accrued expenses
|
|
|
43,615
|
|
|
|
45,154
|
|
Total
Accounts Payable and Accrued Expenses
|
|
$
|
1,985,808
|
|
|
$
|
2,630,948
|
|
|
(1)
|
Included
within accrued compensation expense is a liability of $42,000 related to 200,000 stock
options to be issued by the Company and a liability of $191,000 related to the 100,000
warrants that were rescinded by the Company in exchange for the 100,000 options to be
issued upon the approval of the 2020 Equity Incentive Plan. See Note 11 – Commitments
and Contingencies – Consulting Agreements for details related to the Options and
the cancelled warrants.
|
|
(2)
|
See
Note 11 – Commitments and Contingencies –Taxes for detailed related to delinquent sales taxes.
|
NOTE
8 – DEFERRED REVENUE
At
September 30, 2020 and December 31, 2019, deferred revenue consists of the following:
|
|
September
30,
2020
|
|
|
December
31,
2019
|
|
Franchise
fees
|
|
$
|
997,199
|
|
|
$
|
1,210,719
|
|
Unearned
vendor rebates
|
|
|
33,630
|
|
|
|
64,953
|
|
Less:
Unearned vendor rebates, current
|
|
|
(33,630
|
)
|
|
|
(64,953
|
)
|
Less:
Franchise fees, current
|
|
|
(42,020
|
)
|
|
|
(57,744
|
)
|
Deferred
revenues, non-current
|
|
$
|
955,179
|
|
|
$
|
1,152,975
|
|
NOTE
9 – OTHER CURRENT LIABILITIES
Other
current liabilities consist of the following:
|
|
September
30,
2020
|
|
|
December
31,
2019
|
|
Gift
card liability
|
|
$
|
90,269
|
|
|
$
|
88,673
|
|
Co-op
advertising fund liability
|
|
|
294,439
|
|
|
|
298,662
|
|
Advertising
fund liability
|
|
|
267,921
|
|
|
|
265,308
|
|
|
|
$
|
652,629
|
|
|
$
|
652,643
|
|
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
10 – NOTES PAYABLE
Convertible
Notes
Convertible
Note Payable to Former Parent
As
of September 30, 2020, the Company had an amount of $82,458 in convertible notes payable to Former Parent outstanding.
15%
Senior Secured Convertible Promissory Notes
During
the nine months ended September 30, 2020, the Company repaid an aggregate of $450,000 in 15% senior secured convertible promissory
notes.
12%
Secured Convertible Note
During
the nine months ended September 30, 2020, the Company repaid the $75,000 12% secured convertible promissory note.
Other
Convertible Notes
During
the nine months ended September 30, 2020, the Company repaid a $25,000 other convertible note payable.
As
of September 30, 2020 and December 31, 2019, the Company has another convertible note payable in the amount of $100,000 which
is included within convertible notes payable. See Note 11 – Commitments and Contingencies – Litigation, Claims and
Assessments for details related to the $100,000 other convertible note payable.
Other
Notes Payable
On May 9, 2020, the Company entered into a
Paycheck Protection Program Promissory Note and Agreement with Greater Nevada Credit Union, pursuant to which the Company received
loan proceeds of $866,300 (the “PPP Loan”). The PPP Loan was made under, and is subject to the terms and conditions
of, the PPP which was established under the CARES Act and is administered by the U.S. Small Business Administration. The current
term of the PPP Loan is two years with a maturity date of May 9, 2022 and contains a favorable fixed annual interest rate of 1.00%.
Payments of principal and interest on the PPP Loan will be deferred for the first ten months of the term of the PPP Loan. Principal and interest are payable monthly and may be prepaid by the Company at any time prior to maturity with no prepayment
penalties. Under the terms of the CARES Act, recipients can apply for and receive forgiveness for all, or a portion of loans granted
under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for certain permissible
purposes as set forth in the PPP, including, but not limited to, payroll costs (as defined under the PPP) and mortgage interest,
rent or utility costs (collectively, “Qualifying Expenses”), and on the maintenance of employee and compensation levels
during the eight-week period following the funding of the PPP Loan. The Company believes that it has been using the proceeds of
the PPP Loan, for Qualifying Expenses. As of the date of filing this report the Company submitted their application for forgiveness
of the PPP Loan. However, no assurance is provided that the Company will be able to obtain forgiveness of the PPP Loan in
whole or in part.
On
May 14, 2019, the Company issued a $91,000 promissory note to a related party. The note has a stated interest rate of 15% over
the original term of one year with monthly interest payments. The note becomes due in one year or the first day the Company trades
publicly on an exchange. This note was repaid in full during the first quarter of 2020.
On
October 10, 2019, the Company issued a $300,000 five-year promissory note to a former franchisee with an eight percent interest
rate. During the three and nine months ended September 30, 2020, the Company repaid $13,377 and $38,246, respectively, of the
five-year promissory note.
During
December 2019, the Company issued a note payable in the principal amount of $300,000. The note has an original issue discount
of 20%. The note become due in full on or before February 21, 2020. The note has been repaid during the first quarter of 2020.
On
February 3, 2020, the Company issued a note payable in the principal amount of $150,000. The note has an original issue discount
of 20%. The note become due in full on or before February 21, 2020. The note has been repaid during the first quarter of 2020.
As
of September 30, 2020, the Company had an aggregate amount of $1,119,860 and $0 in other notes payable and other notes payable,
related party, respectively. The notes had interest rates ranging between 1% - 8% per annum, due on various dates through October
10, 2024.
The
maturities of other notes payable as of September 30, 2020, are as follows:
|
|
Principal
|
|
Repayments
due as of
|
|
Amount
|
|
09/30/2021
|
|
$
|
486,574
|
|
09/30/2022
|
|
|
493,638
|
|
09/30/2023
|
|
|
64,141
|
|
09/30/2024
|
|
|
69,465
|
|
09/30/2025
|
|
|
6,043
|
|
|
|
$
|
1,119,861
|
|
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
11 – COMMITMENTS AND CONTINGENCIES
Consulting
Agreements
On February 18, 2020, the Company entered
into a professional services agreement with a company to provide advice on business development of food stores and delivery kitchen
operations. In addition, they will review and advise the Company on potential acquisition targets, including financial analytics
for post-merger entities and provide assistance in preparing pro-forma financial information. The term of the agreement commences
from the effective date on February 18, 2020 and expires on February 18, 2021. Pursuant to the terms of the agreement, the Company
agreed to issue 300,000 shares of the Company’s common stock and 100,000 three-year cashless warrants with an exercise price
of $5.00 per share upon signing of the agreement as payment. The grant date fair value of the warrants of $191,000 was recorded
in general and administrative expense as stock-based compensation. The Company rescinded the issuance of 100,000 warrants and
300,000 shares of the Company’s common stock in July 2020 that were issued in the first quarter of 2020, pursuant to a consulting
agreement. Although the shares were duly authorized and validly issued, the Company rescinded the stock and warrants as it did
not have the required amount of equity authorized under its 2019 Incentive Stock Plan. Following the rescission of the warrants
and shares of common stock, the consultant threatened to commence legal proceedings against the Company and demanded the Company
to re-issue the 300,000 shares of common stock and 100,000 warrants and to provide the Consultant registration rights. In order
to settle and avoid the time commitment and expense associated with potential litigation, the Company and the Consultant entered
into a Settlement Agreement (“Settlement Agreement”) on August 11, 2020 whereby the Company agreed to issue 300,000
shares of common stock within 5 five days of entering into the Settlement Agreement. These shares are not subject to any
equity plan. The Company agreed to register the shares of common stock in consideration of a release by the Consultant. In addition,
as part of the Settlement Agreement the Company will issue 100,000 stock options upon the approval of the 2020 Equity Incentive
Plan.
On February 24, 2020, the Company entered
into a Consulting Agreement with consultants with experience in the area of corporate finance, investor communication and financial
and investor public relations. The term of the agreement is for two months from the effective date on February 27, 2020 and expires
on April 27, 2020. Pursuant to the terms of the agreement, the Company agreed to pay $215,000 in cash and to issue 10,000 shares
of the Company’s common stock. In the event the Company elects to not extend the term of the agreement, it is to notify
the consultants within five days of the conclusion of the 60-day term. The Company did not extend the term of the original
agreement. As of September 30, 2020, the company issued the 10,000 shares of common stock and paid the $215,000 in cash pursuant
to the terms of the agreement.
On
April 8, 2020, the Company entered into a professional service agreement with a consultant to provide advice on investor outreach
and institutional engagements. The Consultants will also provide continuous market insight and interpret our trading activity.
The term of the agreement commenced from the execution date and ends on April 1, 2021. Pursuant to the terms, the Company agreed
to pay the consultant in the form of non-qualified stock options to acquire 200,000 shares of the Company’s common stock,
exercisable at $2.50 per share for a period of one year. The Options are fully vested upon the signing of this agreement. In addition,
the option is callable by the Company in the event the market price of its shares close above $3.50 per share for five consecutive
dates upon which the consultant will have three days to elect to exercise or forfeit the options. The Company has not issued the
options pursuant to the original terms of the agreement and on August 11, 2020, the Company and the consultant entered into an
amendment and agreed that the 200,000 non-qualified stock options shall be issued upon the Company’s shareholders approval
of its 2020 Incentive Stock Plan. See Note 12 – Equity – Warrants and Options Valuation for details related to the
accrued compensation expense recognized in connection with the liability.
On July 28, 2020, the Company entered into
a Consulting Agreement with consultants with experience in the area of corporate finance, investor communication and financial
and investor public relations. The term of the agreement is for one month from the effective date on July 28, 2020 and expires
on August 28, 2020. Pursuant to the terms of the agreement, the Company agreed to pay $253,500 in cash and to issue 15,000 shares
of the Company’s common stock. As of September 30, 2020, the Company issued the 15,000 shares of common stock and paid the
$253,500 in cash pursuant to the terms of the agreement.
Litigations,
Claims and Assessments
In
2017, Limestone Associates LLC (“Limestone”) filed a complaint against ARH in the Civil Court of the City of New York,
County of New York, #78549/2017 for commercial non-payment of rent for the amount of $25,748 plus cost and disbursements of this
proceeding. In May 2018, Limestone filed a complaint against ARH and Robert E. Morgan (the former CEO of the Company) in the Supreme
Court of the State of New York, County of New York, index # 154469 seeking $1,357,243 in damages for rent, interest and other
expenses.
In
May 2018, the Company, Former Parent and Mr. Morgan were listed as defendants to a lawsuit filed by Crownhall Realty, LLC (“Crownhall”)
in the Supreme Court of the State of New York county of New York, #154467. Crownhall is seeking $1,034,087 in damages for rent,
interest and other expenses.
On
October 3, 2018, the Company, ARH and Mr. Morgan entered into a settlement agreement with Crownhall and Limestone agreeing to
forfeit all security deposits, pay an upfront amount of $25,000 and an additional $175,000 to be paid over 20 months. This agreement
settles litigation surrounding two closed locations, which the plaintiffs were seeking a total of $2,391,330 in past damages for
rent, interest and other expenses. As of the date of the filing of these condensed consolidated financial statements the settlement
has been paid in full.
On
March 27, 2018 a convertible note holder filed a complaint in the Iowa District Court for Polk County #CVCV056029 against the
Company for failure to pay the remaining balance due on a promissory note in the amount of $100,000, together with interest, attorney
fees and other costs of $171,035. On June 6, 2018 a default judgement was entered against the Company for the amount of $171,035.
The Company repaid an aggregate amount of $71,035, consisting of principal and interest, as of the date of the filing of this
report. As of September 30, 2020, the Company has accrued for the liability in convertible notes payable in the amount of $100,000
and accrued interest of $22,039 is included in accounts payable and accrued expenses.
In
May 2018, Resolute Contractors, Inc., Quality Tile, MTL Construction, Genesis Electric, JNB Interiors and Captive Aire filed a
Mechanics Lien for labor, service, equipment and materials in the total amount of $98,005. The Company intends to set up various
payment plans with these vendors. As of September 30, 2020, the Company has accrued for the liability in accounts payable and
accrued expenses.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
11 – COMMITMENTS AND CONTINGENCIES, continued
Litigations,
Claims and Assessments, continued
On
December 12, 2018, the Company was listed as a defendant to a lawsuit filed by a landlord in the Superior Court of the State of
California. Fountain Valley is seeking approximately $121,000 in damages for rent, interest and other expenses. On February 15,
2019, the Company entered into a settlement agreement and payment plan in the amount of $85,000. The Company agreed to make the
following payments (i) $15,000 on or before March 15, 2019, and (ii) ten monthly installments of $7,000 commencing on April 15,
2019 and continuing monthly on the 15th day of each month though January 15, 2020. The company has accrued for the liability in
accounts payable and accrued expenses and has been making repayments pursuant to the settlement agreement. As of January 15, 2020,
the Company has met all their obligations and the full amount has been paid.
On
or about March 7, 2019, the Company was listed as a defendant to a lawsuit filed by a contractor in the State of Texas. The contractor
is claiming a breach of contract and is seeking approximately $32,809 in damages for services claimed to be rendered by the contractor.
The Company is working with legal counsel in order to reach a settlement. As of September 30, 2020, the Company accrued $30,000
for the liability in accounts payable and accrued expenses.
On
January 23, 2020, the Company was served a judgment in the amount of $130,185 for a breach of a lease agreement in Chicago, Illinois,
in connection with a Company owned store that was closed in 2018. As of September 30, 2020, the Company has accrued for the liability
in accounts payable and accrued expenses.
In
the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary
course of business. In the opinion of management after consulting legal counsel, such matters are currently not expected to have
a material impact on the Company’s financial statements.
The
Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements
after consulting legal counsel.
Operation
Lease
On
June 26, 2020, the Company was informed that one of their leases for a future military location was terminated due to the current
economic environment as a result of COVID-19.
Corporate
Address Change
During
October 2020, the Company relocated its corporate office address from 308 East Renfro Street, Suite 101, Burleson, Texas, 76028
to 2600 South Shore Blvd. Suite 300, League City, Texas, 77573.
Kitchen
Service Agreement
On
February 26, 2020, the Company entered into a Kitchen Services Agreement with a major delivery-only kitchen concept. The Kitchen
Services Agreement provides for five initial locations starting in the Chicago market. In addition, the Company has placed deposits
for an additional five locations to be determined. The Kitchen Services Agreement provide the Company with access to the delivery-only
locations for a one-year term with an automatic one-year renewal unless terminated by either party. The delivery-only locations
are set up for third party delivery and provide that the Company must pay monthly license fees, processing service fees and storage
service fees. The monthly license fees for the five initial locations range from $3,000 to $4,000. The monthly license fees become
due 14 days after the Company is granted access to the location. As of the date of filing this report the Company has opened
four of the five initial locations agreed upon in the Chicago market and entered into additional agreements for two location in the Philadelphia market, one location in the Miami
market, one location in the Providence market and one location in the New York City market.
Taxes
The
Company failed in certain instances in paying sales taxes collected from customers in specific states that impose a tax on sales
of the Company’s products. The Company had accrued $248,721 and $329,089 which includes penalties and interest as of September
30, 2020 and December 31, 2019, respectively, related to this matter.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
12 – EQUITY
2019
Equity Incentive Plan
The
Company’s board of directors and shareholders approved and adopted on October 28, 2019 the 2019 Equity Incentive Plan
(“2019 Plan”), effective on October 28, 2019 under which stock options and restricted stock may be granted to
officers, directors, employees and consultants in the form of non-qualified stock options, incentive stock-options, stock
appreciation rights, restricted stock awards, restricted stock Units, stock bonus awards, performance compensation awards
(including cash bonus awards) or any combination of the foregoing. Under the 2019 Plan, the Company reserved 214,286 shares
of common stock for issuance. As of September 30, 2020, 188,524 shares have been issued under the 2019 Plan. See Note 13
– Subsequent Events – 2020 Equity Incentive Plan for details of the new plan that was adopted and upon adoption
of the new plan the Company will no longer issue shares under the 2019 Plan, but any existing grants under the 2020 Plan will
remain outstanding.
Common
Stock
On
February 17, 2020 the Company authorized the issuance of an aggregate of 25,616 shares of common stock to the members of the board
of directors as compensation earned through the end of the fourth quarter of 2019.
On
March 31, 2020, the Company issued 75,000 shares of common stock of the Company to a consultant that assisted the Company in the
area of investor relations and capital introduction.
On
April 21, 2020, the Company issued an aggregate of 51,105 shares of common stock in exchange for accrued interest related to convertible
notes that where converted in 2019 in the amount of $357,735.
On
June 1, 2020, the Company issued 5,000 shares of common stock of the Company to a consultant with an aggregate fair value of $10,150.
On
June 5, 2020, the Company issued 15,000 shares of common stock of the Company to a digital marketing consultant with an aggregate
fair value of $46,050.
On
June 24, 2020 the Company authorized the issuance of an aggregate of 4,340 shares of common stock to the members of the board
of directors as compensation earned through the end of the first quarter of 2020.
On
August 21, 2020, the Company issued an aggregate of 53,571 shares of common stock of the Company to various consultants with an
aggregate fair value of $200,705.
See
Note 11 – Commitments and Contingencies – Consulting Agreements for details related to additional stock issuances
during the nine months ended September 30, 2020.
Closing
of Offerings
On
February 12, 2020, the Company priced its initial public offering of 1,540,000 shares of common stock at a price of $5.00 per
share. The Company started trading on the Nasdaq Capital Market on February 13, 2020 under the ticker symbol “GRIL”.
The Company closed on the offering on February 18, 2020, yielding proceeds of $6,780,000, net of underwriters and other fees of
$920,000. Upon closing of the offering the Company issued 123,200 warrants to the underwriters as part of their agreement.
On
September 10, 2020, the Company priced its public offering (“September Offering”) of 3,294,118 shares of common stock
at a price of $1.70 per share. The Company closed on the September Offering on September 15, 2020, yielding net proceeds
of $4,940,001, net of underwriters and other fees of $660,000. Upon closing of the September Offering the Company issued 263,529
warrants to the underwriters as part of their agreement. See Note 13 – Subsequent Events – Closing of September Offering
– Over-Allotment for the closing on the over-allotment option that was granted to the underwriters.
Restricted
Common Stock
On February 18, 2020, the Company issued an
aggregate of 216,783 shares of restricted common stock of the Company, with an aggregate value fair value of $1,083,915, to the
executive team pursuant to their employment agreements as part of completing the initial public offering. On August 11, 2020,
the executive team entered into an agreement individually with the Company to cancel an aggregate of 216,783 vested shares of
restricted common stock of the Company previously issued in the first quarter of 2020 and acknowledge that no further compensation
is due under their employment agreements during the quarter ended September 30, 2020. As a result of the cancelled restricted
common stock, the Company reversed $1,083,893 in stock-based compensation during the quarter ended September 30,
2020, that was originally recorded during the three months ended March 31, 2020, within general and administrative expenses
related to the cancelled shares in the unaudited condensed consolidated statement of operations.
At
September 30, 2020, the unrecognized value of the restricted common stock was $20,235. The unamortized amount will be expensed
over a weighted average period of 0.25 years. A summary of the activity related to the restricted common stock for the nine months
ended September 30, 2020 is presented below:
|
|
|
|
|
Weighted
Average Grant
|
|
|
|
Total
|
|
|
Date
Fair Value
|
|
Outstanding
at January 1, 2020
|
|
|
2,426
|
|
|
$
|
65.33
|
|
Granted
|
|
|
216,783
|
|
|
|
5.00
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(218,009)
|
|
|
|
(5.34
|
)
|
Outstanding
at September 30, 2020
|
|
|
1,200
|
|
|
$
|
65.33
|
|
Stock-Based
Compensation Expense
Stock-based compensation related to restricted
stock issued to employees, directors and consultants and warrants issued to consultants amounted to ($1,005,698) and $2,619,522
for the three and nine months ended September 30, 2020, respectively, of which ($1,006,656) and $2,617,460,
respectively, was recorded in general and administrative expenses and $958 and $2,062, respectively, was recorded in labor
expense within restaurant operating expenses. Stock-based compensation related to restricted stock issued to employees, directors
and consultants amounted to $431,631 and $613,333 for the three and nine months ended September 30, 2019, respectively, of which
$429,315 and $611,191 was recorded in general and administrative expenses and $2,316 and $2,142 was recorded in labor expense
within restaurant operating expenses.
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
12 – EQUITY, continued
Warrant
and Options Valuation
The
Company has computed the fair value of warrants granted and options accrued for as accrued compensation expense using the Black-Scholes
option pricing model. The expected term used for warrants and options issued to non-employees is the contractual life. The Company
is utilizing an expected volatility figure based on a review of the historical volatilities, over a period of time, equivalent
to the expected life of the instrument being valued, of similarly positioned public companies within its industry. The risk-free
interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with
the expected term of the instrument being valued.
The
options accrued for in accrued compensation expense had a grant date fair value of $46,000 on April 8, 2020. The Company recorded
a mark to market fair value adjustment of $(100,000) and $4,000 on the consolidated statement of operations during the three and
nine months ended September 30, 2020. The Company has estimated the fair value of the options using the Black-Scholes model using
the following assumptions: expected volatility of 66.77-112.17%, risk-free rate of 0.12-0.23%, expected term of 1 year, expected
dividends of 0%, and stock price of $1.42 – 2.71.
Options
On
July 27, 2017, the Company issued stand-alone non-qualified stock options, not pursuant to a plan, to purchase an aggregate of
4,821 shares of the Company’s common stock to its franchisees that expires three years from the date of issuance. The options
were forfeited during the third quarter of 2020.
Warrants
See
Note 12 – Equity – Closing of Offerings for details related to additional warrants issuances during
the nine months ended September 30, 2020.
A
summary of warrants activity during the nine months ended September 30, 2020 is presented below:
|
|
Number
of Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining Life
In Years
|
|
Outstanding,
December 31, 2019
|
|
|
2,450,287
|
|
|
$
|
5.51
|
|
|
|
3.7
|
|
Issued
|
|
|
486,729
|
|
|
|
3.65
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
(354,159
|
)
|
|
|
6.74
|
|
|
|
-
|
|
Outstanding,
September 30, 2020
|
|
|
2,582,857
|
|
|
$
|
4.08
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
September 30, 2020
|
|
|
2,582,857
|
|
|
$
|
4.08
|
|
|
|
3.6
|
|
The
grant date fair value of warrants granted during the three and nine months ended September 30, 2020 and 2019 was determined on
the date of issuance using the Black-Scholes option pricing model with the following assumptions: expected volatility, dividend
rate, risk free interest rate and the expected life. The Company calculates the expected volatility using the historical volatility
of comparable companies over the most recent period equal to the expected term and evaluates the extent to which available information
indicates that future volatility may differ from historical volatility. The expected dividend rate is zero as the Company does
not expect to pay or declare any cash dividends on common stock. The risk-free rates for the expected terms of the stock warrants
are based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not experienced significant exercise
activity on warrants. Due to the lack of historical information, the Company determined the expected term of its warrant awards
issued using the simplified method. In applying the Black-Scholes option pricing model, the Company used the following assumptions:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Risk
free interest rate
|
|
|
-
|
%
|
|
|
1.61
- 2.32
|
%
|
|
|
1.37
|
%
|
|
|
10.61
- 2.62
|
%
|
Contractual
term (years)
|
|
|
-
|
|
|
|
5.00
|
|
|
|
3.00
|
|
|
|
5.00
|
|
Expected
volatility
|
|
|
-
|
%
|
|
|
58.24
- 88.10
|
%
|
|
|
55.33
|
%
|
|
|
52.64
- 88.10
|
%
|
Expected
dividend
|
|
|
-
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
MUSCLE
MAKER, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
NOTE
13 – SUBSEQUENT EVENTS
Delivery-only
location
Subsequent
to September 30, 2020, the Company opened one more delivery-only location pursuant to the Kitchen Services Agreement.
Election of Directors
On October 27, 2020, the Company held its annual shareholders meeting and the shareholders
voted on the directors to serve on the Company’s board of directors. The shareholders elected Stephan Spanos, A.B. Southall
III, Paul L. Menchik, Peter Petrosian, Jeff Carl, Major General (ret) Malcom Frost and Phillip Balatsos to serve on the Company’s
board of directors.
Authorized
Capital
On
October 27, 2020, the shareholders approved to amend the Company’s articles of incorporation to increase the number
of authorized shares of common stock from 14,285,714 to 25,000,000 shares of $0.0001 par value share common stock.
2020
Equity Incentive Plan
The
Company’s board of directors and shareholders approved and adopted on October 27, 2020 the 2020 Equity Incentive Plan (“2020
Plan”), effective on October 27, 2020 under which stock options and restricted stock may be granted to officers, directors,
employees and consultants in the form of non-qualified stock options, incentive stock-options, stock appreciation rights, restricted
stock awards, restricted stock units, stock bonus awards, performance compensation awards (including cash bonus awards) or any
combination of the foregoing. Under the 2020 Plan, the Company reserved 1,750,000 shares of common stock for issuance. As of the
date of the issuance of these consolidated financial statements 1,744,056 shares of common stock were outstanding under the
2020 Plan.
Closing
of September Offering – Over-Allotment
Pursuant
to the underwriting agreement for the September Offering the Company granted the underwriters an option to exercise for
45 days, to purchase up to an additional 494,177 shares of common stock to cover the over-allotment. On October 27, 2020, the
Company closed on the over-allotment yielding proceeds of $764,399, net of underwrites and other fees of $75,600.
Operation Lease
Due to the economic effect of COVID-19
the Company made the decision to close one of their Company owned stores permanently during the quarter ended September 30, 2020.
As a result the Company was able to negotiate a sublease on October 29, 2020, for the remainder of the lease term in which the
subtenant agreed to make lease payments to the Company until the lease terminates on February 28, 2021.
Chelsea Acquisition
On October 19, 2020, the Company acquired
a franchisee store in Chelsea, New York, as a corporate store (the “Chelsea Acquisition”). The purchase price of the
store was $68,292, of which $34,146 related to equipment purchased and the remaining $34,146 was attributed
to leasehold improvements. The Company agreed to forgive a promissory note in the amount of $68,292 in exchange for the
purchase of the location. In addition, the Company became obligated for payments pursuant to a five year lease, exclusive of options
to renew. Monthly rent payments pursuant to lease agreement
range from $11,000 to $16,105 with a straight line rent expense of $13,431 per month.
Philadelphia Acquisition
On November 2, 2020, the Company acquired
a franchisee store in Philadelphia, Pennsylvania, as a corporate store (the “Philadelphia Acquisition”). The purchase
price of the store was $250,000, of which $125,000 related to equipment purchased and the remaining $125,000 relates to leasehold
improvements. The Company paid cash of $75,000 to the seller on the closing date and agreed to a $175,000 7% promissory note over
the next sixty months with the first payment being due and payable on December 2, 2020. As part of the acquisition the
Company agreed to a lease assignment and assumed all the liability under the lease upon the closing date.
Common Stock
On November 10, 2020 the Company authorized
the issuance of an aggregate of 5,944 shares of common stock to the members of the board of directors as compensation earned for
the second and third quarter of 2020.